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.

Transition Timeframes and Factors that Contribute to Them

One of the contributing factors and most commonly asked questions when it comes to dental practice transitions is “How long will this take?” As with any business transaction, the answers are not cut-and-dry. Here are some transition timeframes and the factors that contribute to them to help guide your decision.

Buy-out: 0–365 days

A buy-out is the quickest and most predictable transaction with the search being dependent upon marketability and location of practice. In a buy-out, the senior doctor is looking for someone to take over the entirety of his or her practice but can choose to stay on as a long-term associate, contributing to the transition period. Once a buyer is found, the success rate is close to 100 percent.

Buy-in: 1–4 years

A buy-in is essentially a short-term and defined associateship period that is approached from an owner time set, not employee. While the majority of the time is spent finding the right fit, the buy-in should occur within one year after the getting-to-know-you period. A roadmap is established upfront with all the material facts about the transition to make the process more predictable and the time horizon to be more defined.

Merger: > 2 years

The longest part of this transition is finding two clinicians who are not only compatible, but also have a similar timeframe and geographic location, both in terms of real estate. Though not always the case, in most mergers, one facility is kept while the other is relocated. However, the operational side can be as quick as a buy-in as only purchase documentation and operational agreements are required.

Affiliation: < 3 years

Similar to a merger, with an affiliation, the doctor will most likely stay on for a period of time with the buying dental service organization or group, depending on the practice type and location. Also similar to the search process of a buy-out, the operational process for an affiliation can be even quicker even though there is more due diligence as they are familiar with the process, compared to a first-time individual buyer.

Associate: 5 years

On paper, taking on an associate is normally the fastest route as there are often a lot of prospects; however, with a one-in-five success rate, timing can be unpredictable finding the best match for your dental practice. While the search can be the quickest part at about one month, the operational part of having that person buy in can take up to a year and ultimately might not work out in the end.

Private equity investments: > 5 years

The underlying goal of this transition is to make sure the practice is big enough that a private equity group would be interested in funding it. Private equity groups are constantly searching for the right practice and can close as fast as any DSO or individual once the correct partner with a solid platform is found. However, the majority of the time is spent because the doctor would need to stay on board for at least five years since it is the business they are looking to take over.

What’s next?

Read up on the different options for dental practice transitions in the e-book “Strategies for Transition,” then contact the experts at Professional Transition Strategies to start the conversation.

How to Manage Your Dental Student Loans

While dentistry will most certainly be a lucrative career in the long run if you play your cards right, the harsh reality is that the average dental school debt is approximately $260K. Add to that an average of $220K in lost earnings plus interest, and a graduate can count on expening $570K toward dental school. Don’t be discouraged that dentistry is the number one job in America for debt; your investment is typically paid back within eight years of practice. Here are some points to consider along the way.

Buy a practice

Rather than starting as an associate or even working for a dental service organization, after graduating with a negative net worth, the fastest way to make dentistry worth it is through practice ownership, most notably in an area where there is demand. Though counterintuitive, taking on more debt will pay off.

Grow your practice

Consider the population-to-dentist ratio in your practice area, then hire consultants to grow your practice and stand out above the rest. Working with smart financial planners and CPAs throughout the process will keepy you headed in the right direction.

Shop insurance providers

The leading cause of a lower income is the lower fees associated with PPO insurance plans. Shopping insurance providers will not only be financial beneficial as a business owner, but for your patients, as well.

Ask the right questions

What are my debt repayment options? Can I pay down my student debt? Can I limit my student debt? Should I repay my debt? And perhaps most importantly, will practicing dentistry make me happy?

What’s next?

Read up on other options in the e-book “Recent Graduates,” then contact the experts at Professional Transition Strategies help guide you on the right path.

The Kids Are in College; Now What?

Becoming an empty-nester is a natural time to start thinking about your next steps, as well. While there is still tuition to be paid, a well-laid dental practice transition takes years of planning, whether that means engaging in a partnership or preparing for retirement. Here are some steps to start taking now.

Contact a broker

It takes approximately 150 hours to transition a dental practice, which is one of the many reasons to hire a professional broker. In order to get the most of your sale, both financially and personally, a professional broker will help you focus on the bottom line and create an accurate appraisal of your dental practice while vetting potential buyers and removing any emotion from the transaction.

Crunch the numbers

Determine how much you need for retirement, how much debt you have left, and how much you need to get out of the practice when you ultimately decide to sell it. The most important point is to plan for your transition while production is still high to ensure you gain a higher valuation. Because the most recent years’ collections are weighed heavier than past years, you’ll want to go out on a high note if a sale will take place in the next two or three years.

Know your options

With all the transition options available, you’ll want to have an understanding of your ideal transition and discuss with a broker what is currently possible and what you need to do to get to your ideal transition plan. Planning early will allow you the option to affiliate with a dental service organization, bring on a partner who will eventually buy the remaining share of the practice when you are ready to retire, or simply understand where the practice needs to be financially and strategize how to increase the value of the practice if needed.

What’s next?

Read up on sellers’ options in the e-book “Strategies for Transition,” then contact the experts at Professional Transition Strategies to get the proverbial ball rolling.

Dental Practice Transitions, by the Numbers

You’ve kept up with the Insights blog; you’ve taken the dental practice transition quiz. Now it’s time to learn even more about the process by way of a cheat sheet broken down by the numbers.

1,500

Number of active patients considered full capacity for a single dentist. Any more, and it may be time to consider taking on an associate or partner.

680 

Credit score that is favorable to getting a better business loan.

80

Percent of goodwill that contributes toward the overall value of your practice.

150 

Hours it takes to sell a dental practice, which is one of many reasons to hire a professional broker.

15

Minimum number of days patients and staff should be notified about the sale of a dental practice.

30

Percent of dental practices that will belong to a dental service organization by 2021, as predicted by the American Dental Association.

5

Years out you should start thinking about a retirement plan.

20

Pages that make up a prospectus, broken down into different categories of interest to the buyer identifying the areas that potentially need attention.

99

Percentage success rate of a buy-out, versus 60 percent for a partnership and 20 percent for an associateship.

What’s next?

Read the e-book “Strategies for Transition” to learn more about the different dental practice transition options, then contact the experts at Professional Transition Strategies to learn more.

How to Get a Return on Your Dental Practice Investment

Purchasing a dental practice is no easy task, but it’s only the beginning of the hard work you’ll need to do to see a return on your investment. Whether the practice is new or existing, opportunity cost should drive all your post-buying decisions. Here’s how you can ensure ROI is top of mind.

Time value

At the top of your considerations list should be the theory that a dollar in the bank today is worth more than the expectation of receiving a dollar in the future. In other words, spending and earning wisely now will only pay off in the long run.

Loan payment

Like taxes on your mortgage, interest on your loan payment can be written off as a deduction. Consider taking out a longer-term loan with lower payments to increase the cash flow of the practice, similar to taking out an insurance policy.

Tax advantages

Along the same lines, maximizing tax advantages with every decision will only pay off every year. For example: While all assets depreciate in value over time, Section 179’s Depreciation Schedule allows you to depreciate all assets up to a certain amount in the first year so that no taxes will be paid, in most cases. (Note: Associates don’t receive the same type of tax advantages as the practice owner.)

Cash flow

When purchasing an existing dental practice, cash flow should be analyzed by the income stream of the practice, the compensation necessary for the purchasing dentist, and any obligations incurred, no matter if you are looking at the loan for the actual purchase of the practice or any other working capital needed for equipment, supplies, or anything else to get the practice ready for operation.

Sole proprietorship

Rather than taking the safer route working as an associate or for a dental service organization that will only provide a commission for the work you do, owning your own practice will only maximize the investment of your dental degree because you’ll not only receive a commission but also a profit component.

Prospectus

When working with the experts at Professional Transition Strategies, an approximate ROI equation for the purchase of the practice is included in each prospectus, which adds up the compensation of the doctor, any adjustments made for non-business-related expenses, and net income distributions. The remaining amount is an approximation of the cash flow or immediate ROI available to the purchasing doctor.

What’s next?

Read up on the buying process in the e-book “Transitions: Your Next Adventure Awaits,” then contact the experts at PTS to help guide you through the process.

5 Steps to a Pre-Retirement Plan

Any business owner will tell you retirement doesn’t happen overnight. A well-planned retirement from your dental practice can start as early as five years out. Here are some suggestions to help grease the wheels in the meantime.

Valuation

You don’t need to wait until you’re ready to sell to start the valuation process. Valuating your dental practice before retirement is on the horizon will give you an idea of how much it’s worth and what you need to increase (production, collections, or otherwise) in order to pay off your loan, if you have one.

Scale back

If you’re looking to cut back leading up to retirement but can’t stop collecting or increasing services for financial reasons, consider hiring on a dentist to moonlight or even take on a partner, depending on the size and value of your practice (above or below the $1.2 million mark).

DSO affiliation

In order to get more flexibility by releasing the office management and HR of your practice, consider affiliating with a dental service organization at the peak of your production. While this isn’t an option for everyone since each DSO has its own practice profile or practice requirements (including collections, EBITA, number of ops, location, and type of dentistry), you’ll get a higher valuation and be able to completely retire in a couple of years when the time comes.

Resale

Not every dentist will make money when looking to retire the business. Smaller practices might benefit from reselling equipment and charts separately rather than as a whole entity. Selling patient records is often recommended when a dentist wants to increase production in a short amount of time.

Improvements

Hiring a real estate professional through PTS will help you evaluate the time remaining on your lease to renegotiate lease terms or sale of the building and advise on any upgrades or other improvements that would add to the value of the practice.

Equipment

It may seem counterintuitive to replace equipment when thinking about selling your practice, but upgrading or overhauling large equipment if you’re more than five years out from retirement will help get your money’s worth out of it. Similarly, equipment with technology (X-ray, intraoral cameras, etcetera) can be upgraded within three to five years before it becomes obsolete.

What’s next?

Start thinking more about retirement with the e-book “Strategies for Transition,” then contact the experts at Professional Transition Strategies to begin the valuation process.

7 Changes to Make After a Dental Practice Transition

No two dental practice transitions are alike, but there is one hard-fast rule that buyers should follow across the board: Don’t make any changes after acquiring a practice for at least six months, no matter how smooth the transition, if you want to keep patients and staff happy. What’s more, it is to your benefit to get a feel for the practice and how (and why) the previous dentist operated before making any changes. Once everyone feels settled, here’s how to proceed.

Go digital

When it comes to radiography, intraoral, and any recordkeeping for that matter, transitioning over to electronic software will only pay for itself in the long run. Not to mention, all successful dental service organizations also wait at least six months before changing practice management software.

Equipment and supplies

It may be tempting to update equipment and supplies when first taking over a dental practice, but waiting will not only allow you to become familiar with the equipment but also give you time to price out other dental suppliers.

Procedure types

Branching out to include additional procedure types or eventually become a multispecialist dental practice is a well-laid plan over time, as long as patient care and need are at the top of your consideration list.

Marketing strategy

Your new practice will need a marketing strategy that is specific to its staff and client demographics rather than carrying over a plan from the previous owner. That said, any good marketing strategy takes time to plan in terms of reach and return on investment.

Staff

What worked for the previous owner might not for your new practice, especially if bringing on your own staff. Consider hygiene and operative schedules, as well as a different payroll strategy for staff, including benefits, dates, and pay rate.

Insurances

Once the dust has settled, it’s a great time to start shopping other insurance companies to make sure you’re offering the best coverage for your patient base, while also opening the door to new patients.

Facility improvements

One of the easiest and least expensive changes to make is giving the facility a facelift by changing paint color or cabinets and countertops. While you may want to make these changes right away to make the practice your own, it will be to your advantage to get to know the space first, while also not making too many visual changes upfront that may turn off existing patients.

What’s next?

Read about more changes to consider on our Insights blog, then contact the experts at Professional Transition Strategies to help facilitate the process.

6 Factors when Valuating a Dental Practice

The process of valuating a dental practice before selling is not only necessary for the banks and buyer, but also valuable for assembling a prospectus. A proper valuation will include an appraisal, which will help the seller determine which transition option is best. Here is what you can expect to provide during that process.

Upgrades

Should you upgrade before selling your dental practice? Yes, if selling within five years; no, if selling within a shorter amount of time. Upgrades can be as small as getting rid of clutter and giving the space a facelift as you’re not going to get out what you put in when prepping to sell.

New equipment

While purchasing new equipment before selling your dental practice will add to the value of a prospectus, you won’t get a return on your investment dollar for dollar. When it comes to hard assets, consider what you could get it insured for and the resell value, among other financial factors. When valuating, Professional Transition Strategies will conduct a physical observation of the office with photos of the equipment.

“Goodwill”

There’s more to a prospectus than hard assets, which are easy to quantify. However, the majority of a practice’s value comes from its ability to generate a long-term income stream to the buyer, which includes the doctor’s status within the community, practice name, location, staff loyalty and longevity, and brand awareness and marketing, all of which mean you pay fewer taxes at closing.

Finances

The financials that are involved in a sale include top and bottom line numbers, most recent tax returns, a three-year weighted average of collections and production broken down by provider and procedure type, past three years of profit-and-loss statements, investments, list of insurance plans, current balance sheet, accounts receivable aging report, and a copy of the current lease.

Specifics

Other factors that will be included in the analysis will be whether or not the practice is digital (and the cost to make it digital, if it’s not); the desirability of its location; if the practice refers out all its work; the total active patients and new patients per month for the past 12 months; employee roster with hire dates, hourly wages, and benefits; a bio of the selling doctor; and office hours.

Buyer

Your practice will value differently if you’re selling to a dental service organization. A DSO won’t take hard assets into account but rather will focus on collections and other finances. DSOs also have private equity money, which is favorable to a bank over an individual buyer when it comes to securing a loan.

What’s next?

Read up on the process of valuating your dental practice in our e-book “Strategies for Transition,” then begin calculating how much your practice is worth on the PTS homepage.

20+ Questions to Ask Your Buyer to Ensure a Successful Transition

After so many years owning a private practice, you’ve become invested both financially and emotionally. Once you’ve decided it’s time to sell, it is to your advantage to concern yourself with the buyer‘s intentions to ensure a successful transition for all parties involved. Here is a comprehensive list of questions to ask potential buyers to get one step closer to the completion of the sale.

 

Professional background

What is your dental philosophy?

What type of dentistry have you done in the past? What do you like to practice and prefer not to, such as restoring versus replacing implants?

Is there a type of dentistry that you would like to get into, such as orthodontics, endodontics, etcetera?

What do you like and dislike about your current situation, including specialties that are done in-house versus outsourced?

Are you certified or plan to be certified in Invisalign?

 

Finances

How many lenders have you talked with?

Are you prequalified? If so, for how much?

Do you have enough credit and cash in your bank?

Have you ever been delinquent on payments, filed for bankruptcy, or been sued by a patient?

Are you able to prepare a balance statement and show the past two years of tax returns?

 

Real estate

Do you plan to keep the current location of the practice?

Do you want to lease or buy a space?

Do you have a preference on a five- or ten-year lease?

 

Updates

Do you plan to make any updates or improvements to the practice, its equipment, or software?

Are you willing to pay for any upgrades out of pocket after the sale, or do you prefer upgrades to be made before the sale?

Do you plan to keep the existing staff or bring in your own?

 

Corporate buyer

How do you plan to grow practice profitability?

What are the company’s overall economic goals compared to earnings expectations and financial statements and tax returns?

Do you have references from dentists who previously sold their practices to your company? Were these dentists’ commitments fulfilled in the transaction?

Does the company have a track record of successfully purchasing practices and selling off the new combined entity?

 

Future plans

What are your goals for the practice after the sale?

Do you plan to bring on any specialists?

Would you ever sell to a dental service organization or another corporate buyer?

How can we be sure to protect ourselves and our interests to ensure a smooth transition for patients and staff?

 

What’s next?

Start the process of selling your practice or look for practices for sale, then contact the experts at Professional Transition Strategies to take the next steps.