A Step by Step Guide to Selling a Dental Practice

Selling a dental practice is a complicated process which extends far beyond simply finding a buyer and closing on the sale. Therefore, to ensure your practice transition is successful, it is imperative to follow these critical steps:

1. Are you ready to sell? Making the decision to sell your practice is one of the most important decisions you will make in your professional life. Therefore, it’s prudent to put a great deal of thought into when and how you would like the transition of ownership to occur, including evaluating the financial (including tax consequences) and emotional implications of a sale prior to initiating the transition process. Once you are emotionally and financially prepared to move forward, the next step is to choose a transition strategy.
2. There are countless ways to sell a dental practice. In order to tailor a customized transition strategy to fit your individual situation, you should begin planning your transition 3-5 years in advance of a sale with the assistance of an experienced dental practice broker. Undoubtedly, if you wait too long to start planning, you will have fewer options available to you when the time comes to sell your practice. Another advantage of beginning the process well in advance of a sale is the ability to address/correct issues and avoid making mistakes that could have a negative impact on practice value. This ensures that you maximize the value of your practice upon sale and position the future practice owner for success.
3. Once you have made the decision to sell and have selected a transition strategy, you are now ready to initiate the transition process. The first step in this process is to collect all of the information your practice broker will need to complete a formal practice valuation/appraisal, including: financials, practice management reports, office lease, equipment list, pictures, etc. Upon completing the valuation and establishing the asking price, your broker will construct a comprehensive practice profile that will be utilized to confidentially market your practice to prospective buyers.
4. When you sell a dental practice, maintaining confidentiality during the transition process is extremely important. Therefore, your practice broker should require all potential buyers to complete a confidentiality agreement prior to receiving any information regarding your office, oversee all communication with potential buyers and their advisors, and schedule all practice showings to occur after office hours.  
5. The next step is to find the right buyer for your practice. Your practice broker will confidentially market your practice locally and nationally, and spend the time necessary to evaluate the needs, goals, skill-set, and creditworthiness of potential buyers prior to providing them with your practice information and scheduling a showing.
6. Once an ideal buyer has been located, the next step in the process is to agree on the terms of the purchase in a Letter of Intent, which should detail the proposed purchase price, intended closing date, assets included in the sale, and a list of contingencies that have to be met before the transition is completed (at a minimum).
7. Upon agreeing on the principle terms of the sale, the next step in the process is for the buyer to secure financing. Since most buyers will require 100% financing, it is important for your buyer to work with lenders who are familiar with dental transactions. Again, your practice broker should play an active role in referring the buyer to several experienced dental lenders and helping position their loan request in a favorable light with each lender to enhance the probability of securing financing approval. This involves understanding each lender’s unique underwriting requirements, presenting a comprehensive practice prospectus, cash flow analysis, and supporting documentation (financials, practice managements reports, etc.), and proactively addressing any potential red flags up front.
8. While navigating the financing process, the buyer should also be working on completing their due diligence on the practice. This typically involves meeting the selling doctor, reviewing patient charts and practice reports, inspecting equipment, and consulting with an accountant to evaluate the cash flow of the practice.
9. The most important document involved in a dental practice sale is the Asset Purchase Agreement, which serves as the legally binding document detailing all of the terms of the sale. This document should be specific to a dental transition and be a win-win agreement that protects both sides and discusses how common issues, such as accounts receivables, credit balances, and rework will be handled post-closing. Your practice broker should either provide you with a draft Asset Purchase Agreement and/or introduce the parties to experienced dental attorneys to assist with drafting/reviewing the APA and any other legal documents associated with the sale.
10. In addition to the APA, the buyer will need to negotiate an assignment of the existing office lease or negotiate a new lease with the landlord. It is important to consider the requirements of the lender when negotiating the lease terms and to approach the landlord at the proper point in the transaction to protect confidentiality while not delaying the closing.
11. As the closing date approaches, the buyer and seller will need to work closely with his/her advisors to ensure that all the details of the transition are completed prior to closing, including transferring/establishing service provider accounts (utilities, phone, etc.), PPO credentialing, establishing business bank accounts, merchant services, and third-party financing options, drafting a transition letter that will be mailed to the active patient base upon closing, and ensuring the lender receives all necessary documentation to fund the buyer’s loan on the closing date.
12. Throughout this process, the staff and patients are typically unaware that the dental practice is being transitioned to a new doctor. The reason for this is simple: to protect the goodwill of the practice. Selling a dental practice is an emotional process for any doctor because of the relationships developed with their patients and staff over the years. Timing of this introduction, how the initial meeting is handled, and training the staff on how to explain the transition to patients is a critical step in ensuring a smooth transition of ownership and maximum patient retention following the sale.

While this list covers the most significant steps required to sell a dental practice, it is by no means comprehensive. Each practice transition is unique and presents its own set of challenges to overcome during the transition process. Therefore, it is imperative to be educated about the process and employ the services of experienced professionals (practice broker, attorney, accountant, etc.) to help you navigate the process, protect/maximize the value of your practice, and ensure your transition is as smooth and successful as possible for all parties involved.

Presently, we are in the grips of a significant health and financial crisis. Depending on your age, this is a partial list of the events you have weathered in the course of your professional career:
1) 18-20% interest rates early in your career

2) The 1980s Savings & Loan crisis

3) The 1987 stock market crash

4) The Kuwait War

5) The Oct. 27, 1997 mini-crash

6) The early-2000s dot-com stock market meltdown 

7) 9-11

8) The financial crisis of 2007-2009

9) The Oct. 2018 stock market meltdown

10) The Covid-19 financial meltdown and health crisis

These events, and the everyday challenges and responsibilities you face as a practice owner, have all taken their toll. Maybe you’re thinking that it’s time to ride off into the sunset and let a young dentist purchase your practice. If you are a practice owner, and you are financially able to sell, here are some pros and cons of selling at this time…
Pros:
1) Buyers put extra emphasis on the the most recent calendar year’s gross revenue. You had a good 2019, but 2020 will very likely show a decline of practice revenue.
2) Buyers are still looking to purchase, and banks are still open for business. If you begin today by having your practice evaluated (which would take 2-3 weeks), and a buyer is found within a short span of another month, the writing and negotiating of contracts and setting up a time for closing on your sale would typically take another 60-90 days. By that time, this crisis will very possibly be over, or at least will have become significantly more manageable.

3) Interest rates are at historic lows. Buyers want to take advantage of these low rates. 
4) Even though business is currently almost at a standstill, the mandated closure of dental practices is creating a tremendous backlog of need for dental services. You know how busy you are when you come back from a one-week vacation. Most of us have avoided long vacations for this very reason. This pent-up demand for dental services presents a good scenario for buyers, and we are making them aware of this.
5) Concerning practice sales, we have been in a seller’s market. Age demographics have been suggesting that a buyer’s market is inevitable; baby boomer dentists are eventually going to sell their practices in large waves. This current health/financial crisis is likely to hasten the development of a buyer’s market. If you’re considering selling, you’ll want to be at the front end of a buyer’s market; competition increases and prices drop as that market establishes itself. Several doctors have shared with us in the past few weeks that this current crisis is the final straw for them. Expect the wave of practice sales to grow because of the combination of these factors.
6) It’s time to leave business behind and enjoy the fruits of your labors. You only live once. Every economic downturn and/or significant world event takes something out of you, especially as a business owner. How many more of these events do you want to endure?
Cons:
1) There could be an economic boom after this crises resolves, making this hardship a relatively small blip in the big picture. This may or may not happen.
2) Being a dentist is fundamental to your identity, and you want to keep going for as long as you can do it. We get it, and we applaud you!
3) There will always be buyers. That’s true. However, in a buyer’s market, there will be many other practices for sale. As new sellers flood the market with dental practices, the strongest practices in the prime locations in the biggest cities will sell the fastest (even though they will sell for less than in today’s market). Smaller practices in smaller urban areas or rural areas will have fewer buyer candidates.
4) You’re in the middle of a long-range, strategic plan to build up your practice and sell at X time. It may make more sense to stick with that plan. 5) Even though you may be financially able to retire, it may not be the the best time strategically for you to sell with regard to your overall financial strategy. That’s a decision for you, your spouse, and your financial/legal advisors.
6) You decide you want to sell on your own terms. You’re not going to let an outside event determine your timeline. Again, we get it!
Whatever your decision is, good luck in this difficult time. Consider your future as you deal with the present. We hope that things work out the best for all of our fellow dentists!
Copyright 2020, Kim Sena DDS, Erick Rupprecht DDS
Michigan and Ohio Analysts; Legacy Practice Transitions At Legacy, we do not take a commission on the real estate portion of your sale.