How to Leverage Equity Arbitrage in the Sale of Your Dental Practice

Even if you’ve heard the term before, you may not know that equity arbitrage is a financial concept that was rarely utilized by dentists before private equity started investing in the space. In short, it all has to do with how valuable the equity is in your practice currently and how much your equity ends up being worth after the sale of your dental practice. “It may be appealing to wait until retirement before starting the sale of your practice, but you would be leaving value on the table,” Professional Transition Strategies (PTS) Founder and President Kyle Francis said in an article for Dental Economics. Here are all the ways equity arbitrage could play out during the transition of your dental practice.

When equity arbitrage takes place

Equity arbitrage occurs during a consolidation wave, such as the one occurring now with dental service organizations (DSOs) since they can offer more money for the same practice because they’re backed by private equity and, therefore, not beholden to the same debt ceilings that private owners have to deal with. Francis explains that by owning your practice, you essentially own the cash flow that exists after all the expenses of the practice are paid, including a fair doctor’s salary to do the work. This cash flow works like an annuity, which you can leverage as an investment much differently than before consolidation. If your equity can be combined with multiple other practices’ equity, the large investment vehicle can grow faster and provide more returns. In the case of DSOs, this means a much higher financial result is accomplished, and the dentist can be the beneficiary of that arbitrage.

What is needed for equity arbitrage to occur

Since dental practices have a steady cash flow and recurring clientele, they can be very profitable, which is appealing to private equity investors. During a consolidation wave, a private equity firm can buy a dental practice at fair market value and increase the value of the equity that has been invested by five times over the course of a typical five-year private equity investment cycle. Equity arbitrage can take the form of a 100% buy-out, sub-DSO concept or joint venture.

How to start the equity arbitrage process

Francis notes that yes, DSOs approach dental practices all the time, but the best way to know the true value of your dental practice is to have it appraised by a professional broker. Only then will you learn its enterprise value, which calculates earnings before interest, taxes, depreciation and amortization (EBITDA), along with how many multiples of this value groups will consider offering. A professional advisor will be able to assess your risk profile to determine how much you want up front versus how much potential you must earn with the sale of your dental practice.

What’s next?

Contact the experts at PTS to determine when is the best time to transition ownership of your dental practice.

How to Scale a Dental Practice

Even if you’ve heard the term before, you may not know that equity arbitrage is a financial concept that was rarely utilized by dentists before private equity started investing in the space. In short, it all has to do with how valuable the equity is in your practice currently and how much your equity ends up being worth after the sale of your dental practice. “It may be appealing to wait until retirement before starting the sale of your practice, but you would be leaving value on the table,” Professional Transition Strategies (PTS) Founder and President Kyle Francis said in an article for Dental Economics. Here are all the ways equity arbitrage could play out during the transition of your dental practice.

When equity arbitrage takes place

Equity arbitrage occurs during a consolidation wave, such as the one occurring now with dental service organizations (DSOs) since they can offer more money for the same practice because they’re backed by private equity and, therefore, not beholden to the same debt ceilings that private owners have to deal with. Francis explains that by owning your practice, you essentially own the cash flow that exists after all the expenses of the practice are paid, including a fair doctor’s salary to do the work. This cash flow works like an annuity, which you can leverage as an investment much differently than before consolidation. If your equity can be combined with multiple other practices’ equity, the large investment vehicle can grow faster and provide more returns. In the case of DSOs, this means a much higher financial result is accomplished, and the dentist can be the beneficiary of that arbitrage.

What is needed for equity arbitrage to occur

Since dental practices have a steady cash flow and recurring clientele, they can be very profitable, which is appealing to private equity investors. During a consolidation wave, a private equity firm can buy a dental practice at fair market value and increase the value of the equity that has been invested by five times over the course of a typical five-year private equity investment cycle. Equity arbitrage can take the form of a 100% buy-out, sub-DSO concept or joint venture.

How to start the equity arbitrage process

Francis notes that yes, DSOs approach dental practices all the time, but the best way to know the true value of your dental practice is to have it appraised by a professional broker. Only then will you learn its enterprise value, which calculates earnings before interest, taxes, depreciation and amortization (EBITDA), along with how many multiples of this value groups will consider offering. A professional advisor will be able to assess your risk profile to determine how much you want up front versus how much potential you must earn with the sale of your dental practice.

What’s next?

Contact the experts at PTS to determine when is the best time to transition ownership of your dental practice.

What to Consider Before Selling Your Dental Practice

Deciding to sell your dental practice can arguably be the most challenging step in the transition process. With the right team of advisors in place, it can be a financially and emotionally fulfilling experience. But where do you start, and how is the value of your dental practice determined? Whether you’re ready to begin planning your transition strategy or you want to learn more about your options, it’s important to understand what impacts the sale of your dental practice. Here are the top five considerations before selling your dental practice.

Know the facts

It’s easy to talk in hypotheticals when thinking of selling your dental practice, but there are a lot of considerations to get on your radar sooner rather than later. You’ll want all the information available to make the best decision for your dental practice. 

Before entertaining offers, you’ll need to have a prospectus in place for both an individual buyer and a group to assess the fair market value of your dental practice as this can vary based on a range of factors. A prospectus includes practice and patient demographics, practice location, staff, insurance, facility, equipment, production summary by category, financial analysis, practice valuation and return on investment

This will help determine if your practice is healthy enough to bring on a partner, whether you should consider affiliating with a dental service organization (DSO), or if you need to make some drastic changes so your practice is more appealing to potential buyers. The most common transitions include:

  • Buy-out: Purchasers buy a practice within a relatively short time period. On average, this takes about three to six months and is the quickest transition route.
  • Buy-in: A specific buyer purchases a defined portion of the dental practice. This is a longer-term approach that can expand the value of your practice over time.
  • Affiliation: You sell a percentage of your business to another entity, typically a DSO, with the intent to slowly transition out of the practice and give up clinical control to the group. This is an excellent way to maximize the practice’s value.
  • Associate to buy-in: A group of associates will court a potential buyer to purchase over a period of time. This process ensures compatibility and a smooth transition to map out the future of the practice. Division of power is the biggest decision that needs to be made with this method. While this is the longest approach — taking at least five years — it’s also the most flexible.
  • Associateship: Yes, you can sell to associates while maintaining full control, but in this method, not everything is agreed upon upfront, leading to a mere 20% success rate.  
  • Merger: Two existing dental practices combine into one entity, and owners often stay on as equal partners after merging. Mergers offer great benefits, like the net income remaining constant or even increasing because there is no loss of business.
  • Roll-up: You purchase multiple dental practices and combine them under one entity to maximize economies of scale. This can boost the value of your practice when it’s time to sell. A roll-up transition is the most lucrative if you have the time and capital to dedicate to this plan.

Make a plan

No matter the reason for your transition, starting the process as early as five years out will give you ample time to identify and make changes to your dental practice to improve the valuation. A good broker will make suggestions on how to amplify your marketing efforts, increase production, and streamline costs and efficiency, including dental supplies, lab costs and even payroll in an effort to increase profitability

Starting the transition process early also gives you the flexibility to be more discerning with the offers you receive. If you’re in a pinch to sell your practice, you may be forced to take one of the first offers and leave money on the table. Being in the driver’s seat of the sale affords you the time to evaluate offers and choose the best one for you, your staff, and your practice, as well as making your practice more attractive to DSOs looking for an affiliation.  

Stay the course

Maintaining your production is one of the best things you can do to obtain the highest valuation possible for your practice because the financials from the most recent years will weigh the heaviest when determining the practice’s value. Slowing down your production can have a massive impact on the price you can get for the practice.

The same holds true for your practice’s specialty. Gearing up for a transition is not the time to focus on a new niche specialty or even make the move toward a multispecialty practice. By opening the practice up to a new specialty — like going from a general practice to a periodontics practice — you decrease the potential buyer pool, which can negatively impact your sale options.

Keep an open mind

Thirty years ago, one of the only transition options was taking on an associate who would hopefully buy your dental practice one day, but today, there are so many more possibilities. Working with a qualified broker will only open your eyes to a dental practice transition you might not have otherwise considered. 

Your options are really only limited by your imagination. Do you want to start the process early so you can affiliate with a DSO before you retire? Or are you ready to get out of the business with a buy-out option so you can move into the next phase of your life? Asking yourself these questions and more will help you narrow down your choices so you can better prepare for the next steps. 

What’s next?

Contact the experts at Professional Transition Strategies to get the ball rolling on the sale of your dental practice.

PPO versus HMO Dental Insurance — The Biggest Differences

dental tools

PTS can help you differentiate between PPO and HMO insurances.

Being a business owner has probably taught you more than you bargained for. That can especially be said for navigating the sea of dental insurance options for providers. It’s a fine line between choosing which options are best for your practice and which your patients would prefer in your given location. Each option has its own set of challenges faced by dental providers, so the answer isn’t ever going to be cut and dry.

Some plans require your dental practice to be part of a network; others limit maximum charges and many have set fees for specific services. So how do you know which is better for your dental practice and its patients? A good start is learning the differences between the two most common types, a Preferred Provider Organization (PPO) and Health Maintenance Organization (HMO) insurance plan, namely costs and flexibility.

Once you’ve got the PPOs and HMOs squared away, you’ll also want to know:

  • What does HMO dental cover?
  • Is HMO or PPO dental better?
  • What does PPO mean in dental insurance?
  • What is the best PPO dental insurance?

The pros and cons of PPO and HMO insurances

Choosing between insurance options isn’t a quick answer for the dental practice or patients.

PPO breakdown

A PPO plan is combined with a large network of dentists under contract to the insurance company to deliver specified services for set fees and according to the provisions of the contract. PPO plans offer a balance between low-cost care and dentist choice with higher out-of-pocket costs for the patient.

A PPO has a more expensive premium but offers more choices for both the provider and patient. Specifically, a patient will still have coverage when seeing an out-of-network dentist since most dentists accept PPOs and don’t typically require a referral from a specialist. In general, patients prefer PPOs due to freedom of choice when it comes to different coverage features and limits but will have to meet a deductible. While PPO plans can have capped benefits, there is no best-case scenario since it is based on a patient’s budget and family needs

HMO breakdown

Under an HMO plan, contracted dentists are paid a certain amount each month in advance for each patient who has been designated or assigned to that dentist. Dentists with a small network must then provide certain contracted services at no-cost or reduced cost to those patients, which is usually not reimbursed to the dentist or patient if treatment is received outside a contracting office.

Conversely, while an HMO insurance plan typically has a lower premium and no deductible, it focuses on preventative care and gives less freedom of choice to the patient for how many dentists accept that plan. The term “restrictive plan” is commonly used, though it doesn’t have exclusions for preexisting conditions. However, HMOs generally do not place a cap on benefits, as long as the right situation exists for both dentist and patient, but may restrict the number of visits, treatments, or diagnostic tests allowed.

A comparison for patients

Your patients will likely ask, so it’s important to know how the two plans stack up.

Primary dentist: Patients will need to choose a primary dentist under an HMO but will need to be referred to a specialist, while PPO plans do not require the patient to choose a primary dentist and do not need a referral for a specialist.

Preventative dental care: This is usually covered at 100% under both plans, including teeth cleanings, oral exams, certain types of X-rays, fluoride treatments, and sealants, though yearly and age limits may apply.

Fillings, root canals, and extractions: Basic restorative services have a flat fee under an HMO, but for a PPO plan, patients will first need to meet their deductible then share a percentage of the covered costs for non-preventative services up to an annual maximum.

Crowns, bridges, dentures, and oral surgery: Major restorative care is covered by both HMOs and PPOs up to a certain amount.

Orthodontic care: Both HMO and PPO plans offer variations of coverage for these benefits but may include age restrictions and deductibles.

Other insurance plan options

PPOs and HMOs aren’t the only insurance options for dental providers and patients.

EPO

An Exclusive Provider Organization (EPO) insurance plan is essentially a hybrid of PPO and HMO insurance, the primary difference being an EPO only allows you to see an in-network dentist but doesn’t require the patient to call the company to request to be transferred.

Indemnity insurance plans

Dental indemnity insurance is an FFS plan that requires insured members to pay dentists directly for dental services rendered. Patients receive compensation from the insurance company by submitting a claim.

Dental savings plans

Although not technically a dental insurance plan, dental savings plans provide patients affordable access to dental care with discounts on most dental services after an annual membership fee for access to a network of participating dentists and specialists. These types of plans can be maintained within the dental practice or through a third party like Kleer.

When to consider a change to insurance

Because every situation and transaction is unique, PTS can help point dental practices in the right direction.

After a dental practice transition

Once the dust has settled after a dental practice transition, it’s a great time to start shopping for other insurance options to make sure you’re offering the best coverage for your patient base based on which options generate the most revenue compared to the list of accepted insurances.

When your dental practice is too busy

Is your number of active patients—those who have visited the office in the last 18 months—more than 2,500 when 1,500 active patients are considered full capacity? Are you booked 80% of the time with a six-month advance? When all else fails or isn’t enough to keep your patients at a reasonable amount, it’s time to shop for different insurance options.

When you want to attract new patients

The underlying goal of any business owner is to grow its customer base. With a dental practice, whether new or existing, a small but impactful way to attract new patients is to reevaluate insurance options, while at the same time contributing to the valuation of your business.

How to diversify your insurance

As the dental insurance landscape continues to evolve, PTS advises improving your profitability and patient relationships by latching onto the emerging trends.

The facts

According to a 2020 survey by DentistryIQ, it all points “away from costly FFS models and toward coordinated care, value-based reimbursement, and more streamlined, affordable, and prevention-based experiences.” In fact, the number of health plans offering adult dental benefits has more than doubled since 2018, according to West Monroe Partners, adding to the convergence.

What this means

Standalone insurers have historically dominated the market, but now they will be forced to evolve, partner with health plans, or lose out to the new competition. Additionally, individual plans could shift toward employer-sponsored plans. In turn, dental practices will have to adapt to the growing demand for value-based care with lower costs in terms of reimbursement terms.

The results

Dental insurance plans will continue to converge to offer a unified product for oral and overall health. The health integration is supported by value-based dentistry, health plan partnerships, and available dental insurance driving patients to routine care, resulting in more dental visits and even more billable opportunities for your practice.

When to strategize

Designate someone on your team to track insurance trends and explore the options that work best for your patient base. When necessary, outsource for efficiency and cost-efficiency. Staff members can continue communication with patients related to insurance education and benefits.

Continuing trends

While the COVID-19 pandemic continues, manage your practice workflows with cloud-based practice management software for the benefit of both the patients and staff. And though not a long-term solution, teledentistry can be used to communicate any changes to patients without the need for an office visit.

When it makes good business sense

Insurance options affect more than just your patients but also your bottom line.

Dental practice demographics matter

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 you are planning on offering Medicaid and lots of insurance options, you can be in a low- to middle-income area. Conversely, if you want to be more FFS and offer a lot of cosmetic services, being in an affluent area would be advantageous.

Dental practice merger considerations

Do both practices entering the merger currently accept insurance and the same plans? If not, then decide what you are going to keep and what you are going to stop taking. Keep in mind that patients may switch providers should you stop accepting their insurance. Are your fees similar? Patients don’t want to feel as though they are now being overcharged after the merger and may ultimately leave the practice.

Managing 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 a graduate can count on spending $570K toward dental school. The leading cause of a lower income is the lower fees associated with PPO insurance plans. Shopping insurance providers will not only be financially beneficial as a business owner, but for your patients, as well.

The interplay with Delta Dental Premier

While there’s no hard deadline for the shut down, PTS helps you prepare for the change.

The latest

Because Delta Dental Premier is being eliminated, dental practices whose patients are primarily Delta Dental Premier subscribers will have a hard time selling as the buyer can lose all those patients. What’s more, the attrition rate can also affect the multiple used in the valuation, decreasing the overall value of the practice.

Read the fine print

At this time, Delta Dental is no longer allowing practices to participate in Premier-only plans. As this is a phased approach, in California, a new Delta contract requires all new participants with Delta agree to see not just the Premier patients, but also all patients on any Delta PPO plan. Because a great majority of California doctors are on the Delta Dental Premier program, no California doctor on Delta Premier can hire an associate unless they will only see non-Delta Dental Premier patients. The same will apply to all states as it is rolled out.

Know your fees

Because Delta Dental Premier is the higher-paying program, dentists are being forced to join their lower-paying PPO plan if they wish to stay in the network. By choosing to stay on with Delta, your practice must accept all PPO patients, which often come with $1,000 or more fee discounts. These lower reimbursement rates threaten to reduce practice profits and significantly lower the value of affected practices. However, before rushing to sign up for the lower-paying PPO plan or drop Delta participation altogether, remember in the average practice, insurance company reimbursements account for less than half of the total receipts.

Exercise the competition

Many fee-for-a-service (FFS) dentists only participate in Delta Dental, leaving their options limited in terms of services and fees. But just as you wouldn’t enter a contract with the first and only dental supplier, dental practices should explore all options for coverage contracts. As with all business decisions, knowing your options will only help leverage deals and speak more intelligently to keep your contractual obligations honest. When given the power of exclusion, any organization will do what’s in its best interest and not in the interest of clients, so it’s important and necessary to keep your options open.

Bottom line

While there’s no one right answer for dental providers across the board when it comes to insurance options, the experts at PTS can help point you in the right direction. Contact us today.

5 Steps to Selling a Dental Practice

dentist office

Are you thinking of selling a dental practice? If so, you’re likely wondering how long it will take. You have put a lot of time, sweat and tears into building a successful practice. The fact that you are considering selling it can take a mental and physical toll. To prepare for your upcoming transition, here are five things you should know.

Start planning your dental practice transition early

One of the best pieces of advice is to start planning early. Planning early allows you more options than if you wait until the year you are ready to move on. These options are not only the type of transition you go with, but also which offers you consider. If you wait until the last minute to transition out of your practice, you may be stuck taking the first offer you receive. By starting early, you can be more discerning about offers that come in and move forward with the one with which you feel most comfortable.

Starting early gives you time to consider different transition styles. If your practice is large enough, you can sell half of your practice to a partner and continue to work for a few more years. When you determine the time is right, you can then sell the other half to either your current partner or someone else.

Getting a head start also allows you to consider affiliating with a dental service organization (DSO), which you most likely wouldn’t be able to if you needed to get out immediately. The reason for this is that DSOs tend to request the current doctor stay on for about two years.

By starting early, you can determine if you are happy with the value of the practice or if you need to get more out of it to clear any debts. This knowledge can help guide you when determining if you need a few more years to build up the value of your practice before taking that next step.

A transition period is a period between two transition periods. – George Stigler

Know the facts

Instead of living in the hypothetical, know your reality. Too many times, one can plan for a transition without knowing the facts. “Ignoring facts does not make them go away,” as businessman and Hall of Fame quarterback Fran Tarkenton once said. (1) It’s important to have a prospectus in place when determining the right transition type for you and your practice. By understanding the fair market value of your practice, you will know if your practice is healthy enough to bring on a partner, whether you should consider affiliating with a DSO or if you need to make some drastic changes so your practice is more appealing to a potential buyer.

To take this deep dive into your practice, look to a professional to create a prospectus. The knowledgeable experts at Professional Transition Strategies (PTS) will create a prospectus for you at no cost or obligation to work with us. We do this because we believe it is important to practice what we preach: Know the facts before you make any decisions.

The prospectus includes but is not limited to:

  • Practice demographics
  • Practice location
  • Patient demographics
  • Staff
  • Insurance
  • Facility
  • Equipment
  • Production summary by category
  • Financial analysis
  • Practice valuation
  • Return on investment

Don’t let the value of your dental practice drop

A common mistake made by dentists and dental specialists throughout the country is to let the value of their practice drop leading up to a transition. This honest mistake happens when doctors decide they are ready to scale back but they aren’t ready to “hang up their hat” just yet. By cutting back their schedules, only taking certain cases, reducing their hygienists’ hours, etc., they inevitably see their production and collections decrease.

Considering a practice’s value heavily depends on the average of the last three years. With the most recent year receiving the most weight, this reduction will result in a significant drop in value. As investor Warren Buffett once said, “Price is what you pay. Value is what you get.” (2) As much as one would like the practice’s value to be based on the “potential,” the truth is that a bank won’t lend on the hypothetical. Therefore, it is imperative to consider your plans before cutting back, because “cutting back” can dramatically cut the value of your practice.

Know your transition options

Without knowing all your options, how can you possibly choose the right one? One size does not fit all when you’re selling a dental practice. You cannot know you made the right decision without knowing the available options. Once upon a time, a dentist’s only options when transitioning a practice was to either sell to another doctor or close the doors. Times have changed. A dentist or dental specialist now has several options.

The most common transition types include:

Speak with a dental transition expert to determine the best plan for you and your practice.

How long will it take to sell my dental practice?

The most common question leading up to a transition is, “How long will it take to sell my dental practice?” Many factors can help gauge how long your practice will be on the market. One that will play a major role is the location of your practice. Is your practice in a metropolitan area? Is it in a rural community? Is your practice in a desirable area of the city? While it can’t be said for all practices, the offices positioned in “hot spots” of the country — such as Austin, San Diego or Denver — will move faster than those based in a smaller, more rural area. Sales can be as short as 22 days from the day your practice goes on the market to the day it closes or as long as two to five years.

Another variable that will play a part in how long it takes to sell your practice is your practice size. Practices valued between $750,000 and $1.2 million tend to be a sweet spot for most buyers. Practices collecting less tend to sit on the market longer. The reason is that smaller practices mean less revenue for the incoming doctor. This is especially true if the buyer is still paying off student debt.

What is a dental practice broker?

A dental practice broker has undergone training that makes them an expert in taking you through a dental practice transition. A factor in how long a practice takes to sell is the experience and knowledge of your broker. To ensure you are in the best hands, you should hire a broker who is familiar with practices like yours. This does not mean practices in your city, town or even state. It is more important that your broker has worked with practices of your size and in the transition capacity you are looking for — affiliating with a DSO, partnerships, straight buy-outs or even partnering with a private equity firm.

It’s also important to make sure your broker “pounds the pavement” on your behalf and be active when it comes to finding the right buyer. All too often, practice transition brokers post a marketing description on a few websites, sit back and wait for calls to come in. Work with someone like PTS that takes a proactive approach to finding the right fit for your practice.

What’s next?

If you are considering the possibility of selling a dental practice, contact the team at PTS. We will answer any questions and help prepare you in this exciting new stage of your life.

Resources

25+ Documents Required for Closing a Dental Practice Transition

Closing on a dental practice can be exciting and anxious at the same time. After receiving closing instructions from your bank, it’s time to start getting your documents in order. Here’s a list of what you’ll need to bring to the closing, whether you’re the buyer or seller.

Sellers

  • Asset/stock purchase agreement
  • Goodwill agreement
  • Non-compete agreement
  • Asset allocation
  • Re-work
  • Lease/real estate purchase
  • Selling doctor’s employment agreement
  • Operating agreement (if buy-in or merger)

Buyers

  • Lease or purchase agreement building (6 weeks)
  • Asset/stock purchase agreement (4 weeks)
  • Goodwill addendum
  • Non-compete agreement
  • Asset allocation
  • Bill of sale
  • Independent contractor or employment agreement for other doctors in practice (1 week after purchase agreement complete)
  • Proof of insurance (4 weeks)
  • Business insurance
  • Property insurance
  • Life insurance
  • Disability insurance
  • Organization documents (varies widely by state)
  • Articles of organization
  • Incorporation and certificate of good standing
  • IRS letter of EIN
  • Operating agreement if a partnership (2 weeks)
  • DBA document (1 week)
  • Bank account/wire instructions for receipt of loan proceeds
  • Current state licensing documents/NPI number/DEA registration
  • Debit agreement from bank for loan repayments
  • List of insurance plans currently in-network with
  • List of plans the buyer is credentialed with currently
  • Direct deposit into the new bank account, if necessary
  • Operating agreement (only if entering a partnership or merger)
  • Promissory note
  • Collection agreement (collection basis, per diem or base salary for transition period)
  • Lease or building purchase agreement finalized

What’s next?

Contact the experts at Professional Transition Strategies to help get you one step closer to closing on the dental practice of your dreams.

3 Reasons to Start Your Dental Practice Transition Early

dentist working on patient

Dental practice transitions don’t happen overnight. In fact, a well-laid plan can take as long as five years if done properly. Even if you aren’t ready to hang up the proverbial hat, it doesn’t hurt to take a few steps in the right direction. Here are some suggestions to make sure your dental practice lands in the right hands. 

More transition options

Once upon a time, the only options for transitioning out of a dental practice were to sell to another dentist or close its doors. But today, the options are seemingly endless. You can choose to sell your practice in whole or a portion to a partner for a longer-term transition plan, sell your practice but continue to work as an associate, merge with another successful dental practice, or affiliate with a dental service organization (DSO), among others.

More offers

Your options aren’t limited to the type of transition but also the offers you receive. If you wait until the last minute to transition out of your practice, you may be stuck in a situation where you have to take the first offer you receive. By starting early, you can be more discerning on offers that come in and truly only move forward with the one with which you feel most comfortable.

Increase value

The necessary step of valuating your dental practice not only helps determine which type of transition would be best, but also tells you what upgrades need to be made before selling your business. If the value of your practice isn’t enough to clear your debts, you can decide if you need a few more years to build up the value of your practice before taking that next step.

What’s next?

Learn more about your transition options with the e-book “Strategies for Transition,” then contact the experts at Professional Transition Strategies to begin the process.

Dental Practice Transition Due Diligence Checklist

dentist working on patient

Once the seller and buyer agree to the terms, the due diligence process begins, which can take anywhere from 30 to 45 days. In the case of a successful dental practice merger and even affiliation, careful due diligence is imperative. But no matter the type of transition, practicing due diligence will leave little room for error in the long run among your team of advisors. While the documents required may vary depending on the specifics of your transaction and lending requirements, here’s a checklist to help get everything in place.

Seller’s side

Practice corporation: Is there a legal corporation to which sales proceeds should be paid, including family trust, corporation, personal funds and 1031 exchange?

Will the buyer get a Doing Business As (DBA)?

Does the existing entity need to be closed?

In the case of a merger or buy-in, what is the Tax ID (EIN) for the practice?

Is there a license needed for the business?

For the selling doctor, what is the existing and new work schedule, and what is the compensation?

If the value of accounts receivable will be determined on the day of closing, what will the standard schedule for accounts receivable valuation look like in terms of percentages? This includes real estate, insurance and licensing.

Buyer’s side

What documents are required for the bank? This includes a loan application with preapproval letter, the bank’s personal financial statement, tax returns for the previous three years, a credit report, verification of funds, bank statements, final loan offer from the bank, closing instructions from the bank and articles of incorporation with IRS documents.

What’s next?

Contact the experts at Professional Transition Strategies for a complete due diligence checklist and to get the dental transition process started.

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

Every so often, Professional Transition Strategies (PTS) hosts a webinar for sellers to learn more about the transition process. In April 2019, 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 you would consider selling to a dental service organization (DSO), 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 certain 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% 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%.

Clean up your books

In addition to charging yourself market rent if you own the building, if you employ your spouse, consider replacing them or at least start paying them 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, certified public accountant (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 roadmap 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 hard 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 PTS to learn about the next steps.

Transition Timeframes and Factors that Contribute to Them

dentists working on patient

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 their 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%.

Buy-in: 1–4 years

A buy-in is essentially a short-term and defined associateship period that is approached from an owner’s time set, not employee’s. 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 (DSO) 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.