How do I sell my dental practice? How long will it take?
The prospect of selling a dental practice can be a bit daunting, but, like selling houses or cars or your old CBCT, if you know the process and what to expect it becomes much easier. Many times, doctors are selling dental practices that they have spent the better part of their lives building and nurturing. They wonder “What will happen to my staff?” and “Will the new doctor take care of my patients?” among a hundred other questions that come with selling something that means more than just what the accountants and suppliers see. So, let’s break down the basics of selling a practice. Understanding the basics will, hopefully, alleviate the fear of and potentially help prepare for that eventual day.
Step 1: What is the Value of My Practice?
Valuing a dental practice will be the topic of a future post, but the basics are this: banks are a major decider in the value of a dental practice. You might be on Main and Main and have all the top-of-the-line equipment, but the reality is that bankers rarely ever see any of that. What they see is income and expenses. Because most buyers will need a loan to buy your practice, they will rely on banks to fund 100% of the purchase. This generally means that Loan Dollars = Purchase Price, which is why banks play such an important role. Understanding the value of your practice is a key first step in selling. Brokers who specialize in practice sales and have relationships with bankers who fund practice loans can help with this and should be able to help free of charge.
Step 2: Do I Hire a Broker?
Practices have been sold with and without a broker. Not using a broker will save in selling costs and may be appropriate in certain circumstances. However, the sale of a small business such as a dental practice is complex and much less standardized then selling a home for example. Too often I see dentists who want to save the brokerage fee by trying it themselves. This often leads to longer-than-normal transition times, stress and failure. Because a transition involves many parties (buyers, sellers, bankers, attorneys and escrow agents) an experienced practice broker will be able to manage the transition process much more efficiently and with much more success. Brokers get paid when the deal closes, so they are motivated to keep everyone on task and moving towards closing. In addition, brokers will have a Rolodex of possible buyers, which means the practice gets exposed broadly to the market and will likely achieve a price that more than makes up for a brokerage fee. By the way, those fees range from 7.5% - 10% depending on the size of your practice, i.e., the bigger the practice the lower the fee.
Step 3: Marketing
If you’ve decided to hire a broker and have signed a listing agreement, the next step is preparing the marketing materials. Marketing materials can include things like a simple 1-page flyer with a few highlights, a postcard, and a detailed 30+ page prospectus outlining pertinent details of the practice. The goal of marketing materials is to generate tours. The more prospective buyers you get through the door, the more possibilities you have of receiving offers. Marketing time ends when an offer or “Letter of Intent” (LOI) is accepted. This can take as little as a few days or many months with the average being 1-2 months. Remember my comment above about Main and Main and all the top-of-the-line equipment? While these attributes of a practice may not affect the value with the banks as much, they will motivate potential buyers and reduce marketing time. Buyers love modern practices with $800,000+ in steady or increasing collections in good locations with 4+ operatories and strong hygiene programs. The more of these attributes your practice has, the less time you can expect to be on the market. Also, during the marketing period is when prospective buyers will tour the office and, hopefully, meet the seller. Some brokers try and keep buyer and seller apart until closing, but I feel like they need to meet early on for several reasons such as giving the seller an opportunity to see how the buyer will fit in the practice and giving the buyer a sense of the seller’s practice philosophy and clinical regimen. Meeting early is especially important if the seller is going to remain in the practice for a transitional period, which is often the case. Orchestrating this requires consistent coordination and an open dialogue, so I think it’s better to start talking about it early.
Step 4: Escrow
Once an LOI is accepted, your broker will open escrow. Using an escrow isn’t absolutely necessary. You can still transition your practice with the bank acting as a quasi-escrow. However, I’ve found that banks like to be banks and sometimes have a hard time executing the tasks that an escrow agent would normally take care of, which usually just means delays. The buyer and seller split the cost of using an escrow, which is approximately $5,900 for a practice selling for $1,000,000 (less for smaller transactions, more for bigger ones). During the escrow period is also when the buyer performs their due diligence investigations, when the attorneys draft the asset purchase agreement “APA” and, if the seller leases their office space, when the landlord is notified and the lease assignment is drafted. The escrow agent will also run a lien search to see if the seller’s ownership entity has any outstanding debt. This includes loan such as equipment loans, practice purchase loans, PPP, EIDL and even car loans in some cases—any loans held under the entity that owns the practice. All of these loans must be paid off (or forgiven) prior to or at closing.
Step 5: Will I need to Hire an Attorney?
As far as I know, there are no standard sales contracts for selling a dental practice across dental attornies. This means that each time a practice is sold, an attorney must draft an APA (sometimes also called a purchase and sale agreement “PSA”). It is customary for the seller’s attorney to generate the first draft. Attorneys charge $5,000 - $6,000, so this becomes an additional expense for each party. Once a buyer has been sourced and escrow has been opened, the roll of your broker decreases and the roll of the attorneys increases. Using a football analogy, the broker gets the ball to the 20-yard line and then hands it off to the attorneys. The attorneys then finalize the APA, the lease assignment and closing provisions required by the bank to get it over the goal line, with the broker helping block along the way. I always recommend hiring an attorney once the buyer has been approved by their bank and has worked through most of their due diligence. Doing so earlier might mean a seller spends $5,000 with an attorney for a buyer who may not qualify for a loan or who might not perform for other reasons. When closing time comes, the attorneys will also help with things like entity formation and firing and rehiring of the staff (this happens so the staff then works for the buyer). Long answer is, yes, each party will need to hire an attorney. Attorneys are an integral part of the selling/buying process.
Step 6: Closing Escrow and Selling the Practice
The sale of the practice occurs when the APA is signed, and the money is transferred. If an escrow is used, the escrow agent will collect all funds necessary to close, ensure all paperwork is signed and in order, ensure all seller liens are paid in full and then close escrow. Prior to closing, escrow will send each party a settlement statement which details the income and expenses for each party. This gives everyone a clear sense of how the money is being distributed. Once escrow is closed, escrow will then wire funds as detailed on the settlement statement. At this point the practice is sold and the buyer is now the owner. If all has been done right, the seller transition period, the staff and patient notices, insurance accreditation, and the post-closing collection procedures have been worked out between the parties so that the transition is as smooth as possible. Below is a basic timeline to sell a practice…keeping in mind that if your practice has many of the attributes that buyers are looking for, it will likely sell faster.
|Valuation and Listing||1 week|
|Marketing Prep||2 week|
|Marketing & Tours||4 weeks|
|Escrow & Closing||6 weeks|
While selling a practice may not be as easy as filling a lower premolar, doing so can be a lot easier if you’re prepared and have a solid team of professionals helping you. Fear is the result of poor preparation, so let’s get prepared people! You may not be a seller soon, but you will be a seller someday, so stay tuned on ways to get your practice ready for that eventual day…and best of luck to you out there who are getting ready to sell soon. One client told me it’s like owning a boat, the two best days are the day you buy your practice and the day you sell it. That closing day is going to be great!