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Thinking Like a Buyer When Preparing to Sell Your Practice

by Gavin Shea | 03/01/2015 | Financing & Financial Planning , Dental

Published in ADA News on March 2, 2015

If you?re thinking of selling your dental practice, you?re apparently not alone. The practice transitions market is undergoing the most meaningful growth we?ve seen in about six years. 

Beginning in 2009, the number of available practices for sale started declining as retirement opportunities diminished and doctors chose to continue practicing for a few more years. That trend has now shifted, with older practice owners beginning to leave their careers and sell their practices. At the same time, practitioners just now reaching the traditional retirement age are placing their businesses on the market as well.

As a result, the dental industry is likely to experience a large number of available practices for sale over the next two to three years. How can sellers preserve practice value and attain top dollar in a vigorous buyer?s market? Keeping the buyer?s perspective and lender?s requirements in mind will be critical. Following are a few tips for getting the most out of (the sale) of your practice.

1) Maintain production levels. As you approach retirement, it?s natural to want to slow down your work schedule. However, it?s critical to maintain production levels through your very last day at the office to preserve the practice value you?ve worked hard to build over the years. If you limit the number of hours you spend in the practice each week, you can potentially devalue your practice at the time of sale.

Your buyer?s lender will look at your income history for the previous three years to help validate the assessed practice value and sale price. Clearly, if you are winding down your business over your final years of practicing, you are devaluing your future equity. 

Let?s say you traditionally work 4˝ days a week, but decide to drop to 3 ˝  days a week in order to wind down your practice during the few years prior to sale. That 25% reduction in your work week can also lead to 25% reduction in your net income.  Since dental practices typically sell for a multiple of net income, you can begin to see how this decision can impact your practice?s sale price.  In addition, many buyers and lenders can be wary of purchasing a practice that has demonstrated declining revenues and income. 

Maintaining your normal work schedule can potentially preserve a higher estimated value for your practice. Remember that your buyer?s lender will base the valuation amount for the practice acquisition loan on this value.

2) Incorporate advanced technology. Most buyers cannot afford additional funding for equipment upgrades once they have obtained a practice acquisition loan. They are seeking to purchase as much practice as they can now afford, equipped with as much of their preferred technology as possible. In particular, for new dental school graduates trained in the latest equipment, an up-to-date practice that includes that specific technology can have a significant edge over competing practices.

In addition to increasing genuine appeal and value for the right buyer, the inclusion of advanced equipment may also benefit your practice with improved efficiencies, higher production levels, greater patient confidence, and more referrals. Remember that any investments designed to bring more dollars into your practice will be recaptured in your sale price.

3) Leave potential profits in the practice. Prospective new owners will evaluate the future production potential of your practice perhaps more than any other factor of your business. They want to know that your patient base has the ability to generate reasonable, immediate cash flow when they take the helm, and that the practice is well positioned for continued growth. 

In addition to reviewing the proper financials and projections, your buyer will look for evidence that servicing your patient base will support their income requirements. While your inclination may be to complete all of the major dental work your patients need, this may in fact work against you.  A savvy buyer will want to see a  genuine opportunity  to generate meaningful cash flow, so maintaining the status quo will work in your favor.

4) Keep your financial books in order. Smart practice buyers will work with their broker to understand the guts of your practice operations long before they come by to view your location. As you approach retirement, be sure you are keeping your financial records properly organized with full documentation of production levels, charges and receipts, bank deposits, and tax returns. Any discrepancies in your financials may lead to deeper investigation by the buyer and potential negotiation of your sales price.

By following these important guidelines ? maintaining production levels through the sale of your practice, staying technologically current, leaving future work for your buyer, and keeping your financial books in order ? you increase your chances of gaining the highest dollar for your career-long investment, and attracting the perfect new owner for your practice and patients.

Gavin Shea
Gavin Shea is the Senior Director of Sales and Marketing at Wells Fargo Practice Finance. Gavin has over 17 years of financial experience helping practitioners start, grow, and transitions their practices through a diverse array of financial products and services.

All practice financing is subject to credit approval. Business Refinance Program is for business term debt only. Revolving credit and existing Wells Fargo Practice Finance debt are not eligible for consolidation.

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