Many dentists want a practice valuation when they’re about to start the process to sell their practice or for another reason relating to a pending practice transition. There is a benefit of conducting this valuation early on though and doing a deep dive into the financials and the details of the practice. Some dentists will procure a practice valuation years in advance to help with their transition planning. This can also give them an objective view of their performance so they can work to improve upon it before presenting their valuation to potential buyers.
The elements of a practice valuation
Practice transition consultants use a wide range of financial and practice data. This may be performed 5-10 years before a transition event, especially if the dentist is targeting a particular sale price. If the doctor isn’t satisfied with their value, the transition consultant can look at things through a different lens and help advise the practice owner on ways to boost the bottom line.
Typically, the first step in a valuation is a discovery call with the dentist, followed by an onsite meeting to gather practice data and financials and to evaluate the facility. Evaluating a practice involves looking at elements such as the cash flow and a comprehensive practice profile. Sometimes the data collection and office visits may be conducted confidentially by the practice owner because they may not want the staff to know early on that they’re considering selling their practice.
Practice transition steps
There are many moving parts when it comes to selling a practice, and having a transition consultant can help with navigating these complexities. A practice transition consultant is often engaged to connect with potential buyers and initiate conversations. This starts with getting a nondisclosure ( confidentiality) agreement signed by the potential buyer to make sure they safeguard the confidential nature of the transaction and everything that is discussed. Once the nondisclosure agreement is signed, the consultant shares additional details, such as where the practice is located and other information to help determine if there is a fit for a potential buyer.
During the process, the consultant vets the buyer to understand their background, goals, production capabilities, and what they’re looking for in a practice. Consultants with a lending background will also know what banks are typically looking for in a buyer and will gather that information. If the buyer has a strong interest and seems like a good fit on paper, the consultant will introduce them to the seller at that point. Having the selling dentist provide a tour of the practice is an important next step. They know all the nuances of the business and are typically proud to share what makes their practice stand out. They’ll also want to make sure that the buyer seems like the right person who will continue their legacy the way they want.
After this meeting, if the buyer moves forward, they’ll sign a letter of intent. From there, the consultant typically makes recommendations for a dental CPA or attorney who can represent the buyer if they have not already retained representation. The consultant can also introduce the buyer to lenders who specialize in dental practice transitions as well as provide overall management of the pending sale. A large part of this involves the vast amount of information needed from lenders, who will evaluate data such as monthly production collection reports as well as any information about how well the practice has rebounded since the practice reopened after the pandemic.
Supporting the buyer and seller
One added value of having a transition consultant involved in the process is their role in keeping both parties on track. This may include providing exhibits, preparing a patient announcement letter from the seller., and helping buyers understand the steps such as setting up credit card and insurance processing as well as payroll services.
Adding an associate
One popular transition choice among dental practice owners is to hire an associate who will eventually buy into the practice as a partner. This can be a good option if there are enough patients to support two dentists. If the patient base is insufficient to support two doctors, then the practice owner may consider reducing their clinical schedule to give the new doctor adequate patients to be productive. If a partnership is eventually it’s paramount to have properly designed partnership agreements citing all the financial and operational terms of the arrangement.
While going through the valuation process, dentists should also document all their important business information in one place and put this in a safe. This way in case of an emergency where they can no longer practice, their family members or partners have the information they need to quickly prepare a valuation if needed. Delays can cause a devaluation of the practice because the longer a practice lacks a producing dentist. The more the practice value will go down as patients go elsewhere.
Transitions can take many forms. While previous generations of dentists would practice in one community and then retire, it’s become more common to see dentists have multiple transitions. They might consolidate or sell their second practice or choose to relocate to another state for personal reasons. Regardless of the plan, it’s prudent to get a practice valuation done several years before selling the practice. This sets the stage for a successful transition.