fbpx

How Much Is My Practice Worth?

How to Renegotiate Your Dental Practice Lease, Part 2

By now, you’ve already established your role of landlord or tenant in the lease-renegotiation process thanks to part one of this blog post. Now, it’s time to break down the basics of lease renegotation for your dental practice. Here, we offer a primer to get you started in the right direction.

Research time

A lease renegotation typically takes place at least one to two years prior to the lease expiration date to allow time for the tenant to decide if they wish to extend their lease term or start another property search while also notifying the property manager, leasing agent, or landlord of the decision. Starting the process early will provide leverage during the renegotiation process, especially if market conditions have regressed or become stagnate, as well as compare the existing lease to current market rates and terms.

Location and patient base

The lease-renegotiation process is the perfect time to ask yourself if your existing location is right for the future growth of your practice in the next 10 or so years. Is the location is centralized to your patient base? Do your patients come from different parts of town? Are the demographics in your area the same as your patient base? Is your existing location in a declining or up-and-coming part of town? Is your existing building deteriorating because the landlord won’t spend money on making necessary upgrades to meet modern building codes? Do you have good visibility from a high-trafficked area? Can new patients find your practice? Is your practice easily accessible?

Parking and building improvements

In addition to assessing whether or not the current state of the building meets your business’s needs, this is also the chance to discuss future capital improvements and make recommendations, including to the lobby, elevator, restrooms, HVAC, landscaping, handicap accessibility, and even the possibility of adding reserved parking spots and additional or covered parking. Make sure to get in writing what capital improvements the landlord plans to make, as well as discuss whether or not the landlord plans to sell the building in the coming years.

Tenant improvements

Aesthetic updates to the facility are typically an out-of-pocket expense that can be negotiated based on the terms of the new lease. Tenant improvement dollars can include new paint, flooring, lighting, and other small cosmetic improvements. Meeting with an in-house architect or local firm with medical or dental expertise can help the tenant and landlord both gauge how much the proposed improvements will cost.

Signage

An often-overlooked marketing investment is the signage for your business, which can speak volumes in terms of branding and advertising. Building, monument, lobby, and hallway, window, and door signage can generate an additional 75 percent of customer base and referrals. However, city code regulations or covenants may limit the size, placement, and style options, and the lease-renegotiation process is an opportune time to discuss these options with the landlord.

Common goals

Rental rate reduction tends to be the most common goal for a tenant during the lease-renegotiation process. However, other options exist in terms of expanding or decreasing your current square footage, a cap on expenses, rent abatement, exclusivity, or reworking the lease assignment language if you plan to sell your practice within the new lease term. While a lease renewal tends to be more beneficial for the tenant in a bad economy, it’s important to pick and choose the items you want to negotiate during the renewal process in a thriving economy.

What’s next?

Contact the real estate experts at Professional Transition Strategies to assist you in your upcoming lease renegotiation.

How to Renegotiate Your Dental Practice Lease, Part 1

Depending on the remaining time left on the lease of your dental practice, it may be time to renegotiate the terms, which can make financial and practical sense for both the landlord and tenant. The key to a successful renegotiation is to start one to two years before your lease or renewal option comes due in order to weigh all your options in terms of staying or looking at alternative options. Here’s how to navigate the renegotiation process from both the perspective of the landlord and tenant.

Landlord

By including the renewal option within a lease, a landlord removes the uncertainty of a prior lease and instead gains a guarantee or strengthen an already-existing guarantee. The lease renegotiation process is the perfect time to ask for a lease extension and increase or decrease the rent depending on the economy and tenure of the current tenant, as well as speak with your tenant to assess the business’s needs in terms of square footage. Tenants who pay their rent on time, take care of the property, and are respectful to their neighbors can eliminate the need to create a new listing, show the space, and avoid the possibility of having your space sit empty and not collecting any income, while tenants who regularly miss payments, are disruptive to neighbors, perform illegal activities, or are simply difficult to work with can be forced from the space.

Tenant

The old adage of “it doesn’t hurt to ask” applies during the lease renegotiation process in which it is the optimal time to change the aspects of the lease you are dissatisfied with. Although there is no guarantee that the requests will be met, paying rent on time and being an overall good tenant will put the odds in your favor. The lease negotiation process is also a good time to have an honest conversation about the state of your business with both yourself and your landlord. Is the current space occupying your needs? Would you benefit from a decrease in rent or increase in square footage? Before considering a relocation, have a conversation with your landlord upfront to see what can be done to accommodate your growing or downsizing needs.

What’s next?

Stay tuned for next week’s post that will outline the basic needs tenants should look at when looking to renegotiate the terms of a lease. Then, contact the experts at Professional Transition Strategies to get the lease renegotiation process started.

How to Valuate Dental Practice Patient Demographics

In addition to office equipment, furnishings, instruments, and supplies, the going concern value of a dental practice that is presented during the prospectus process includes demographics of its patients. Here’s a breakdown of the aspects of patient demographics that are taken into consideration when valuating a dental practice.

Patient data

Patient records are taken into account during the prospectus process. This includes the number of active versus inactive patients, the average number of new patients per month, and the number of new patients during the most recent 12-month period.

Staff care

The role of staff during the transition process can’t be understated. Staff who knows all of the patients and their needs is an essential part of the practice. Additionally, letters of introductions to all active patients and/or referring sources provided by staff all add to the value of the dental practice.

Bookkeeping

How and where patient records are kept is an important part of the valuation process. Questions to ask include: Are patient files organized in the office by the individual? Are patient records stored in practice management software? When was the last complete chart audit?

Insurance information

Insurance details don’t just matter to the patients but are also taken into consideration during the valuation process. In addition to which insurance plans are accepted, it’s important to know what percentage of patients pay with insurance versus cash.

What’s next?

Contact the experts at Professional Transition Strategies to learn more about how the current state of your patient demographics affects the prospectus process.


How and Why to Valuate the Hard Assets of Your Dental Practice

As part of the dental practice prospectus process, valuating your hard assets should be taken into account. In fact, the weighted value of hard assets can comprise 15 percent of the value of your dental practice. Here’s a breakdown of how and why to put a price tag on the hard assets of your dental practice.

Ownership structure

The price presented on a prospectus assumes a smooth transition of ownership, including letters of introduction to all active patients and/or referring sources, the seller’s best efforts in assisting in the transfer of the practice, and a non-compete agreement. These intangible assets are what will make or break a transition after it occurs.

Practice demographics

Another factor that is considered in the prospectus price includes the going concern value of the dental practice, such as patient records, current location, and telephone numbers assigned to the practice. The buyer will use this information when considering how or if the practice needs to grow.

Equipment inventory

Upgrading equipment, such as computers, office equipment and furnishings, and instruments and supplies, can help make the practice more attractive to potential buyers. While it needs to make financial sense to remodel before selling, having up-to-date dental equipment helps in the transition because the buyer won’t have to replace or upgrade items on day one.

What’s next?

Contact the experts at Professional Transition Strategies to learn more about how the current state of your hard assets affects the prospectus process.


Webinar: “10 Ways to Prep Your Practice for Transition”

Every so often, Professional Transition Strategies hosts a webinar for sellers to learn more about the transition process. In April, a webinar geared toward sellers detailed the steps and options when considering buying a dental practice. Here are the key takeaways.

Think about your strategy

A seller should begin with the end in mind. Think about your long-term needs, how much time is needed to implement the plan, and what your ideal strategy looks like, including a buy-out, partnership, or associateship, as well as whether or not you would consider selling to a dental service organization, private equity for extensive growth, or merger with another local practice.

Start or keep growing your practice

The biggest failure of owners is letting the practice start to decline when thinking of selling. In turn, the value of the practice drops significantly and can cause a bank to decide not to finance the acquisition. What’s more, it lowers the total options that a broker can deploy. It is worthwhile to market your practice right up until the point of transition to ensure the value won’t decline over the course of time.

Focus on core details

Other than financials, it’s important to take a wholesale look at your practice to assess what has made your practice successful. Do you provide certain treatments that set you apart? What niches do you work in? Do you serve a cetain community very well? Are you engrained in the business sector? Is your management style unique in that it allows you to keep employees for a long time?

Run an equipment evaluation

Most practices are valued using a weighted system that takes into account how old the equipment is. If time allows, it may make sense to purchase upgraded equipment, use that equipment, depreciate it over five years, and achieve a much higher sales price, even though you won’t get a 100 percent return on your investment. Consider going digital if you haven’t already, then upgrade cone beam computed tomography, digital impressions, computer-aided design and manufacturing system, and new chairs and units.

Consider the real estate

If you don’t own the building, notify your landlord that a transition will happen. If possible, sign a new lease or an addendum that allows the lease to be assignable to a dentist who qualifies for bank financing. If you do own the building, which can be sold as an asset to help pay for retirement, start paying yourself market rent. Alternatively, consider relocating your practice to a more desirable location, which can raise your practice valuation by as much as 5 percent.

Clean up your books

In addition to charging yourself market rent if you own the building, if you employ your spouse, consider replacing him or her or at least start paying him or her what market value for the position would be. What’s more, don’t stop writing off items through your practice; keep track of personal travel, depreciation, etcetera.

Know your “why”

One of the biggest worries for a buyer is that they will have to compete with you over time so it’s important to be able to articulate a real and communicable reason to a buyer at least a broker so that they can tell the story for you.

Build an advisory team

Assembling a team of advisors to help guide you through every step of the process will ensure the success of your business is established from the beginning. As with any team, you’re only as strong as your weakest link, so it’s important to choose advisors who have experience in the dental industry, such as a consultant, technology advisor, real estate broker, equipment and supply representatives, CPA, and attorney.

Know your practice’s worth

Creating a practice prospectus that breaks down the profitability of the practice helps to understand the value of the practice and can help determine the best strategy to use, as well as give you a road map for what you need to do before the sale occurs, which could alter your expectations in terms of horizons. Factors such as revenue, net income, seller’s discretionary earnings, and value of assets will all be taken into consideration.

Execute strategy

After determining which strategy to implement and how long it will take to get there, you can start getting the work done that needs to happen before the transition takes place. Now is the time to start working with an advisor to take the next steps toward implementing your strategy over the set period of time.

What’s next?

Learn more about the dental transition process in an upcoming webinar, then contact the experts at Professional Transition Strategies to learn about the next steps.

4 Dental Practice Ownership Structures

Choosing the right business structure for your dental practice is a matter of saving thousands in tax dollars annually, in addition to making your practice run smoothly. The right structure will not only impact how the business pays taxes, but also how the dentists are compensated. Here’s a breakdown of your options.

Limited liability company

While LLCs offer some form of legal protection, dentists can still be held liable for malpractice or negligence, and setting up a legal entity can offer protection from the repercussions of other dentists’ or hygienists’ actions. With low setup and maintenance costs, LLCs work best for smaller, single-owner practices that distribute all or most of the business income. Having more than one owner will change how the entity is reported for tax purposes and how income and losses flow through to the owners, who are considered partners in the case of LLCs.

Professional limited liability company

Similar to an LLC in terms of asset protection, a PLLC is made available or required by in some states for licensed professionals who are subject to different tax rules, including deductions. PPLCs function best in dental practices that operate like corporations and have employees file W2s. PPLCs typically include an attorney and tax advisor as part of their team of advisors.

Professional association

When an LLC is not an advisable option based on geographic location, dental practices that function as corporations can effectively set up a PA to protect assets, as well as offer multiple options for taxes and consequences. While a PA does not shield against malpractice or liability actions, it can protect your practice against the actions or omissions of the practice’s associates.

S-corporations

S-corporations aid dental practices, typically medium to larger practices that are experiencing a high level of growth, in sheltering income from the Federal Insurance Contributions Act and Obamacare taxes on high wage earners. As an S-corporation, dentists can pay themselves wages that will be subject to self-employment tax but can be deducted from business income, the remainder of which will be shared among the owners on a pro rata basis and will not be subject to self-employment tax.

What’s next?

Contact the experts at Professional Transition Strategies to get input into the different types of dental practice ownership structures, how it will affect your future prospectus, and which is right for you.

Why Dental Practice Demographics Matter

Whether looking to buy a new dental practice or sell an existing one, assessing the demographics of the surrounding area will only be advantageous. Once you’ve established the type of practice you want, make sure to consider the competitive analysis and demographics to ensure the location will work for your practice. Here are some factors to consider when looking at the big picture.

Ask the right questions

How is population growth? What is the age distribution? Is it your target market based on income and job types in the area? What is the average education level? Do the majority of residents come from an ethnic background? Does the neighborhood lifestyle align with your practice?

Consider the prospectus

When valuating a dental practice, its physical location of the practice and type of building in which it resides will be at the top of the prospectus list of demographics to help determine fair market value.

State the facts

In addition to the obvious percentage breakdown of patient demographics by gender and age brackets, a list of nearby specialists will help determine if your practice will thrive in the current climate. For example, if your practice is geared toward children (i.e., pediatric dentistry or ortho), you’ll want to be in a younger community. If you do a lot with implants and prosthodontics, you’ll want to be in an older community. If you are planning on offering Medicaid and lots of insurance options, you can be a low- to middle-income area. Conversely, if you want to be more FFS and offering a lot of cosmetic services, being in an affluent area would be advantageous.

What’s next?

Contact the experts at Professional Transition Strategies to analyze the demographics of your dental practice area for you.

How to Assess Fair Market Value for Your Dental Practice

Assessing fair market value of your dental practice comes in many forms, but the methods that are most appropriate are market and earnings (capital income). Any valuation will ultimately use one of these approaches, but using a combination of approaches will form a more reliable indicator of value. Here are some factors that will contribute to your fair market value.

Legal definition

According to the IRS, fair market value is defined as the price at which a property would change hands between a willing buyer and a willing seller when the buyer is not under any compulsion to buy and the seller is not under any compulsion to sell, with both parties having a reasonable knowledge of the relevant facts.

Valuation

Fair market value includes the going concern value of the practice, including dental and office equipment and furnishings, instruments and supplies, patient records, current location, and telephone numbers assigned to the practice.

Transition information

Fair market value assumes a smooth transition of ownership, including letters of introduction to all active patients and/or referring sources, the seller’s best efforts in assisting in the transfer of the practice, a non-compete agreement, and all other tangible and intangible assets of the practice.

Personal worth

Fair market value does not include the accounts receivable of the practice, cash on hand, and any other bank or cash accounts, the practice owner’s personal belongings, marketable securities, real estate or vehicles, if any.

Financial, legal, and management records

Fair market value can be assessed using practice tax returns from previous years, internal bookkeeping data, personal visits from a broker, and an analysis of the major management areas of practice, including all client management systems, as well as a visual analysis of the practice location and physical plant.

Sale details

Fair market value can be assessed based on whether selling to an individual or dental service organization. What’s more, the types of procedures and dentistry that the office performs affect the value.

What’s next?

Contact the experts at Professional Transition Strategies to start the process of assessing fair market value for your dental practice through a prospectus.

3 Types of Dental Practice Buy-Ins

Deciding to start the buy-in process isn’t cut and dry. A buy-in allows you to become a partner with an ownership stake in the practice, but from there, the options will depend on your end goals. Here are three types of dental practice buy-ins, broken down by their pros and cons.

Single practitioner office

Pros: Buying in to a single practitioner office is more successful than associateships since everyone is tied to the practice for the long run. Job responsibilities tend to be better understood, and everyone has a say in what goes on in the practice, allowing for a smoother work environment. This route is much more stable as it forces you to work through potential issues with your partner to equalize the power dynamic. A better sense of control is established by each dentist having an intimate and valuable say in the type of dentistry performed and how the office is run.
With your partner being tied to your success, this mentor/mentee relationship will push them to want to see you succeed as much as you want them to succeed.

Cons: A partnership is similar to a marriage in that it can sometimes be great but other times you may need to work through problems. To ensure a happy and successful partnership, communication is key. And since you will have a partner, you won’t have full control.

Group practice

Pros: In addition to the same advantages a single practitioner office provides, a group practice is even more stable and tends to be more successful so you can expect more income from the beginning. Because there are more decision makers, there is a higher delegation of duties and more responsibilities to share, and in turn, less management. With a larger group, there are more skill sets so you can focus on your specialty.

Cons: If you are the last person to buy in to the practice, you will be the lowest on the totem pole so you may get voted down more often. It is incredibly rare to have the opportunity to be the majority owner, and since the practice is already established and successful, you can expect a higher valuation.

Corporate

Pros: In addition to the same advantages single practitioner offices and group practices provide, buying in to a corporate practice allows you to have less management responsibility than the previously mentioned options.

Cons: In a corporate buy-in, you will most likely only be a minority owner as it is incredibly rare to be a majority owner in this type of situation. You can expect to pay upfront for a larger monthly sum, in addition to having lower responsibility. This option also leaves you with a similar position as in associateships because you are the minority owner and will still be beholden to the majority.

What’s next?

Read more on the different options for buying in to a dental practice in the e-book “Recent Graduate,” then contact to the experts at Professional Transition Strategies to figure out which option is best for you.

How To Assess Your Dental Practice Competition

Not assessing your competition is a missed opportunity when establishing your dental practice. While competition can make profitability challenging, being smaller and more innovative positions your practice to be purchased by a larger more conventional practice looking to add products and services, and sales to larger competitors are normally quite lucrative. Here’s why and how to get a feel for where you stand.

Competitive market analysis

Create a list of competitors based on specialty or geographic area, including types of products and service lines, expected market share, marketing strategies, and notable strengths and weaknesses. This will help managers account for the presence of competitors when making business decisions, identify the strengths and weaknesses of competitors, and exploit
weaknesses, emulate strengths, or avoid competing in areas where other companies are especially strong. Market analysis should be conducted on an overall basis, as well as a more localized competitive analysis.

Online resources

For better or worse, online reviews and rankings on Google, Yelp, and Facebook can give a clear view of public opinion. Then, utilize online resources to develop your analysis to determine if the information you are basing your decisions on is valid.

Business plan

Create a strong business plan by outlining all aspects of your practice, including mission, goals, structure, and service lines, while also assessing your financial information. Also consider if you are a specialist, your referrals, and if they already have an established relationship with the competition. How can you use that information to gain a competitive edge?

What’s next?

Contact the experts at Professional Transition Strategies to start a business analysis and get a leg up on your competition.



Contact Us

Completed 200+ Transitions in 37 States