Dental Practice Sales | True or False?
By Matt Porter, Menlo Dental Transitions
In Part I of this blog series, we covered some important facts that you need to consider when preparing to sell your dental practice. Today, we are going to play a game of True or False to dispel some of the more common myths when selling your practice.
I will have to carry the note on the sale of my practice because banks aren’t lending to recent dental school grads. False. The dental practice lending market is very fluid, but in the last year, lenders have been providing financing for 100% of the purchase price AND an amount for the buyer’s working capital, up to as much as an additional $50,000. What may be counterintuitive is that lenders are more apt to
provide financing for a more expensive practice than a lower priced practice. This is due to the more expensive practice’s ability to provide the cash flow necessary to pay the buyer’s student loan, practice loan and living expenses. Some banks will even lend to new graduates, while others require at least a year of experience or count an AEGD as equivalent work experience.
Practice valuations take into account the last 3 years of financials. False. In the past, dental practice appraisals were typically calculated using the last year’s financials, but other than establishing a pattern of consistent performance, the last 3 years are of little impact. In today’s market, due to the amount of large fluctuations in the micro and macro economy, both buyers and lenders are basing their valuations on the last 12 months of financials and collections. In additional, in situations of declining revenues of typically more than 10%, lenders will require some type of seller financing for a portion of the purchase.
Practices are selling for X% of collections. False. Every time I hear a dental practice value reduced down to a simple, generic rule of thumb such as percentage of collections, I want to scream! In this past year, I’ve completed transitions between 65% and 96% of their respective collections. There is such a broad spread in these values that it impossible to use this rule of thumb as a proper benchmark. Much of a valuation depends on what’s ‘below the line’, expenses and profitability, not to mention the qualitative facets of each practice – location, demographics, staff, equipment, facility, procedures, insurance mix – and the list goes on.
It typically takes 6 months to sell a practice. False. As with valuation, a sweeping generalization doesn’t give you enough information to make an informed decision. For a practice in a metropolitan area, a broker can typically have a dental practice sale completed in 4-6 months. In a more rural area, you need to start planning earlier, as it can take a broker anywhere from 18-24 months to sell a practice in a rural area. Brokers representing specialty practices in a metropolitan area have a similar time frame of roughly 12 months. Based on my secondhand experience of watching FSBO (for sale by owner) dental practice sales, it typically takes the owner/dentist 12-18 months to sell their own practice in a metropolitan area. Of course all these time frames depend on a number of factors, most notably sales.
A significant number of patients will leave the practice following a dental practice sale. False. It is an old wives tale that up to 20% of the patients in a practice will leave during the first year of a transition. With some of our buyers, we have worked to successfully track patient loss and attrition. After the initial six months, we have found the patient loss to be around 5%, but even that amount is typically offset by new patient flow. Based on conversations with national dental lenders and practice brokers in other regions with similar tracking methods, the range of results is between 2% to 8%. Even in the circumstance of a short transition period of 30 days, with the right planning and programs in place, the patient attrition has stayed in the range of 5%.
As you can see, you can’t believe everything you hear. These misconceptions are prevalent in today’s dental market and are often passed on from colleague to colleague through anecdotal stories. Don’t be afraid to pick up the phone and ask for some real-time advice from your broker or CPA. A good advisor will have their finger on the pulse of the current market. Armed with the facts and being able to avoid the future pitfalls, you can confidently plan your transition and ultimate retirement, leading to more peace of mind today and more financial freedom.