“If you are waiting for the right time… Time never comes. Time only goes.”
There are plenty of pundits and experts to weigh in on when and how any business owner should monetize their business. Dentistry is no different. Many of these same pundits have a vested interest in – and inherent conflict with – the outcome. They stand to lose revenue when their clients sell their businesses. A story as old as time.
What is *actually* being sold in a practice sale?
The primary asset being conveyed in the sale of any professional service business is the customer list – the patient base in the context of a dental practice. This is why the goodwill is usually the largest tax allocation in successful practice sales (80%+). The other core asset being monetized is the “Owner Income” – i.e. the excess income an owner doctor earns from the practice beyond the FMV compensation they’d earn as an associate (e.g. 30% of receipts). Combined, the Owner Income and the FMV compensation should equal Seller Discretionary Earnings (SDE).
Owner Income is commonly referred to as “EBITDA” in the context of most valuations. EBITDA is the free cash flow that repays debt and funds future capital expenditures and profit distributions. This is the same figure that any practice lender is analyzing to pay back debt related to funding practice growth and acquisitions.
But, But, My Foregone Income!?!?
This tends to be one of the more oft-discussed topics. “…Well, if I sell today, I lose tomorrow, right?...”
Sure, that is the case with selling any healthy business or earning asset. Talk to most former business owners and there is almost always a list of lingering “what ifs?” in the wake of a business sale. There can even be a grieving process akin to losing a loved one, getting divorced, or any other significant life event.
Ideally though, it should be a celebration - the opening of a new chapter and/or a pivot to a healthier path forward.
Note that a dental practice sale only represents the monetization of Owner Income (or EBITDA). It is not the monetization of the FMV associate compensation which remains. In a general dentistry practice, the primary contributor to EBITDA are the profits derived from the hygiene team followed by the doctor’s contribution.
Excluding the non-financial considerations to selling a business can make it rather easy to criticize or dismiss the basic math. We’ve all heard some form of this statement, “…If I sell and work-back I’m going to pay for my own practice in X years…” The sale of any business requires blue sky and upside for the next owner. If it does not, then the next owner only has downside and shouldn’t do the deal (at least on those terms).
Most businesses are ultimately valued based on what can be reasonably financed – e.g. cash on hand, bank debt, investor dollars etc. The related risks and return expectations are well established. Be wary of outlier bids or bids overly weighted towards contingent payments, “second bites”, and improbable “recap” scenarios. Again, the market is only getting more efficient, not less, and outsized equity returns simply aren’t happening anymore. They will also not be returning.
There is usually an upper threshold – as determined by the market – to the valuation of any business or asset. In a professional services business, your most valuable assets walk out the door every night. A dental practice is not a government bond. There are no guarantees. It is a living, breathing economic engine and results can swing day to day or even hour to hour. People quit. People move. People get sick. People suffer injuries. There are no patents, no widgets, no long-term purchase contracts. Most practices are usually only as good as their last patient’s experience.
The numbers certainly do matter. However, be mindful of the weighting of any one determinant on the overall decision to sell. Hand wringing over the numbers alone can cause one to lose sight of the bigger picture, potentially sacrificing other important considerations.
Ok, so what else matters beyond the numbers?
Only individual sellers can explain this. Since practice valuations and pricing have become more standardized, the numbers alone have become less of a differentiator. There really aren’t “good deals” anymore for most buyers, especially groups. The market has become rather efficient and transparent.
Peace of Mind
This might be both the most significant and least talked about driver of practice sales. From day-to-day people management, to recruiting challenges, to insurance company contracting, to marketing decisions, being an independent dentist has become increasingly demanding of time and energy. This energy expenditure is on top of the demands of patient care.
This dynamic tends to be very individualized in nature. Some doctors love the “business side” of dentistry. Some absolutely abhor it. Many (most?) are somewhere in between, depending on the day.
Doctors realize true value from the peace of mind that can come from another party assuming responsibility for sustaining the larger business. Being part of a group can provide a doctor with an opportunity to leave their practice on Thursday or Friday and know that there is nothing for them to do practice-wise for a couple days. They can enjoy their weekend, take a real vacation, turn their phone off, and just unplug. Their practice and patients will be waiting for them upon their return.
Peace of mind is further bolstered by developing the clearest path forward for the patients and staff. A wise buyer does everything they can to protect the patient base being purchased. How? It focuses on the retention and happiness of the people who know the patients. This applies to all staff, not just the dentists. A seller can help safeguard their legacy with their team and patients by pursuing a transaction with a buyer who values the team and the team’s role in caring for the patients.
This human dynamic transcends any P&L or tax return and is paramount to making any transition successful for all.
Change Management
Change Management is a crucial topic to dig into in conjunction with the deal economics. What changes are buyers intending to drive to align the practice with the investment scenario they underwrote to for their lenders and investors?
Discussing the topic of Change Management is equal to, if not more important than, the numbers themselves. If the buyer and seller are not on the same page about what is expected post-transaction, you could be kicking a fair amount of otherwise avoidable heartburn and frustration down the road.
Buyers that suggest “…we don’t change anything…” warrant curiosity. Nothing? Really? The dental ecosystem is littered with groups who made this claim their rallying cry for years. How many of them are still around? How are they faring? If you don't plan to change anything, what value are you adding?
The amount of change can and does vary and it is safe to say that any thoughtful buyer is going to have a punch list of opportunities for any prospective acquisition. It could be as simple as new practice management software. It could also be more significant, including the retooling of different operational aspects of the practice.
If the buyer and seller aren’t on the same page regarding change management everyone can suffer.
Human Capital
Many sellers are simply burnt out with managing other humans. The career path and timing of most staff members are rarely in lockstep with the seller. Staff usually need and want their jobs to continue indefinitely.
If a practice has not developed a true office manager role, it can present its own challenges in the context of a transition. The price tag of a dedicated office manager can seem daunting at first. However, they can help drive a culture and results that substantially add to the value of the practice. Operationally, the presence of a good manager de-risks the practice sale for most buyers and, in turn, can enhance the overall valuation for the seller.
It is very common to encounter understaffed practices. Running a practice too lean might drive that Nth dollar of profit, but it leaves little margin of error for the next owner and can even unknowingly heighten risks for the current owner.
Said differently, unusually high profit margins tend to be more of a red flag than a green one for most buyers. Wise buyers are going to adjust below-market wages to FMV in their financial models and valuations to make sure there is cushion in their budgets should unplanned turnover occur.
Hope this helps. Please LMK if you have any questions.
Best,
Sean