Whether dentists are trying to sell a practice due to retirement, or positioning themselves to become part of a larger dental group as a result of cost pressures and coordinated care, they must use a critical eye when considering what makes their business attractive to buyers.
In my case, the most significant selling point proved to be documentation of an effective business model that consistently results in accounts receivables (AR) that average 21 or fewer days, when most dentists are happy with 45 days. It’s important to note that healthy cash flow supported by revenue cycle technology, along with a number of other tangible and intangible business assets that appeal to buyers, are not practice characteristics that “just happen.”
Special considerations when selling your dental practice to your son or daughter
Dentists usually think about the value of a dental practice twice in their career – when buying and selling their practice. Between these two points, they focus on caring for patients and day-to-day business. To ensure a profitable sale, dentists need to evaluate the value of their practice, and take time to strategically plan for the practice’s growth and sustainability throughout ownership of the business, not just when preparing to sell. While it’s not always feasible to change some aspects of a practice, such as location or practice profile, dentists should be prepared to articulate and document why the location, practice philosophy, assets, and technology are valuable to the right buyer.
Location affects demographics
The old real estate adage that only three things matter in the sale of property – location, location, location – applies, but does not dictate the sale of a dental practice. When selling a practice, dentists are selling more than just property or an office building. The location translates to demographics and population trends that determine a buyer’s interest.
For example, a practice located in an area with predominately upper middle or high-income residents aged 50-plus is more attractive to a dentist who wants to focus on restorative services than an area that is populated primarily by young families.
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Of course, long-established practices may be located in areas that have changed considerably since opening. The practice may have started with young adults who are now grandparents, but don’t assume this is a negative in the sale of your practice. The key is to document the practice demographics and how they have grown, and to demonstrate how the practice has adapted as the area has changed.
Practice philosophies must mesh strategically
In addition to examining demographics, a potential buyer will look carefully at the dental practice philosophy – is it primarily a cosmetic or a restorative practice, or a combination? Market demographics play a critical role in the success of selling a practice, but buyers are also looking for an existing patient base on which they can build.
This is not to say dentists should create a practice only to appeal to potential buyers. There are buyers for every type of practice as long as one can demonstrate a successful business model. Initial conversations with buyers often discuss philosophy. For example, is this particular “bread and butter” practice ripe for or resistant to focusing on esthetic services, and it depends on the doctors’ philosophies. Understanding the patient base and documenting patients' services will provide insight into the philosophy and how it meshes with a potential buyer’s goals.
Intangible assets create most value
While a dollar and cents value can be placed on a dental practice, it’s not easy to do. Determining the value of a practice involves a variety of expense and revenue multipliers, a review of recent sales of similar practices, and an assessment of tangible and intangible assets, with the value of intangible assets having the greatest impact. Dentists should be prepared to provide a number of reports, including tax returns, AR aging reports, profit and loss statements, patient demographic reports, detailed equipment inventory, copies of lease agreements for office and equipment, software license transfer agreements, salary and benefit information for employees, and copies of declaration pages for all insurance policies. These documents give buyers an opportunity to evaluate tangible financial assets and responsibilities, but the real value of a practice lies in the intangible assets.
Brand and intellectual property are the key intangible assets. Brand equity involves a combination of the practice’s reputation in the community, customer experience, perception of service, and recognition of quality, along with patient and employee loyalty. Protecting the practice’s brand during a sale requires a careful approach to the sale. If a team is aware the practice is for sale, they may be understandably insecure in the current work environment as well as the prospective one. This can lead to the loss of valued employees and patients who want to select their own new dentist or workplace rather than having one selected for them.
I’ve witnessed a number of practice transition deals fail as employees and patients disappeared, leaving the dentist/owner in the difficult situation of hiring new team members while trying to attract buyers to a devalued practice. Keeping the sale of the practice quiet and using non-disclosure agreements until the deal is final eliminates unnecessary workplace stress and protects the practice brand for the new owner, and more importantly, for the seller should the deal fall through.
Though they may not recognize it as such, intellectual property is the single most attractive asset to a buyer. These are the business practices that led to the seller doctor’s success. While financial statements prove the viability of the business processes, it is critical to codify policies and procedures. When patients and employees understand established policies such as collecting co-pays and deductibles at the time of service, the buyer is assured continued cash flow and minimized collections risk. The correlation between established policies, including collection at the time of service, and financial statements demonstrate sustainable business practices that will continue after the transition.
Established policies and procedures related to the use of business technology are also important. It is not enough to say the practice has revenue cycle technology. It is critical to show that team members maximize their use of automated tools. My practice’s use of OneMind Health’s revenue technology to predetermine benefits, submit claims, track referrals, and review claim payments was key to the practice’s positive cash flow.
Written business protocols for team members that integrate the use of revenue cycle technology create an opportunity for a buyer to see that positive bottom line results supported by technology can continue after transition.
Technology supports results that drive sale
Dentists tend to focus on clinical technology as a key driver of practice value. This is true only to the extent that practice productivity is attributable to that particular clinical technology. Used dental equipment, no matter how sophisticated, retains little intrinsic value, but if dental team members can work more efficiently as a result of the technology, the equipment has a direct impact on revenue.
I’ve known colleagues who updated most of their clinical technology just before placing their practice on the market in an attempt to facilitate a “turnkey” sale. Unless the existing clinical technology is obsolete, the cost of new equipment is rarely recouped and may make the practice less marketable. Dentists have their own preferences for clinical technology and will install the equipment they choose.
For example, many dentists have been told that selling a practice with film instead of digital imaging is impossible. In my case, the lack of digital imaging was a plus because the buyer also preferred film and did not want to assume ownership of equipment he could not use.
Business technology, while still unfamiliar to most buyers, is a critical selling point if positioned correctly. For this reason, it is important not to identify business technology as a stand-alone valuable asset. Because buyers are probably not acquainted with the software and its capabilities, sellers must point to the processes and the results of those processes as a valuable asset.
As mentioned, my practice relied on revenue cycle technology to support efforts for time-of-service collections, pre-treatment estimates, and claims filing. My employees’ ability to maximize the technological benefits generated financial results that appealed to the buyer, including decreased overhead, accelerated cash flow, reduced default rates, and lower billing and collection costs.
Building a dental practice that gains value throughout the life of the practice and recaptures that value at transition requires dentists to balance time as a clinician and a business owner. The clinical side of the business comes naturally with training and years of experience; however, recouping financial and time investment when it’s time to sell can be a challenge. A strategic approach to learning how business technology enhances financial stability, developing business processes that create efficient workflows, and understanding patient and market needs can make all the difference. Developing an understanding of these activities and implementing new processes now will make selling a practice simpler and more profitable in the long run.
Dr. Brian Hendrickson practiced general dentistry for over 27 years after graduating from Washington University School of Dental Medicine. He studied corporate governance at Harvard Business School and the Corporate Directors Institute, serving on numerous corporate, philanthropic, and scientific boards. He most recently served as Assistant Professor at the University of Colorado, and is founder and president of Thinkocity, a health care business systems developer and management consultancy.
