How will you transition your dental practice to another dentist when it’s time to leave? If you’re like most dentists, you’ve put off making this important decision. And without preparation, your practice may not achieve the smooth transition you anticipate.
So how can you plan for the successful sale of your practice? To paraphrase Nike, don’t procrastinate – just do it. Planning the steps to sell your practice is critical to the continued success of the practice, but it is also a complex and emotional endeavor. In many ways, it can be like a scheduling a routine physical or creating a will – critical, but not urgent, so it continues to be pushed lower on your to-do list. Resist the urge to put off doing this crucial task.
Step 1 – Making the Decision
The number one reason most dentists decide to make a transition for their practice is because they want to retire. However, this is a decision, and a transition, that can’t be made quickly. Ideally, you should begin your planning process three to five years before your target retirement date.
Once you’ve made the decision to make a transition for your practice, set a deadline of nine months to one year to complete your succession plan. Schedule four to eight hours each month into your calendar to work on your succession plan and dive into the process. Also, during this time be sure to discuss your plans with your advisors, such as your attorney, CPA, other dentists you trust, and your family.
Remember that establishing a practice sale plan won’t tie you to one solution for selling your practice. It is understood that the plan will be a “living document” that you will definitely revise as your life circumstances change and as the marketplace changes. Having this “roadmap” in place will make it easier for you to react to these life changes – and choose which fork in the road will best meet your needs. It certainly beats being lost in the wilderness with no map or GPS to guide you.
Step 2 – Know the Value of Your Practice
Will the practice you’ve worked so hard to build help carry you to retirement? Are you actively planning the transition? Once you have made the decision to begin the process, knowing the value of your practice is the second crucial step in the transition plan.
Having solid data on what your practice is worth will help you make management decisions that help you grow your biggest investment – your practice – over time, just as you would grow the funds in your stock portfolio. This “investor’s mindset” might include identifying potential risks to the practice and minimizing them, and make your practice more attractive to a buyer.
The value of your practice becomes even more important as you get closer to selling it. Knowing the value of the practice will help you realistically plan for retirement or other ventures after you leave the practice. Having the valuation information will also greatly help you and your financial team plan for tax implications and investment strategies as you go through the transition. It is easy for a dentist to develop an idea of what he thinks his practice is worth. However a valuation that reviews the financial statements and comparable practices can result in a realistic, but totally different, number.
I once met with a dentist who told me he had his succession plan completely worked out. He was going to tell his practice to his son for $2.5 million. When I asked him how he arrived at this value, he said “because that is the amount I will need to maintain my country club lifestyle.” When the actual practice valuation was completed, his practice was actually worth $750,000. He had to dramatically change his expectations for his life after the sale of the practice.
Don’t be blindsided by unrealistic expectations about the value of your practice. Invest in a practice valuation. Use the valuation to make management decisions that will enhance the value of your practice before and during the transition process. This information will also greatly aid you in determining your retirement and lifestyle expectations following the sale of your practice as well.
Step 3 – Know All the Options Available
It’s a fact of life that the demographics of dental professionals, like the general demographics in our country, are changing. There are fewer dentists graduating from dental schools who will be entering the marketplace looking for a practice to purchase, while there are many Baby Boomers who are considering retiring.
As young dentists and retiring dentists consider their next steps, most practices will experience one of three sale arrangements: complete sale, partnership, or a one and a half practice situation.
A Complete Sale
Depending on the size of the practice, a retiring dentist may sell 100 percent interest in the practice to a new dentist. He or she may stay on with the practice for a few months to introduce patients to the new dentist and staff. Remember that a new dentist may not have the knowledge to manage the day-to-day operations of a practice. Therefore, the retiring dentist may need to be prepared to share his or her management knowledge with the new dentist.
As the sale of the practice occurs, training of key personnel may also need to be taken into consideration – especially if long-term staff members decide they do not wish to remain with the practice.
50 Percent Purchase
In a half interest purchase, the retiring dentist adds a partner who purchases 50 percent of the practice, with the understanding that the partner will eventually purchase the remaining interest in the practice. Ideally, the purchase agreement should clearly state the date that 100 percent of the practice will be purchased by the new partner as well as the length of time the retiring dentist plans to continue working in the practice. A retiring dentist can then avoid an awkward situation of taking in a partner and later learning that the partner does not wish to purchase the practice after all. This method can also be started well before the three to five year period and will only work in a growing practice.
A “One and a Half” Practice
An increasingly popular sale arrangement among dentists is where the dentist sells the practice but continues to work on a part-time basis for a specified length of time. In this case, the dentist doesn’t actually retire, but works fewer hours on a part-time basis, allowing time to pursue other activities. This will work only if the practice is growing. This arrangement will take efforts on the side of both dentists.
Making Your Practice Attractive in a Buyers’ Market
Today’s demographics show that there are more dentists retiring than younger dentists coming into the profession. And as Baby Boomers begin to consider retirement, many dental practices will be coming up for sale, making purchasing a practice a buyer’s market. How can you make your practice more attractive to a potential buyer?
Ideally, you should begin to plan your transition away from your practice three to five years before you plan to retire. This will allow your practice to tighten its expenses and cut any wasteful spending, ensure that your bookkeeping records are accurate, up-to-date and easily accessible, and that you’ve allowed for equipment upgrades that will be attractive to younger dentists.
You’ll also want to make sure your payroll records, job descriptions and employee benefits are documented and accessible to a buyer. Be prepared to discuss who among your key personnel are responsible for day-to-day operations, and discuss their desired role in the practice after its eventual sale, so you will be able to answer questions from an inquisitive buyer.
Understand the demographics and geographic area of your patient base, and be able to share this information with buyers. If you lease office space, consider whether renewing the lease in your current location will make sense prior to the sale of the practice. Likewise, if you own the property, consider whether paying off the mortgage makes sense prior to the sale.
Your financial records, patient base and equipment are the equivalent of “curb appeal” for your dental practice as you prepare it for sale.
There are several sources who can begin the process of locating buyers for your dental practice, including brokers, other dentists, attorneys, accountants, bankers, and professional associations. For the most successful outcome, work with someone who understands the dental profession and can match buyers and sellers who have similar philosophies.
It’s also important to establish a relationship with a bank that deals with dental practices. Not all banks understand the business of dentistry.
No matter which transition plan you choose, it’s important to realize that once the practice is sold, the selling dentist’s role is to assist the buyer in making the transition, and then get out of the new dentist’s way. Although the retiring dentist has put his or her mark on the practice, often for many years, it’s time for the new owner to now put his or her own mark on it.
Step 4 – Assessing Where You, Your Family and Your Practice Are
When you own a dental practice, it’s easy to get caught up in the day-to-day activities. And it can be easy to put off having those important, strategic discussions with your spouse and key personnel about the future of your practice. However, communication between you, your spouse and your employees becomes an essential ingredient of a successful practice transition.
As we work with dental practices, we sometimes find that dentists make decisions without first talking to their spouses to determine their lifestyle expectations and their long-term goals. A better approach is to develop a family strategic plan.
Laying your spouse’s goals and desires out on the table is extremely important for the practice transition planning process and for the future of the practice. But it’s not always an easy process. Often family relationships can bring sensitive issues to planning sessions. Using an outside advisor that you trust can help you facilitate this meeting and keep the discussion focused on the future of the practice and working toward meeting everyone’s mutual goals.
By developing a well-defined family strategic plan that is interwoven into the practice transition plan, you can build communication and team-building among your employees and spouse, building consensus on common goals. This can lead to increase productivity and better management decisions.
Step 5 – Setting a Course of Action Involves Communication
We’ve discussed steps to follow when you develop a succession plan for your practice, including the decision to do a transition plan, the value of the practice and the options for transition. And we determined your personal and professional goals and those of your family and key personnel. Now it’s time to set a course of action.
Communication is a key element of a successful practice transition. The sooner you determine your course of action and share it with your spouse and key personnel such as your office manager, the more quickly everyone can work together toward the goals.
Each person involved in the practice must understand the chosen plan of action and clearly understand the one thing he or she must do, above all else, to take the practice through a successful transition. You’ll need to know if, for example, your loyal office manager who has been with you for years will continue to work for the new owner, or retire. Each key member of the team must be committed to the plan’s success.
Dentists sometimes have a succession plan that they thought out in their mind, but they fail to share it with their spouse or key personnel. They sometimes find out too late in the process that their spouse or key personnel don’t share their vision – a roadblock that which can stop or certainly slow down the sale of the practice.
If you’ve shared your plans with your office manager, he or she may be able to help you better prepare the practice for sale by suggesting ways to tighten expenses, cut wasteful spending and help your practice become more profitable – and therefore more attractive to a potential buyer.
Step 6 – Executing and Reassessing Your Plan
The future of your practice might not be in the front of your mind as you go about your day-to-day routine. But if you have a defined plan that everyone is aware of, you can more effectively prepare for a successful transition when the time comes to put it into place. Now it’s time to work on the final step in your practice transition plan: executing it.
Realize that your transition plan is a fluid document. It’s a fact of life that things don’t always go as you planned. Economic conditions may change, new regulations may impact your practice, key personnel might change their mind about their role. The key is not to give up or retreat. If conditions change, reassess your plan and determine alternative ways to reach your goals.
To help ensure the plan continues on course, hold quarterly meetings with key staff, your spouse, your attorney and your accountant that focus only on practice transition issues. These meetings offer an opportunity to remind everyone what the plan entails and how each individual contributes to the success of the plan. This is also the time to determine if the plan still makes sense under current conditions and provides the opportunity to change tactics if the situation warrants.
The most crucial element to help your plan succeed is that you, as the practice owner, commit to the plan and schedule time to make sure it is executed properly. If you don’t believe in the plan or don’t take it seriously, it’s hard to expect the people around you to help you execute it.
Building and implementing a transition plan for your practice isn’t easy. It takes a strong commitment and a lot of time and attention.
However, the process pays off in several ways. You’ll have peace of mind that comes from determining a logical exit plan for yourself, and you’ll know that all those around you know and understand your plan and willingly work to help you succeed.
You’ll know that the future of the practice you worked so hard to develop has been determined, and that the patient base you’ve grown – and who have become almost extended members of your family – will be well taken care of. And you’ll be better able to make strategic decisions about your practice that may impact both current and future plans.
As the old saying goes, failing to plan is planning to fail. Improve the chances that your practice will continue its success by beginning the transition planning process.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.