By Justin Schafer
If you’re a dentist who owns a practice operating several different locations, then you may have wondered how the sale process will shake out once you’re ready to start thinking about retirement. Like any transition, the process can be complex and will vary depending on how many locations you own as well as your time horizon and the post-sale employment agreement.
Consider taking these three essential steps when preparing for a multilocation sale.
Step 1: Organize Your Financials, Critical Documents and Practice Statistics
Before you start the sale process, you need to organize each office’s financial statements and documents. When we work with clients who are about to sell multiple locations of their practice, this is the first step our team tackles. We want to understand what the numbers look like for each individual office, as well as their respective profit and loss (P&L) statements.
It’s also critical to pay close attention to your tax returns and how they’re organized by location. For instance, does each office location have a separate tax return, or are you filing for three or four of your locations under one consolidated return?
If you’re filing all locations under one return, your dental accounting and advisory team could run into problems when trying to dissect what types of dental work you’re performing in each office and breaking them down in the P&L statements for each. A buyer may find it difficult to commit to purchasing multiple locations of a practice if they can’t understand what’s going on at an individual level. The best solution is to maintain separate financial statements and documents–including tax returns–for each of your offices so your team can better analyze income, production, debt, employee wages, profitability and supply costs on an individual basis. This also allows your team to break down the revenue associated with each location, which enables you to sell one of the offices outright if you choose to work with a buyer who’s interested in only one location.
In addition to having clean financial statements and documents on hand, you also need to gather production and collection reports (for at least the past 12 to 36 months) from each office. Buyers will complete separate analyses of each location, so they can see an accurate picture of how each is performing. Doing it ahead allows you to identify and break out specific expenses, and it also could potentially help a buyer pinpoint area where they could increase their profit margin, which can be a big selling point.
A final tip to keep in mind during the first phase of the sale preparation process is to maintain solid practice statistics. Key statistics to track include new patients per month, average patient type and average type of dentistry performed per location. Why exactly do these numbers matter to a potential buyer? Consider this example: If your practice is referring out a lot of specialty work from one specific location, then a buyer will know what gaps they may need to fill in-house or what types of specialists they should bring into that office. In other words, practice statistics help buyers understand what they’re getting for the purchase price, which can help you negotiate for more value.
Step 2: Create the Post-Deal Structure and Strategy
At this point, you’ve cleaned and organized your financial statements and tax returns, and you’ve compiled production and collection reports for potential buyers to review. The next step is determining the post-sale deal structure, including what type of management and production role you’ll have in the practice for a period after the sale has closed.
Let’s take a quick step back and explain why “goodwill” is important to buyers, particularly when you’re selling multiple locations. The longer you stay on board through the practice transition process, the more attractive your practice will be to a buyer. Your buyer will be striving to keep production at historical levels to continue meeting patients’ needs and revenue goals. To do that, the buyer will expect you, as the primary doctor and owner of the practice, to stay and help improve the quality of dentistry that you’ve performed previously, because that’s what the value of your practice is based on.
If your practice fails to meet those standards moving forward, the revenue will drop, and your payment will significantly decrease on the portion of the deal that’s seller financed. If you’re selling a multilocation practice, you may get anywhere from 60% to 70% of the sale payment upfront, but then have the rest of the payment disbursed over a three- to five-year period via a promissory note that’s tied to practice performance. If you’re looking to sell your practice and jump immediately into retirement after the deal closes without investing time back into the practice during the transition, you could inhibit the total maximum value of the business.
With all of this in mind, think about how long you’re willing to work before you even take your practice to market. What revenue numbers do you feel comfortable hitting? Are you planning to retire in two years or to stay on for six to eight years? Keep in mind that many dental service organizations (DSOs) require sellers to work in the practice for three to five years post-sale; others may want you to stay on for five to seven years depending on the size of the deal, the number of locations you have and the revenue targets they expect to hit after they purchase your practice.
Narrowing the Buyer Playing Field
The other piece of your transition strategy comes down to your ideal buyer. If you’re selling a multilocation practice, you most likely have larger offices and so need a buyer who has the cash on hand that would qualify with a conventional lender or private equity money to back the
purchase. With this in mind, you want to make sure the buyer you choose can own, operate and qualify for a larger practice purchase. For instance, in my work with multilocation sales, I typically see buyers who already own additional practices themselves– anywhere from five to 10 or 100 to 200 locations throughout the country.
Some multilocation owners choose to sell to larger organizations or DSOs with experience running multiple locations because they can provide a wider pool of resources that will take the current practice to new heights — such as more profit-sharing opportunities for employees or better technology and equipment in the office. You can help facilitate the merger between your staff and the larger buyer, ensure employees stay engaged, maintain production levels and keep the transition flowing smoothly.
Step 3: Assess Your Sale Readiness
After you tackle the first two steps of the sale process, make sure your practice is well organized internally. Review the terms of your contracts with employees and associates. Organize all your lease agreements and monthly rent obligations and find out what the options are to renew your leases if needed. Look at your human resources handbook and reassess whether your policies are the same or different per office.
Buyers will request and review all these details when engaging in a potential sale with you. The more organized and aligned your policies and practices are across offices, the easier it will be for potential buyers to review the bigger picture, which will likely translate into a higher dollar amount for your practice.
In addition to getting these items organized, have an expert compile a practice valuation in advance of any potential sale, whether it’s 12, 24, 36 or even 60 months away. A transition planning team can look at your financials and analyze the deal as if they were the buyer, giving you a valuable insider’s look into what you can expect. Plus, the team also can help you develop a roadmap and strategy for the sale process. It’s never too early to start planning for a transition, particularly from a tax and financial perspective.
Justin Schafer, of Aprio, LLP is a recognized dental industry leader with more than 12 years of experience guiding clients through practice transitions, mergers, real estate purchases, banking, debt restructuring and practice financing. His experience with financing dental transitions for two of the largest dental lenders in the nation has provided him with both buyer and seller perspectives on virtually every type of transaction imaginable. Justin helps dental practice owners understand the valuation of their practices for potential sales and the financial impact of selling on long-term personal wealth.
If you’re a multilocation owner who’s ready to start planning for a practice transition, speak to your Patterson territory representative about how Patterson Practice Transitions powered by Aprio can assist your practice. Find out more by visiting pattersondental.com/practice-transitions.
Editor’s note: Originally published in the Winter 2023 edition of Advantage by Patterson Dental.
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