Preparing to Transition a Dental Practice: Common Legal and Business Mistakes and Misconceptions
Are you a dentist thinking about selling your practice or bringing on a new partner? Transitioning a dental practice is a major decision that affects your career, finances, and legacy.
While exciting, it can also contain potential pitfalls if you’re not careful. Many dentists make avoidable mistakes or have misconceptions that lead to headaches down the road.
Let’s review some of the most common legal and business errors dentists make when preparing to transition their practice. By identifying these issues upfront and working with an experienced dental business lawyer, you can protect yourself and ensure a smoother process.
Not Having a Transition Plan
One of the biggest mistakes is not having a comprehensive transition plan in place well before you intend to sell or bring on a partner. Many dentists procrastinate because they feel overwhelmed by patients. However, a lack of planning often leads to a frantic, reactive process instead of a methodical one.
Your transition plan should map out key details like:
- Your ideal timeline for transitioning
- Whether you want to sell outright or phase out gradually
- Criteria for your ideal buyer or partner
- Financial targets and minimums you need to meet
- How you’ll get your practice and records in order
- Transition of staff and patient communication
- Your role (if any) after the transition
Sit down at least one to two years before your target transition date and develop a thorough plan. Work backward from your end goal. Consult your financial planner and accountant. The earlier you start strategizing, the better.
Not Getting Your House in Order
Some dentists decide to sell or take on a partner, then scramble to get all their ducks in a row. But you should begin preparing your practice for sale as early as possible, ideally one to two years out.
Key things to assess and address include:
Financial Records
Are your bookkeeping and tax filings current and organized? Work with your accountant to clean things up. An audit will button everything up before a buyer examines your financials with a fine-tooth comb.
Practice Valuation
Get an initial valuation to have a ballpark figure of your practice’s worth. Dentists may expect more. You may need time to increase profitability. The valuation also helps you set realistic pricing expectations.
Equipment and Technology
Is your dental equipment in good shape or due for upgrades? If you have dated equipment, it can deter buyers unless priced accordingly. Consider strategic upgrades that will make your practice more attractive and valuable.
Curb Appeal
Just like selling a house, first impressions matter. Does your practice look modern and inviting? Can the patient areas use sprucing up? Sometimes, a relatively inexpensive refresh greatly affects how buyers perceive your practice.
Staff Contracts and Policies
Are your employee records and agreements in order? Is there anything that will concern a buyer, like a hostile employee or the impending retirement of a key staff member? Address any HR issues. Consider having staff sign new contracts with transfer provisions.
Patient Records
Are your patient records current, organized, and digitized according to privacy laws? Sloppy or incomplete records are a big red flag for buyers. Implement a system to get your records in shape. Also, consider your active patient count, patient retention, new patients, and outstanding insurance/patient receivables.
Lease agreements
Don’t wait for an interested buyer to look at your office lease. Have an attorney review it early on to identify any issues or restrictions on transferability. You may need to work with your landlord on assignment provisions.
Starting these tasks early avoids a time crunch when resolving issues before listing your practice. It also ensures you maximize practice value and appeal to the best buyers.
Only Considering All-Cash Offers
It’s a common misconception that the only good offer is an all-cash one. This leads some sellers to pass up strong buyers who need financing. With interest rates rising, insisting on all cash shrinks your buyer pool.
Many buyers will need some financing, especially first-time practice owners. Banks are comfortable lending on dental practices because they tend to be very stable investments. As long as a buyer is well-qualified, a financed purchase can be just as secure as an all-cash one.
Work closely with your dental transition attorney and banker to vet buyers’ financials.
Look at:
- Credit scores and history
- Debt-to-income ratios
- Post-closing working capital
- Collateral
- Personal financial statements
An experienced dental attorney can structure the purchase agreement to protect you, like requiring the buyer to personally guarantee the full purchase price. They can also hold back a portion of the sale proceeds to cover any issues that arise post-closing.
Don’t assume a financed offer is inferior. Evaluate the whole picture with your transition team.
Misunderstanding Practice Valuation
Dental practice valuation is part art, part science. Many dentists are surprised when they get their practice valued. It may be lower than they expected based on gross revenue.
A common mistake is focusing on topline revenue instead of profitability. A practice can have $1M in annual revenue but much lower profits after expenses. Value is typically based on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), not revenue.
Profitability isn’t the only factor, though.
A valuation weighs:
- Revenue and profit trends over time
- Active patients and new patient flow
- Service mix and accepted insurance
- Equipment and technology
- Staff and doctor salaries
- Transferability of goodwill
- Location and demographics
The valuation process also differs for a full practice sale and a buy-in. In a complete sale, the price is based on the practice’s cash flow and assets, while a buy-in is based on a percentage of equity in the practice entity.
To minimize surprises, get a valuation done early in your transition planning. Understand what drives value in your practice. Your valuation expert can advise you on changes to maximize value before going to market.
Consult a Dental Business Attorney
Transitioning a dental practice is a complex process with many moving parts. It’s ripe for mistakes and misunderstandings. But by educating yourself and enlisting the right advisors, you can avoid costly missteps. Planning ahead is key.
A successful transition starts with assembling an experienced team. You wouldn’t perform a complicated procedure without the proper tools, and you shouldn’t try to manage a practice transition without the proper support. A dental practice lawyer, valuation expert, CPA, and broker can guide you.
If you’re considering a transition and want guidance from an experienced dental attorney, reach out. You can achieve a smooth path to your next chapter with the right planning and support.