Stage 3: Transitioning Your Dental Practice

September 2017

By Erick Cutler

You have worked hard to build a successful practice and now are contemplating your retirement. You want to slow down, yet know you have to put in some endgame effort to get the most value for your practice whether you are selling your dental practice to an associate or putting it on the market. It’s important to understand the transition process from top to bottom and develop a solid plan to help you maximize the value of your practice and allow you to be selective about who ultimately takes over what you’ve worked so hard for your entire career.

Gather Your Team

Starting your transition is a lot like the start-up phase of your practice. You’ll need to gather a team of experts that can advise you on the nuances of selling a dental practice. The exact composition of your transition team will vary depending on the specifics of your practice, but it should include some core players.

  • Accountant

A CPA is crucial for understanding exactly where your practice stands financially. Your accountant will review financial documents such as profit and loss statements, as well as your tax returns. Ideally, your CPA specializes in dental practices, allowing this professional to take a number of unique considerations into account, including insurance reimbursement cycles and dental-industry fee and revenue averages. Your accountant should also be able to tell you the tax ramifications of your transition and provide you with a number of options for reducing your tax burden.

  • Financial Advisor

Beyond business bookkeeping and taxes, it’s also imperative to take your personal finances into account. The most important aspect is establishing and growing the money you’ll need once the transition is complete. Selling your practice will contribute the largest chunk of your retirement nest egg, so it makes sense to hire a professional who can help you develop a plan to maximize your retirement fund and help it continue to grow throughout your retirement. This will likely include many diversified investments as well as a long-term disbursement strategy to ensure you don’t outlive your money.

  • Attorney

Although your broker may handle many of the transition details, an attorney can ensure the transition happens within the law and in your favor. Your attorney can conduct the necessary due diligence and provide you with valuable legal advice. Again, it’s a good idea to work with a lawyer with extensive experience in dental practice transitions.

  • Practice Transition Specialist

This individual, also known as a transition broker, helps owners manage the details of the sale or transfer of a dental practice. This specialist is like the head of the team, tying together the activities of the other team members. This professional keeps the transition process running smoothly, establishing timelines, identifying the strengths and weaknesses of your practice and connecting you with potential buyers. Your broker can also provide valuable information to your CPA, such as average revenues and other financial details.

Get a Valuation

A comprehensive valuation of your practice is imperative for a sale or transfer transaction because potential owners will want to know how much their new business is worth. Many CPAs can help you with a valuation or at a minimum, recommend a third-party service. The two most common methods to determine the value of your practice are capitalized earnings valuation and the net asset valuation.

  • Capitalized Earnings Valuation

This method is the simplest. It uses either the prior year’s net income or an average of the last few year’s net income as the basis. This figure is then divided by an industry-standard cap rate of 25 to 31 percent, giving you the fair market value of your practice.

  • Net Asset Valuation

This method requires that you take stock of both your tangible assets, such as your revenue and the age and condition of your equipment and your intangible assets, including:

  • The types of procedures and treatments your office provides
  • Whether patient numbers are increasing or decreasing
  • The location of your practice
  • Competition in the area

This method works best for well-established practices with an ample customer base.

Organize Your Finances

This is where your CPA will be invaluable. Once he or she has conducted a proper audit of your practice, you’ll be able to have a solid idea of where you stand. This step is also imperative for the valuation process, as it gives the appraiser a comprehensive view of everything that contributes to your revenue. The primary consideration here is ensuring that your practice has a healthy cash flow, as evidenced by three key factors:

  • Fees

Your fees should fall within the area’s average. If they’re too high, potential owners may worry about being able to attract clientele. Too low, and your practice may be missing out on additional revenue.

  • Payment Source Mix

You’ll need to determine how much revenue comes from private insurance, Medicare/Medicaid, and self-pay patients. This is important because potential buyers may not want to take on a practice that is largely based on government-based compensation, which is often lower than market averages. On the other hand, having a lot of self-pay patients may also necessitate offering things such as payment plans and credit-based options to make paying for costly procedures easier.

  • Outstanding Accounts Receivable

You’ll need to demonstrate success in promptly collecting outstanding balances. If you’re regularly waiting four weeks or more to receive payment for your services, you’ll need to implement a more effective collection system.

Audit Your Procedures and Efficiencies

This step involves taking full account of your practice’s processes, systems, and patient experiences. With the help of your transition specialist, ask yourself these four questions:

  • Are our technology and equipment up to date?
  • Which procedures are performed in the practice and which are referred out? Can we start doing these procedures in-house?
  • How effective are our current marketing efforts?
  • How long do patients wait to book appointments and how much time do they spend in the waiting room?

The main idea is to find ways to improve every aspect of your practice to boost not only revenue but also decrease inefficiencies.

Above all, you’ll need to make sure it’s the right time to sell. If any of the above aren’t in place, it’ll be difficult to make a successful transition. There’s no harm in waiting a few months, or even years, to get it right.

Need advice for a successful dental practice transition? Call GPP today!

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

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