If you own a dental practice and are beginning to think about selling the business, potential buyers will look closely at your financial and operational successes and shortcomings in the due diligence process. You may not even realize what elements of your practice will attract buyers, and which will be red flags that may push them away, or drive the price down.
When looking to maximize the financial return you can obtain in a sale, your first instinct will probably be to increase revenue and cut expenses. And yes, of course, those elements like revenue, costs, and profitability are essential — they should be the first thing you look at. However, receiving the best value in a sale means you have to look beyond the basics. Consider questions such as: What are the inputs that drive your revenues and expenses, and are they in your control? What are the risk factors buyers will care about when determining their price?
Risk factor analysis — The central equation in selling your dental practice
The financial valuation of your dental practice can’t be determined by industry averages, or by observing what your competitor down the street sold their practice for. Your practice is only worth what a buyer is willing to pay for it. What buyers are willing to pay is largely determined by risk factor analysis.
This simple formula should always be front-of-mind when preparing to sell: The higher the risk of not being able to replicate or sustain your practice’s success, the lower the price you should expect to get from buyers.
Buyers are not only interested in your revenue, margins, costs, etc. They’ll want to know: Will it be possible to re-create your success after you leave? Does your dental practice have too much exposure if something goes wrong?
You may not immediately connect risk with your valuation, but your buyer will.
15 considerations to help you maximize the value of your practice
Clarify your price strategy
You may have some patients who are loyal or are personal connections who receive free or discounted treatments. This practice is acceptable in moderation — many dentists do it. But acquirers will scrutinize the impact in the due diligence process because they want to strike the appropriate balance between bringing in revenue and not losing loyal patients.
Be mindful that the expectations you set now will continue after you sell your practice.
Reduce treatment do-overs
Some do-overs are inevitable, but each time you need to re-do a treatment you are leaving money on the table. Purchasers will see it as positive if your number of treatment do-overs gradually declines in the years leading up to your sale. Look at the data: if you notice mistakes are disproportionately coming from one dentist, take the time to mentor and train.
Persevere through recruitment and retention challenges
It’s tough to find qualified and talented hygienists, certified dental assistants and receptionists, etc. in any environment, much less the one you’ve been navigating for the past few years. Don’t give up hope; even if you’ve been looking for some time with no success, the fact that you’re invested in replenishing your team reflects well in the eyes of a purchaser.
Losing people often means losing revenue, which will reflect negatively on your financial statements. But if you can demonstrate that it’s a momentary, non-recurring trend, you can “normalize” the financial statements accordingly.
Understand the implications of your lease
If you plan to sell your entire practice, your lease agreement needs to cover the entire financing period (typically 10 years). Even if your practice is wildly successful, your acquirers won’t be able to get financing from the bank without the ability to continue or renew the lease.
A lease that is expiring in the near future (e.g., your building is up for sale), poses a risk that the buyer will need to move the practice elsewhere, which is burdensome and expensive and may result in losing patients. This will almost surely drive the price down.
However, the opposite is true in a goodwill-only sale, in which you’re called upon to move your practice and patient files to a nearby clinic. In these instances, you will benefit from having a lease that expires in the near future. The buyer will not be willing to wait four or five years to take over after they’ve paid and moved in. One or two years is much more palatable.
Make sensible investments in technology
Your practice doesn’t need to be a modern utopia with the latest software and AI tools. But you should look into technology to the degree it will help you improve the patient and employee experience. Simple financial or administrative process automations can also reduce labour costs and help you manage the ongoing labour shortage. If you’re considering making investments in technology, you can look into current government grants available for this purpose, including interest-free loans.
If you plan to invest in new technology, give yourself a few years of lead time before your sell date so buyers can see the impact it’s had. Installing new technology immediately before selling could look like it was completed only for the optics. The buyer will have no way of knowing whether the investment will pay off or if it’s worth the increased purchase price.
Streamline your procurement and material costs
This is particularly important if you run a practice with multiple practitioners or co-owners. There is far more potential for waste to inflate your materials costs if each has their own preference on what materials to use. For example, if each dentist chooses to procure a different brand of cement, more tubes will likely dry up before being used completely.
Buyers pay attention to these discretionary costs and will be drawn to efficiency.
Look at your contracts with partners and junior dentists
Ensure you have non-compete and no-solicitation clauses in your contracts with the other dentists you work with. This is particularly important if your clinic operates in a major centre with a lot of competition. Not only will it protect you from having team members recruited out of your practice, but it can also improve your valuation by signalling to a buyer that their labour situation will be stable.
Review your ratios of new versus returning patients
Under normal circumstances, a successful dental practice should have between 1,200 – 1,500 active files per full-time dentist. Your ratio of new versus returning patients will depend on your circumstances.
Dentists in remote areas can have upwards of 4,000 active patient files and waiting lists stretching a year or longer. In this case, it wouldn’t be cause for concern if a buyer sees a small ratio of new patients because it’s clearly a capacity issue. However, these dynamics change in a major urban centre with more competition — patient files will naturally have less longevity, so a buyer will look for a stronger inflow of new patient files to compensate for higher turnover.
The natural erosion of patient files will occur everywhere, urban or remote; you can’t control factors like patients moving, passing away, or visiting your office less during tough economic cycles. But as you demonstrate you can constantly replace closed patient files with new ones, your practice’s value will remain strong.
Review your patient files by age
Having healthy age demographics is attractive to purchasers who will want to maintain your practice’s performance. Buyers will perceive risk if most of your patients are at an advanced age, without new younger patient files coming in. The opposite is also undesirable: If the vast majority of your patients are young, buyers may begin to ask questions about why patients are not sticking around for longer. The most lucrative treatment plans are typically for patients aged 40-60.
Mentor your replacement
Talent is a precious commodity in the dental industry. It’s not all together common to mentor your replacement and it takes a long time to nurture that relationship. The pipeline of talent, especially the kind that could potentially take over when you retire, is therefore a risk factor purchasers will consider closely. If your practice’s competitive advantage is based on your own individual speed and skill, and you leave your practice without star performer to take your place, the value of your practice will drop post-sale.
Take the time to find and mentor your replacement. Show prospective buyers that you have a plan to replace your individual talents.
Be prudent in improving your physical space
Renovations to your clinic can only be considered an investment if they yield adequate returns that justify the amount spent. Where some dentists run into problems is when improving their space turns into a cost-intensive vanity project. Simple and functional spaces that are in good repair are more important to most buyers than gracing the cover of Architectural Digest.
Educate your patients and set expectations
New owners may want to change existing processes or offer new treatments. They may also bring on dentists or hygienists who rely on different techniques and technologies than your patients are used to. All these changes can make your patients apprehensive and cause an exodus if not managed carefully.
Obviously, your patients will be more inclined to trust a new practitioner if you make the introduction personally and endorse their skills and professionalism. However, in a typical acquisition, most of the patient re-education process falls on the new owner and happens post-sale.
Some purchase agreements contain a clause that a portion of the sale price will be conditional on the future earnings of the dental practice. In these instances, the selling practitioner may be more motivated to take a hands-on approach to educating patients, because the practice’s success becomes easier to replicate.
Time your sale correctly
Optimize the resources you already have
While you may be inclined to expand and grow in preparation for the sale of your clinic, remember that what will truly attract buyers, and those who lend to them, is value. If you expand too aggressively before selling, it’s hard to get good value for your goodwill because your debt servicing costs will be too high.
If you’re inclined to increase revenue by acquiring more space, more equipment rooms, and more staff, first ask yourself if you can improve your margins by optimizing what you already have. Can you get more out of each equipment room by changing the hours you’re open? Can you do more with the staff you currently have by changing schedules, rather than bringing in a new hire?
This doesn’t mean your initial instinct to acquire more space and more staff was incorrect, but always look at optimizing first. There are specialized consultants who can help you find new efficiencies and run a lean operation that will be attractive to buyers.
Speak with your accountant regularly
Too many dentists only meet with their accountant several months after the end of their fiscal year. By that point, it’s much more difficult to make adjustments that will improve your practice’s financial health, or get it back on track if you had a tough financial year.
The more prudent approach is to converse regularly with your accountant so you can adjust course early and often if you need to. Prospective buyers will look closely at your financials — you’ll be better prepared to sell if you’re doing the same.
Succession is a process, not an event
As you put in the work to ensure your practice is profitable, cost-sensitive, and most importantly, easy for new ownership to replicate, you’ll see the highest return when the time comes to sell. Staging the business for sale starts the day you hang your shingle. Your dental practice represents the culmination of your life’s work, and you deserve the highest possible return for it.
This report is provided by MNP. It is for informational and educational purposes only as of the date of writing. This information should not be considered investment, tax or legal professional advice. For specific advice about your situation, please consult a tax, accounting, legal or financial professional. The information contained in this report has been drawn from sources believed to be reliable but is not guaranteed to be accurate or complete. CDSPI, CDSPI Advisory Services Inc., MNP and our affiliates are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.