How to Build Value and Prepare to Sell a Dental Practice

If you are like many older dentists, 2020 may have left you wondering whether it’s time to retire. While that is an understandable question to have right now, there are a lot of factors to consider before you sell a dental practice. Acting hastily can jeopardize the potential value of your practice. However, with a little bit of thought, planning, and expert guidance, you could still be well positioned to transition your practice sooner than you may expect, as buyer activity is high right now. 

Below we’ll discuss some of the factors you should consider and pass along some expert advice from Matt Howard of Blue & Co., a dental CPA, accredited business valuator, and certified valuation analyst with extensive experience in valuing dental practices for transitions. 

Business Valuation: How it Works and Why it Matters

In short, the valuation report for your practice will be one of the most important documents in your transition process. This is what you will provide to potential buyers to show that your practice is worth the price you are asking for it. The business valuation will take into consideration the average collections, expenses, operations and physical practice. “The first part of the business valuation always has historical numbers of the practice,” says Matt Howard.

This report will show whether your practice has grown, stayed at a consistent level of earnings, or declined in the past five years. Under the current landscape, this report will also show your pre-COVID earnings, and where you are currently at in relation to them. This matters, because many banks are looking for practices to be at about 80-85% of their pre-COVID earnings in order to be willing to lend to a buyer. 

In addition to the historical numbers, the business valuator will look through your financial statements and practice operations. Matt explains, “We’ll go through the data. We’ll enter it into our models. We’ll ask very specific questions about that data . . . We want to really understand everything that’s going on inside the practice.” 

Once the business valuator has considered the market variables, they will present you with a draft and look for your input before finalizing the report. Once that is done, the report is finalized and can be presented to potential buyers and the lending bank. 

Can You Build More Value Before You Sell a Dental Practice?

The short answer is yes.

The long answer is also yes—as long as you are looking to build value in the right areas, and have the right amount of time. Some investments, like major equipment or software investments, will probably not be recouped if you are looking to sell soon. Whether an investment in your practice will pay off will depend greatly on the specific type of investment and your timeframe. Again, you’re wise to consult with your financial advisors before spending money on any improvements. 

According to Matt Howard, you should start preparing to sell a dental practice at least five years before you plan on transitioning. This would be the time you start talking to your dental CPA and other financial advisors about the process. This would also be the time you might start talking to dental practice transition specialists, like our team here at DDSmatch Mid-Atlantic. The reason for early planning is to give you plenty of time to make any adjustments to your practice that will maximize value. It will also help you to not overlook any details or make any errors that could cost you when it comes time to close the sale. 

Advance preparation also gives you plenty of time to think about how you want to wind down your career and begin your retirement. Matt explains that “some things to take into consideration are knowing yourself and knowing what your aspirations or your goals are for the practice transition.” 

Too often we see doctors who want to slowly ease out of practicing, who have already started to cut back hours and started seeing fewer patients. What they may not realize is that decreasing your revenue stream now makes your practice less valuable for a future sale. According to Matt, “A decreasing revenue stream in the valuation world is not exactly ideal. What we like to see is [the practice] either consistently growing by inflation or at least steady in the collection perspective.” Decreasing your hours and your revenue stream is not a bad desire, but consider how it will affect a future sale before you take that step. It may be time to bring in an associate so you can still build your business while cutting back on your hours.”

Look at Your Insurance Mix

These days, many dentists are having to deal with higher write-offs than they did earlier in their careers. Some have even decided to close up shop based on this factor alone. If this sounds familiar to you, there are some things you can do before you decide to just lay down your instruments and sell your dental practice.

First, keep in mind that accepting dental insurance plans is really just another form of marketing: it’s a way to make your practice appealing to patients. You are agreeing to reduce your usual, customary, and reasonable fee to attract patients with the insurance plans you work within. And whether you accept someone’s insurance is not necessarily the sole reason someone might choose your practice, it can be a significant factor to many patients. 

Second, take a look at the dental plans that you do accept, and clearly determine your profit margins for each plan. Are you earning enough from these plans to continue accepting them?

Third, for those plans you are not earning enough from to justify continued participation as an in-network doctor, consider becoming an out-of-network provider. Also keep in mind that these plans are negotiable. If you haven’t negotiated your plan rates during the last two years, you are a good candidate for renegotiation. It may be a good idea to talk to an insurance management expert, in which case we can offer some trusted referrals. 

Know the Value of Your Patients

One of the major factors in your practice’s valuation is your patients—both your active patients and new patients. Take a look at your 2019 numbers. How many new patients were you seeing each month? The average dentist should ideally be getting about 25 to 30 new patients each month, assuming a 12-14% attrition rate. If you aren’t seeing these kinds of numbers, you need to determine why. This means looking both at how you are marketing your practice, and how your internal systems for reappointments, case acceptance, and overall patient experience are functioning. In fact, problems with those internal systems can be more significant than your marketing.

If your marketing does need to be retooled, you want to make sure that you are doing it in a way that will make both dollars and sense. A financially rational marketing plan will require you to know how much revenue an active patient (one who makes a follow-up appointment and accepts the care you recommend) brings to your practice. You can determine this by looking at your 2019 collections and dividing it by the number of patients you saw during that same year. Once you have the average value of a patient, you can use it to calculate a marketing budget. This way you can be sure you are not paying more to get new patients than those patients are really worth.

While you are reviewing your 2019 numbers, take a look at each department and procedure category within your practice. Look for areas where you can improve and set appropriate goals. This will help you determine whether your fees for each procedure are set at the right level and will help you in negotiating fee schedules with insurance carriers.

Office Remodels and New Equipment: Is It Worth the Cost?

If you haven’t remodeled your office or upgraded your equipment in quite some time, you may be tempted to invest a lot in those areas. Anytime you are considering a major outlay of cash, you should discuss it with your dental CPA or other financial professionals to make sure that you will recoup that investment either over time or when you sell your dental practice.

Many dentists think adding value in the form of newer equipment or a remodeled office will be helpful when selling a dental practice, but as Matt points out, that is not always true. Matt suggests avoiding significant equipment purchases and remodels five years or less before you plan on selling, and reports that “significant remodels at that point would probably not be a complete one-for-one return on your money.”

That said, if your practice desperately needs updates to bring it up to an average standard of care and appeal to a prospective buyer, then carefully spending money in that area may still make sense. For example, if your practice has not moved into the digital age, now is the time to update your operating systems. However, a newer x-ray machine or more comfortable dental chairs won’t get you a higher price if the ones you currently have are working well. 

Bottom line—hold off on large business expenses that aren’t necessary to get your practice up to an average standard of care, as you won’t likely see that money coming back to you when you sell.

How to Prepare to Retire with Confidence

A great piece of advice for success is to “do what you do best and outsource the rest.” Just as you rely on your dental CPA for financial advice and your dental attorney for legal advice, you may want to consider talking to a dental practice transition specialist for practice transition advice. When it comes time to sell a dental practice, if you’ve put together the right team of trusted advisors, you can be sure that you are making the right choice every step of the way.

DDSmatch has created a clear roadmap for the dentist who is five to seven years out from retirement, called the Practice Optimizer Experience. This program is designed to assess the current value of your practice, help you identify your practice transition goals, and guide you step-by-step toward achieving those goals. Here is what it includes:

  • Conceptual Transition Experience: Sit down with our experts to determine your goals for before, during, and after your transition.
  • Trusted Valuation Analysis: As we detailed above, a reliable business valuation is crucial to anyone listing their practice. Our experienced business valuation partners will analyze your practice twice: once at the beginning of the process, and once before you sell a dental practice.
  • Ideal Retirement Calculation: A financial review of all your investments and projected future income is needed to ensure you can retire comfortably. DDSmatch Mid-Atlantic partners with the expert team at HK Financial Services to provide a Retirement Check-up, either as a third-party opinion or alongside your current advisor’s calculation. 
  • Estate Preparedness Gameplan: Your estate should be prepared and protected in the event of an unforeseen death or disability. Our experts will refer you to a local attorney to create essential legal documents such as a will or trust.
  • Dental Insurance Navigator: As we touched on above, you should review the insurance plans in place before listing your practice. We arrange a customized consultation with Shelley DeGroff of Integrative Dental Solutions, a PPO Advisor, who will advise you on your current payer mix. 
  • Clinical Opportunity Blueprint: We reveal your practice’s potential in a detailed report that functions as a blueprint of opportunities, detailing production mix and intensity, new patient flow, and more. This step allows you to maximize the opportunities for growth in your practice.
  • Critical Metrics Analysis: Your practice is constantly changing, especially as you focus on adding value before retirement. We provide periodic, customized reports aimed at keeping your practice producing at a high level.  
  • Trusted Transition Process: When you are ready to move forward with your transition our experts will start you on our Trusted Transition Process™. This roadmap lends complete transparency to the process of preparing and listing your dental practice, and will successfully carry you through to the other side of your transition. 

While this article can offer you general advice that applies to most dental practices, your specific practice will require an individualized approach. Our experts at DDSmatch Mid-Atlantic have helped many doctors like you sell their dental practices across Maryland, Virginia, and Washington, D.C., and can offer a wealth of knowledge and experience to the process to ensure you achieve the outcome you envision. 

In the end, it is never too early to start planning, preparing, and prioritizing for your future. Contact us today!