Selling your practice is a major decision!
Is it time to sell?
You have devoted your time, money, and energy into building, running, and operating your practice. It may well represent your life’s work. If you have already decided that now is the right time to sell, you want the very best professional guidance you can get. This is where working in tandem with a professional practice broker can make the difference between just getting rid of the practice and selling it for the very best price and terms!
Following are some of the most common topics and questions frequently brought up by sellers. If you have any questions that we have not covered, please don’t hesitate to contact us.
For Practice Sellers
If you’ve come this far, then selling your practice has aroused enough curiosity that you are taking the first step.
You don’t have to make a commitment at this point; you are just getting informed about what is necessary to successfully sell your practice. This section should answer a lot of your questions and help you through the maze of the process itself.
The first question almost every seller asks is: “What is my practice worth?” Quite frankly, if we were selling our practice, that is the first thing we would want to know. However, we’re going to put this very important issue off for a bit and cover some of the things you need to know before you get to that point. Before you ask that question, you have to be ready to sell for what the market is willing to pay. The price is defined as what a willing buyer and willing seller will come to terms and agree to transact the sale.
It doesn’t make any difference what you think your practice is worth, or what you want for it. It also doesn’t make any difference what your accountant, banker, attorney, or best friend thinks your practice is worth. Only the marketplace can decide what the value of your practice is.
The second question you have to consider is: “Do you really want to sell this practice?” If you’re really serious and have a solid reason (or reasons) why you want to sell, it will most likely happen. You can increase your chances of selling if you can answer yes to the second part of this question: “Do you have reasonable expectations?” A yes answer to these two questions means you are serious about selling.
The First Steps
Okay, let’s assume that you have decided to at least take the first few steps to actually selling your practice.
Before you even think about placing your practice for sale, there are some things you should do first. The first thing you have to do is to gather information about the practice.
Here’s a checklist of the items you should get together:
Three years’ profit and loss statements
Five years Federal Income Tax returns for the practice
List of fixtures and equipment
The lease and lease-related documents
A list of the loans against the ractice (amounts and payment schedule)
Copies of any equipment leases
If you’re halfway through the current year, make sure you have last year’s figures and tax returns, and also year-to-date figures. Make all of your financial statements presentable. It will pay in the long run to get outside professional help, if necessary, to put the statements in order. You want to present the practice well “on paper.” As you will see later, pricing a practice usually is based on cash flow. This includes the profit of the practice, as well as the owner’s salary and benefits, the depreciation, and other non-cash items. So, don’t panic because the bottom line isn’t what you think it should be. By the time all of the appropriate figures are added to the bottom line, the cash flow may look pretty good.
A Balance Sheet is not normally necessary unless the sale price of your practice would be well over the $1 million. Buyers want to see income and expenses. They want to know if they can make the payments on the practice (more on this later) and still make a living. Let’s face it, if your practice is not making a living wage for someone, it probably can’t be sold. You may be able to find a buyer who is willing to take the risk, or an experienced industry professional who only looks for location, etc. and feels that he or she can increase the practice production.
The big question is not really how much your practice will sell for, but how much of it can you keep? The Federal Tax Laws determine how much money you will actually be able to put in the bank. How your practice is legally formed can be important in determining your tax status when selling your practice. For example: Is your practice a corporation, partnership or proprietorship? If you are incorporated, is the practice a C corporation or a sub-chapter S corporation? There are also tax rules that impact certain practices on seller financing. The point of all of this is that before you consider price or even selling your practice, it is important that you discuss the tax implications of a sale of your practice with a tax advisor. You don’t want to be in the middle of a transaction with a solid buyer and discover that the tax implications of the sale are going to net you much less than you had figured.
Who are the Buyers?
Buyers buy practices for many of the same reasons that sellers sell practices.
It is important that the buyer is as serious as the seller when it comes time to purchase a practice. If the buyer is not serious, the sale will never close. Buyers who want to purchase a practice strictly for the money usually are not realistic buyers.
A Buyer Profile
Here is a look at a typical buyer of a practice. The majority of the buyers are still individuals who have been out of school two to five years. They have been working as an associate in a practice since they finished dental school. They have seen and experienced a bit of managing a practice, but have not done so themselves. They have an average of approximately $280,000 (and rising) in school debt. There is a fairly even distribution of male versus female buyers.
There are two other types of buyers in the market place. One is an existing dental practice owner who is looking to add another practice to his portfolio. This may be his or her second, third, or tenth practice. The third group is a corporate practice. These are the large groups that own thirty or more practices and are usually backed by private equity. Both the small groups and corporates like to have the seller stay on and work in the practice for several years and may ask the seller to assist in financing the practice.
What Buyers want?
Vast majority of buyers want to buy a practice with good cash flow. They want to replace the income they have been receiving working as an associate dentist.
This may be a bit premature if you have not yet decided to sell but it may help in your decision-making process to understand not only who the buyer is, but also what he or she will want to know in order to buy your practice.
Buyers Wants Cash Flow
The first thing to keep in mind is that the vast majority of buyers want to buy cash flow. Sit down with your accountant or bookkeeper and begin to get your financial statements in order, with cash flow the order of business. Cash flow is not the same thing as profit. Most buyers look at the profit and loss statement or tax return, as well as owner or family compensation. They will consider any excess compensation to employees and family. Buyers will also look at large, one-time expenses such as a new computer system or remodeling. They will consider non-cash items like depreciation and amortization. Interest expenses will be reviewed, as will owner prerequisites. These are items that a professional practice broker considers when advising a selling client on a selling price.
What can You do?
The time to replace that old worn-out piece of equipment or remodel your practice is three to five years before you decide to sell. Don’t assume that a new owner will want to do it or that the price will just be slightly lower because you haven’t updated your practice. The time to “spiff up” the practice is now, even if you aren’t selling. Fix the sign, replace the carpet, paint the place – make it look good. Even if you’re not selling, it’s just plain good for business, and you never know when the time to sell will occur. Keep in mind that anything that increases sales also increases profits and the all-important cash flow!
Long before you put your practice on the market, eliminate the surprises! Review every facet of the practice and remedy any problems that could appear during the sale process. No one likes surprises – most of all potential buyers. Whether legal, accounting, environmental, or anything else – solve it now.
Below you will find a few friendly recommendations that will help in our marketing efforts when you decide you are ready to sell:
Tidy-up outside premises.
Repair non-operating equipment or remove it if you are not using it.
Remove items that are not included in the sale and unnecessary items, especially if inoperative.
Maintain inventory at a constant level. If you let your inventory slide, your business will look neglected. If anything, increase it so your business will look busy.
KEEP NORMAL OPERATING HOURS. THERE MAY BE A TENDENCY TO “LET DOWN” WHEN YOU PUT YOUR PRACTICE UP FOR SALE. HOWEVER, IT’S IMPORTANT THAT PROSPECTIVE BUYERS SEE YOUR PRACTICE AT ITS BEST. SPRUCE-UP THE INSIDE OF THE PRACTICE, ETC.
Keep normal operating hours. There may be a tendency to “let down” when you put your business up for sale. However, it’s important that prospective buyers see your practice at its best.
UPDATE TECHNOLOGY IN THE PRACTICE
What would you do to make it more attractive or more saleable?
Obviously, the financial records of your practice are critical to the sale of your practice, but how it looks is also important. First impressions really count! If a potential buyer doesn’t like the appearance of your practice, the rest of it may never get a chance. If you have any questions, please don’t hesitate to call us. We look forward to hearing from you!
Do you have other questions?
Be sure to visit the Selling FAQ for answers to the following questions