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Dental Practice Ownership : The Final Years
17 Feb 2017 - Simon Palmer - Seller: Timing/ Retirement

There is a paradoxical relationship that dental practice owners have with their last few years of ownership. They usually know when they are within a few years of selling. Yet strangely, they behave as if their practice value is set in stone, start to relax, and let a career worth of work be seriously compromised by fatigue, decreasing the practice’s performance, right before it is about to be appraised. For practice owners like this, history can judge the last few years of ownership harshly!

Unfortunately, practice values are never set in stone. When determining the purchase price, a buyer will focus primarily on the last few years of practice ownership, and less on the decades of impressive work that preceded it.

There are many things that principals can do in these final years of ownership to optimise their return on the practice when a sale happens, and a few pitfalls that they can fall into that will compromise what is achievable. Any practice owner looking to retire in a few years should keep the following in mind, if they want to maximise the results of their sale:

1.      Work Hard

After decades of hard work, a practice owner is justifiably fatigued, and feels that they deserve more holidays and to take it a little easier. They will often choose to work fewer hours per week, fewer weeks per year, and refer more work out in their last year/s in practice, than in all the years preceding.

What they don’t realise is that this choice in their final years will almost certainly compromise the sale price for the asset they spent decades building.

This isn’t the time to take it easy, if you want to maximise your sale price.

If you’re a practice owner who feels that you’re a few years away from selling, and plan on working less and not more during these years…it might be time to sell now. 

2.      Work Lean

Many practice owners seem to become more generous and less frugal with their spending in the final years of ownership.

A good example of this is with wages. Many owners, toward the end of their careers, seem to pay staff well above industry benchmarks. They justify this to themselves by saying that it is for loyalty reasons, because the staff are like family, they can’t bear the thought of training someone else up, or because they believe the practice manager/nurse/receptionist has duties and abilities far beyond the norm.

Unfortunately, the price paid for practices is far more influenced by profit than staff ability and loyalty. As a result, the last years of ownership are not the time to give pay rises or be overstaffed. It is the time to work lean and remain within industry benchmarks for staffing and pay rates.  

3.      Make the work you do count

All too often, when it comes time to sell, a vendor will tell the buyer (or broker) that that the practice really did much more than the official figures show, because:

-       They discount a lot and/or...

-       They take considerable payments on top of that in cash, and do not report it in their books.

Even if this statement is true and believed, unfortunately, the buyer and the bank they are borrowing from can’t count it as income unless it is in the books.

If you are in your last few years before selling, and think that you could significantly increase the numbers of the practice by not discounting and not taking cash anymore, it would be an easy way to increase the price achievable, without working any harder. 

4.      Avoid New Major Equipment Purchases that are Discretionary.

All too often, a practice owner, towards the end of their career (and trying to add excitement into their career), will buy some major equipment (like an OPG, Cerec, laser, etc.), thinking that that it’s a no-lose scenario. They believe that either this expensive equipment will reinvigorate their interest in dentistry, pumping new energy into the practice, or they will simply add the full cost of this equipment onto the sale price when they sell. 

More often than not however, the problem with the owner’s energy levels has nothing to do with the lack of expensive equipment. The new major equipment can sometimes gather dust in a corner and, when the time comes to sell, the vendor realises that adding the cost of unused or underused major equipment onto the sale price of a practice isn’t as easy as it sounds.

The amount a bank will lend a buyer is far more influenced by turnover and profit, than underutilised equipment and fitout. Why?

Because:

a.      The buyer (and bank) is more interested in their ability to repay their loan than the practice being well-equipped.

b.     There isn’t much of a second-hand market for dental equipment outside of the practice it is in.

c.      If you couldn’t get the equipment to generate income in that practice, why would it be assumed that the new owner will?

5.      Security of tenure

There is a temptation among practice owners to only organise as much security of tenure on their premises’ lease as they will need for their own use. This temptation can have disastrous results when it comes time to sell. In order to offer you what your practice is worth, a buyer (and their bank) wants to see that your practice is able to get a long lease (that you have at least 10 years left, or options to renew the lease for that period). If you don’t have this already organised, it can put a lot of power in the hands of the landlord.

6.      Other

-       If you operate several business interests out of the same ABN - separate each business into its own entity.

-       If you operate several practices under the same brand/website/phone number - start separating them into their own contact details, if want to sell the practices separately.

-       If your practice trades under the dentist’s name (Dr Sam Jones, Sam Jones Dental, Jones Dental, etc.), it might be a good idea to try change this in the final years. A purchaser will want the business name to come along with the practice when they buy it, and some vendors are reluctant to sell the right to use their name.

Exit planning is a vital consideration for any business owner, and one that requires some thoughtful execution in order to get an optimal outcome. If you are in the fortunate position where you feel that you have a few years to plan and can do some course correction, the above points illustrate several common-sense considerations which could have a significant impact on how your practice is perceived by a buyer and, ultimately, the price that it could achieve.

If you don’t have the luxury of years to plan, there may still be some smaller adjustments that could make a big difference, which will be explored in a forthcoming article.

 

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