Why Practices Don’t Sell
- Your overhead is too high. Practice buyers and their supporting cast of CPAs, bankers, etc. want the practice to not only support the debt it’s going to incur, but also pay the buyer a minimum salary. The ratio the bankers look at is called the debt coverage ratio. Most of the time, they want to see the debt coverage ratio of 1.2 times to 1. That means for every $1.00 in debt payment, they want to see $1.20 of net income to cover the amount borrowed.
How can you improve this, so you have a good debt coverage ratio? Make sure your overhead is under control. The national average overhead is 65%. You should be at, or below, the overhead level of 65%. The preference is to be below the 65% overhead mark. Go through your expenses with your accountant or consultant and figure out how to improve your overhead and cash flow.
- Your collections are going down. Bankers don’t like to see annual collections going down every year. That tells them patients are leaving the practice and seeking treatment elsewhere. It also may trigger a question on the reputation of the practice. Another question may be, “Is all the dentistry done, and there’s nothing left to do?”
You can fix this by keeping your numbers up year after year. At least be relatively flat, but it’s best to grow your practice at least slightly every year.
- Staff overhead/problems. One thing we see often in older practices is that the staff overhead is above the target of 20% to 25% of total gross collections, including taxes and benefits. If you’re way above that, you need to look at both sides of the equation. If an assistant is making $45/hour, or front desk making $60/hr. and your staff overhead is at 40% of total collections, you have a problem that a buyer does not want to inherit.
It’s a tough position to be in, but if you’re a couple of years away from selling your practice and your staff overhead is at 40%, you should either increase your collections considerably by cranking up production, or ask the staff to take a pay cut. If they don’t want to take a pay cut, you may consider letting a staff member go – the buyer will be doing it anyway so you might as well get it over with.
- Lease issues. We have seen practices not sell because there are problems with the lease. Reasons include: the lease being too high, the landlord wants to tear the building down and not extend the lease, the landlord wants the seller to stay responsible for the lease for the entire ownership term of the buyer, or the landlord being unreasonable with proposed new terms.
Negotiate with your landlord when your lease is up for renewal. Add an “Assignment Clause” to your lease. This states that you can assign your lease to a buyer when you sell your practice. At that time, you will be removed from any responsibility from the lease. Also, work with a commercial broker to make sure you are getting current market rates on the lease and not way above market.
- Low Production. Low producing practices, below $400,000 per year, are hard to sell. They are viewed by buyers as a startup practice, especially if there is a downward spiral in the practice. Buyers and bankers want a practice with solid cash flow that they can instantly make a living and not have to work another job as an associate.
Sell your practice when the collections are high. This is the smartest thing you can do in a practice transition. I have seen doctors sell now for $300,000 when they could have sold 3 years ago for $600,000. They lost $300,000 in the purchase price by waiting too long. Remember, just because you sell your practice does not mean you need to stop working. You can always work as an associate.
These are a few things that keep a practice from selling. Be sure and prepare your practice and yourself to sell about 5 years before selling. Call us and we’ll meet with you to give you guidance on what you need to do to your practice to sell 5 years from now. We are happy to help at no cost to you.