Trying to decide if you should list your dental practice for sale? Don’t do anything until you hire an experienced dental CPA to work for you. Blue & Co. is the third-party, non-biased valuator ddsmatch Four States uses. The Blue & Co team looks at all aspects of the dental practice to determine the true and fair market value price and advises both the seller and the buyer on their next steps.
We recently spoke with Matt Howard of Blue & Co. to find out just how useful CPAs can be in a dental practice transaction. As a dental CPA himself, an accredited business valuator, and a certified valuation analyst, Matt Howard knows the ins and outs of the sale of a dental practice. He helps sellers know when it’s the right time to sell their practice or bring on an associate. Howard explains a few reasons why a dental CPA is invaluable to dental practice transitions.
Deciphering Business Valuation
You don’t want to sell your practice for less than it’s worth, or price it too high and have no takers. A dental CPA can help you figure out the true market value of your practice. For instance, at Blue & Co., their team of experts will put together a 70-page business valuation document that breaks down every financial aspect of your practice.
A dental CPA will look at financial deviations from the norm, and ask you for more detailed information. Maybe there was a month where you were out of town for a lengthy period of time and didn’t see very many patients. Explain that to the CPA so they understand why the numbers reflect a significant change.
As the seller, you’ll receive a draft report from Blue & Co that will go over all the numbers and factors in extensive detail. Your CPA will help you understand how they came up with the final
valuation price. You’ll also have the opportunity to give your personal input after the initial report, so the CPA can make adjustments and present a final version to both you and the buyer.
This report is designed to describe the true market value of a dental practice and reflect how its resources are being used, which are often not the same thing. As Howard notes:
“The biggest noise in [the business valuation of a] . . . dental practice would be the owner’s noise. And what I mean by that is anything that’s inside the practice that is not necessarily operational, or is basically something that the owner has decided to do at the practice that doesn’t exactly reflect the operations of the practice . . .
A lot of times, a seller will own the building, and in owning the building, they’ll pay themselves a leased rate for that building. And sometimes that isn’t a market rate. Sometimes it’s a little bit above, sometimes it’s a little bit lower. And so our job in this process is to really help really work through the practice financials, the historical financial statements, and just basically help sanitize or normalize the numbers as we see them [so] the true operations of the practice are reflected.”
When is the Right Time to Prepare for a Sale?
It’s only natural for a dentist who’s ready to sell his practice to want to cut down their workload as they get closer to that milestone. But before you start decreasing your output or reducing your hours, Howard says it’s best to proceed with a “full steam ahead” attitude so your numbers reflect how much money your practice makes in a typical year.
For example, if a doctor decides to sell his dental practice the same year he starts seeing fewer patients, the revenue stream will automatically decrease and it will look like the practice is beginning to underperform. That sudden downturn can cause the buyer’s lending bank to reconsider loaning the buyer the money to purchase the practice. Howard explains that what banks are looking for is “a very mature practice that’s either consistently growing by inflation, or at least steady in the collection perspective.”
So, instead of slowing things down right when you’re ready to sell, you should begin preparing around five years before you want to sell, or possibly sooner. If you have a goal to retire by 62, and you’re currently 53, keep in mind that you’ll need to work hard for the next 9 years, only slowing down once the valuation and dental practice transition is complete to maximize your practice’s value.
Should I Bring on a Dental Associate if I’m Not Ready to Place My Dental Practice for Sale?
Sometimes dentists want to lessen their workload, but they are not quite ready to place their dental practice for sale. In these cases, bringing on a dental associate may be the right solution. You may be excited about this prospect, but what about the other members of your staff? How do you know if your practice is prepared for this change?
Howard observes, “Every practice has a limited amount of resources, of ops, of time for the staff to not hit overtime. So there’s a lot of variables at play here. Typically, we like to see over a $1.2 million collection practice in general. That way there’s plenty of room for an associate to come in, inherit some of that revenue stream, as in, hopefully the seller wants to back off a bit and transfer some of their patient base over to the associate.”
Benefits to the Seller
With a dental associateship, a seller can gow the value of the practice and keep serving their patients while cutting back on hours here and there if need be. But the seller should keep in mind that some patients who have a long-term relationship with you as their dentist may not want to see someone new and may not like the change. Usually, bringing on an associate can service more patients and keep patient satisfaction and retention high. Just be sure your dental associate is a good match for your practice.
Benefits to the Associate
Many dentists that are just starting out are eager to join a mature, thriving, practice so they can earn money immediately. Plus they don’t have to worry about spending a lot of time trying to attract patients to the practice through extensive marketing and advertising. As an added bonus, they can learn a lot from you.
When a dental associate joins a practice, they may get guaranteed earnings for the first couple of months they are there, and then move into a production or collections-based compensation after that. Ordinarily, an associate is in the thick of paying back student loans and their income needs to cover both their debt and reasonable living expenses.
In other words, it needs to make financial sense for both the practice and the associate to ensure the dental associateship is successful. Blue & Co. has come up with a program they call the Associate IQ. Howard explains how this program helps dentists considering an associate:
“[We] systematically go through the practice. We have about ten different areas that we look at to make sure that it makes sense for the practice to bring this on. Does it make sense from the owner’s side, and does it make sense from the associate’s side?
“Some things we’ll look at, is if you only have three ops, and you want to bring in two dentists a day, that doesn’t make a lot of sense. So after looking at a bunch of these different variables and intricacies of the practice, we will come up with basically a quotient of how you rate on a scale of zero to 100 for being a good candidate for having an associate.”
Doctors need to carefully consider all of the above variables before hiring a dental associate. They should outline expectations with their associate and make sure they’re both on the same page so there are no surprises for either party. When a dental associate leaves, it can be especially difficult on the practice, as the patient base has typically grown and one doctor can no longer handle it on their own.
If you think a dental associateship is the right move for you and your practice, it’s crucial to consult with a dental CPA to be sure you and your practice can support this change in the long run. Taking advantage of all the advice and experience a professional dental CPA has to offer can help you consider all the factors you hadn’t thought of before and guide you to an informed decision.
Should I Upgrade my Practice to Increase its Valuation?
Though it is important to make your practice attractive to the buying doctor, most upgrades won’t necessarily pay off in the sale. Howard explains:
“If you’ve still got the shag carpet in the practice, that probably needs to go away before you start marketing it. So those types of considerations will bring it up to standard of care and that could make it more valuable.
“However, you’re probably not going to get a one-for-one payback on your investment. So my end-all, be-all recommendation is, five years before the practice sale, unless you’re really making your practice digital or doing something that’s bringing it up to standard of care, any other significant remodels at that point would probably not be a complete one for one return on your money.”
Be sure to take a good look at your current dental equipment and patient systems to evaluate if they’re antiquated. A young dentist may not be deterred by lime green-painted walls, but they may not even consider buying your practice if you’re still using old equipment they haven’t been trained on or don’t know how to use.
The Question of Asset Allocation
As Howard succinctly puts it, “It’s not just the price, it’s the overall deal” when it comes to a sale. “And what I mean by that is this: the million dollar price is great and all. However, it’s not about what the price is, it’s about what you keep. And obviously what I’m referring to here is taxation.”
Most everything in the sale is essentially going to be allocated as an asset, or as goodwill. The sale of tangible assets are taxed as normal income. The sale of intangibles, such as goodwill, is taxed at the more favorable capital gains rate. As the seller, the more of the practice value you can allocate to goodwill, the better that is for you—the more money you keep.
Eventually, everything in the sale, for the buyer, can be depreciated over time. So, in the long run, the financial aspect of asset allocation has less of an overall impact on the buyer. For the seller, however, when that tax bill hits, it is a one-time hit.
The good news is that how the assets are allocated is really just a subject of negotiation between the buyer and the seller to agree on a mutually beneficial arrangement. Rather than a fixed formula, this ratio is determined by the agreement of the value between the parties to the sale. With an experienced dental CPA and a competent lawyer on your side, you can be more certain that your interests are properly represented and important details won’t be overlooked.
ddsmatch Four States Can Help You With Your Dental Practice for Sale
If you are considering placing your dental practice for sale in the Kansas, Western Missouri, Arkansas, or Oklahoma areas, we at ddsmatch Four States are your dental practice transition specialists. More than just dental practice brokers, we have refined our Trusted Transition Process to ensure the continued wellbeing of your patients, staff and community. We know how important it is that the buyer not only have the clinical skills and personality to successfully carry on your practice, but also the ability to continue your legacy.
Our focus and expertise revolves entirely around helping you in whatever way best matches your individual goals and needs while helping you avoid common, costly mistakes. Contact us today and find out how we can help you achieve your dental practice transition goals.