Are you thinking about a dental practice transition, like selling your practice, joining a group, expanding your practice, or relocating? If so, you have many important decisions to make. As with any major decision, the better informed you are, the more likely you are to make the right choice. As any practicing dentist knows, the industry is changing, and that can complicate practice transition scenarios.
The percentage of dentists affiliated with dental service organizations (DSOs) is on the rise according to the ADA, especially among young dentists. They are three times more likely to be affiliated with a DSO than dentists who are close to retirement age. More broadly, the dental industry is on the upswing, with a five-year annual growth rate of 2.4% and rising demand due to an aging population.
The good news is that an evolving industry presents compelling opportunities for dentists who know how to navigate the changing landscape or work with a partner who can help them maximize practice value and position the business for a successful transition. With that in mind, here are three tips that can help you kickstart your dental practice transition.
Start planning now
The earlier you start planning your practice transition, the more options you’ll have. One common scenario is that dentists who are close to retirement decide to gradually take on less work. Fair enough; they’ve worked hard all their lives, right? But the problem is that declining income lowers a practice’s value.
As the timeframe for the transition gets closer, options such as joining a DSO are foreclosed since those agreements are often on the condition that the dentist remain with the practice for a set period of time. Waiting until a target retirement date also undermines your negotiating position if you’re selling your practice.
Dentists who plan transitions well in advance are in the strongest position. They have time to maximize practice value, take on associates, or make an agreement with a DSO. They don’t feel compelled to act on a proposition received from a potential buyer to meet a near-term target date. They can take their time and choose the best option from a position of strength.
Get a prospectus
You wouldn’t buy or sell a home without a market appraisal because you need to know the value before considering or making offers. The same is true for a dental practice, and a prospectus that includes a practice description, production for the past few years, patient analysis, and financial information is a critical component of readiness for a practice transition.
The day-to-day management of the practice lulls some sellers into thinking they have enough information to market their practices effectively, but without a prospectus they’re dealing in hypotheticals. You need to know exactly where you stand in relation to your objectives so you can make good decisions.
Say you want to retire in 10 years. Is your practice growing? Maybe you plan to tread water until you’re ready to make a move. That’s fine, but keep in mind that declining revenue, patient count, or income is a huge red flag to potential buyers and banks. The point is, knowing where you stand will help you make the right short-term decisions to meet your long-term goals.
Know your options
According to the American Dental Association’s Health Policy Institute, fewer dentists are selling practices to individuals for a variety of reasons, including a rising student debt load for new dentists and a growing share of group practices in the market. The market is shifting as more baby boomer dentists retire.
But the changing practice marketplace isn’t necessarily cause for alarm. Instead, it’s a reason for dentists who are contemplating a practice transition to familiarize themselves with the many types of transitions. Practice buy-in or buy-out are just two of several options. Others include associateship to buy-in, associateship, merger, roll-up, and affiliation. Knowing all of your options is crucial.
In one actual case, a dentist in a practice with two partners was thinking of selling his share to an individual. The practice was valued at $3.8 million, so his share represented one third of that value. But when the group’s transition expert explored affiliation options, the practice received more than half a dozen letters of intent, which raised the total value to $12 million.
Even with challenges like student debt, the future is bright for practicing dentists of any age. As boomers retire and the overall population grows, demand for dental services is outstripping supply. Dentists have more business model choices today than the independent practice paradigm, including options that can help them achieve a better work-life balance.
If you’re ready to kickstart your practice transition, keep these tips in mind. Whether you choose to do it alone or work with a practice transition expert, you’ll be in a better position to negotiate and make short-term decisions that have long-term impact if you start planning early, understand the value of the practice, and know what options are available. Preparation is the key to success.
As the chief operating officer at Professional Transition Strategies, Rebecca Kilibarda is responsible for working directly with the president of PTS to develop business operations of the company. Her experience and leadership have been focused on developing and delivering result-driven business services, as well as providing unparalleled customer service and creative solutions. Kilibarda has a consistent record of positioning practices for success and providing inventive options to allow the transitioning doctor to accomplish their objective.
