Case Study of a Dental Practice Transition

You’ve decided it’s time to transition the ownership of your dental practice, whether it’s because you’re retiring or just want to unload the managerial responsibilities that come with running a business. While that decision is a big step, there are so many other pieces that need to fall into place before handing over the proverbial keys. Recently, Professional Transition Strategies Founder and President Kyle Francis joined Dr. David Phelps, along with Bill Ladd and Jared Duckett of Duckett Ladd CPAs, on the Dentist Freedom Blueprint podcast to dissect a recent case study of a dental practice transition. Here’s a recap of the sale in progress to help you figure out how to move forward in your own dental practice transition.

The current situation

The owner of this practice wanted to be great at dentistry, as well as a good business person and a learner. He invested in clinical training and consultants to grow his business, which he did, valuing at $6 million (above the $1.5 million average). He has three locations and even started a dental assisting school. He’s not as clinically active at this point. He turned his venture into a dental service organization (DSO) infrastructure. That’s largely due to poor advice from the consultants since a company that size doesn’t need a DSO, nor does it provide any market value.

However, his earnings before interest, taxes, depreciation, and amortization (EBITDA) margin is only 8%, significantly lower than the 20% average. He earns around $650K a year and doesn’t have much savings. He has a fair amount of debt in his practices, close to $4.5 million, mostly acquisition debt but also lots of equipment.

The background

He got into dentistry in the early 2000s and purchased his first practice in 2006, first practicing as an associate and now as a general practitioner. He’s in his late 40s, married with two tween-aged kids. He’s experiences make him a “decathlon dentist” who knows how to do everything and isn’t at the point of burnout or retirement so has time to evaluate the options.

The trajectory

He experienced a growth trend in revenue but not margins and continued to grow his practice during the pandemic. He’s still in the middle of a growth cycle so isn’t sure if now is the right time to consider an ownership transition. Would he be willing to make some hard changes and decisions, like getting payroll under control by increasing revenue or decreasing staff, to get a better deal down the road?

The hangup

With so much invested financially and emotionally, the couple is experiencing what’s known as “founder’s syndrome,” in which the business becomes a part of the family and they rightfully have a lot of pride tied up in it and care about the people involved. In the end, they mostly want to feel debt relief and aren’t as concerned about future income.

The options

He could sell 60% of the business to knock out some of his debt and still leave him with ownership stake. But first, he would need to strip out the DSO structure to make it work and save money. He would need to lower his overhead costs, like dental supplies and lab fees (on top of payroll), which he could accomplish in 18 or so months.

The results

In the end, Francis emphasizes the importance of knowing all your options before making a decision. In this case, he thinks it makes the most sense to focus on what’s underperforming to make the sale more appealing to the marketplace. For the seller, it’s evaluating what’s the worst-case scenario if he decides to wait, using data points to make the best decision for his family and business.

The best path forward

The role of a dental practice broker in situations like this is to take all the emotions out of the process. It’s about giving the seller a different perspective while still understanding what’s at stake, then giving advice that aligns with that vision. There has to be viability on both sides to present all the opportunities at hand to know what life could be like now and in the future.

What’s next?

Every dental practice sale is unique. Contact the experts at Professional Transition Strategies to figure out the best path forward for you and your business.