For dentists, learning how to sell a dental practice is usually a one-time occasion with fairly high stakes that may affect your finances and security in retirement. You likely have questions about how much your practice is worth among other issues. Our guide and checklist will give you some important items to consider as you begin the process of selling your dental practice.
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The Importance of an Advisory Team When You Sell Your Dental Practice
Selling your dental practice is a big decision that reflects years of hard work and commitment to the field of dentistry. Whether your next step is retirement or a pivot in your career, how you sell your dental office can have a large impact on your future. Just as your patients rely on the expertise of you and your team of hygienists, you need a team of experienced professionals to guide you in the sale process. Key members of this team will be your dental attorney and accountant.
Dental Attorney
Hiring an attorney with experience in selling dental practices and dental practice transitions can benefit you in several important ways when you finally decide to sell. Your attorney will be responsible for helping you structure the transaction efficiently and effectively while also taking the lead on important deal mechanics. They will draft key legal documents like the asset purchase agreement or various assignments of property and assumptions of liabilities. Your attorney will also inform you and advise on various rights and obligations you have under the sale agreement from the covenants of you and your potential buyer.
Below we discuss what the dental practice sale can look like in more detail. However, if you have immediate questions about how the dental attorneys at Cueto Law Group can help, please consider scheduling a consultation. We also represent clients on the other side of these transactions who need help figuring out how to buy a dental practice.
Schedule a consultation today.
Dental Accountant
Your dental accountant is another important member of your team who will work closely with your attorney. They provide important financial information disclosure during due diligence and help you understand the tax consequences of your sale. Their input will be useful when confirming the value of your practice and how to set up the payment structure to hopefully mitigate various tax liabilities (e.g., income, capital gain, sales and use, etc.).
Here’s How to Sell a Dental Practice
A lot of factors can influence the process of selling your dental business to a prospective buyer. You will likely need to consider the following when thinking about the sales process as each of these items are important for increasing your chances of having a smooth transition. Some of the topics here will happen linearly while others will happen more simultaneously once you have a signed letter of intent from a qualified buyer.
1. Find Potential Dental Practice Buyers
Once you’ve decided to sell, one of the first things you will need to do is find a buyer for your dental office. Unlike other businesses, dental practices are unique in that state laws usually restrict your pool of prospective dental practice buyers to other licensed dentists (i.e., those with a DDS or DDM and the applicable state licensing). As a result, you often end up selling your dental practice to one of the following:
- Your fellow partners if you co-own with other dentists.
- A current employee(s) who wants to take over your practice.
- An existing dental office that wants to absorb your operation and patient base.
- A new dentist without a current practice who wants to inherit an established practice.
The nature of your buyer will play a big role in the mechanics of your sale and the transition process. For example, a buyout from fellow partners may involve a stock redemption compared to selling to an existing dentist's office that may only want to buy your assets and not the company. Additionally, a new owner may ask that you stay on as an advisor after the sale to help with the transition, but a buyout with your partners may allow for a cleaner break from the practice.
If you don’t already have a buyer in mind, you may consider reaching out to a dental practice broker or a dental service organization that may have buyer referrals.
2. Market Value: How Much Should You Be Selling Your Dental Practice for?
In conjunction with finding your buyer, you will need to figure out the asking price. Agreeing to a sales price will require finding a fair value of your practice. How much is a dental practice worth is a difficult question and no singular approach exists for determining a proper valuation. Rather, several different valuation methods are available to help you lock in a price. Your CPA, financial advisor, broker, or other advisors can help you decide which method makes the most sense and will allow for a successful sale.
How much do dental practices sell for? To answer this question, you may consider some options for determining your practice’s market value. Options may include:
- An average of annual earnings: This simple valuation method takes your revenue minus your expenses (i.e., your profit) and multiplies that figure by a percentage that reflects current market conditions to arrive at the purchase price.
- A percentage of annual net receipts: This method determines value through the total collections your dental practice receives in a year (usually averaged over a few years). Note this is different from the annual earnings approach that looks at your profit as opposed to revenue.
- Your capitalized excess earnings: An approach that considers your collections, expenses, and your production as a dentist to arrive at a practice valuation. Your excess earnings are then divided by a capitalization rate (e.g., between 10 to 30%) to reflect risk and determine market value.
- Asset value approach: The sale price is the sum of your business’s assets both tangible and intangible such as real estate, office equipment, intellectual property, patient lists, and goodwill.
Again, your financial advisors and broker will be in the best position to help you assess the value of your dental office and arrive at a sales price.
3. Identify the Dental Practice Sale Structure
Once you and your buyer agree to a sales price, you can begin the process of determining the best structure for the sale process. Your dental attorney will play a major role in helping you organize the sale and present various options for making an informed decision on the structure. There are multiple ways to execute a dental practice sale and the appropriate option will depend on the nature of your buyer, their financing, and how you’d like to receive payment.
A Partnership Buyout of Your Dental Practice
Selling your interest in the dentist office to fellow partners may look different compared to the paperwork needed for a sale to an outside party. You may need a stock redemption agreement or an LLC buyout agreement depending on if you have a corporation or limited liability company. Your payment from the buyout will usually reflect the business’s appraised value and your ownership interest percentage.
When structuring a buyout, you may have to reference any requirements for the process stated in your organization’s governing documents (e.g., bylaws or operating agreement). Your controlling documents may also contain terms for the appraisal process, rights of first refusal, and other contractually binding terms to follow. Your dental attorney can help review these documents to verify the proper sale process and assist with amending controlling documents or other legal mechanics to protect the enforceability of your buyout.
A Business Sale to a New Owner
A sale to an outside party such as a new dentist or a current employee will involve a more traditional sale process with an asset purchase agreement and other ancillary legal documents. Here, you are selling the business and all of the assets it owns to the buyer. How your buyer finances the transaction will play an important role in how you are ultimately paid (e.g., lump sum at close versus regular installments over a specified period). Some buyers may not be able to finance through a traditional lender, which may require some creativity in how you structure the deal.
Additionally, some buyers may expect or require your continued involvement in the practice to help with the transition planning because of the know-how you have built over time. If you are looking to end your practice immediately after the sale, then choosing a buyer with an existing practice may be preferable. The reason is that they won’t need your continued support because of their experience.
A Sale or Merger to an Existing Dentist Office
If you choose to sell your dental practice to another dentist with an existing business, you may have several avenues for structuring the deal. You could follow the same process as if you were selling to a new dentist. Alternatively, your buyer may prefer a sale of the business’s assets rather than the business itself or a merger with the buyer’s other dentist office. The key difference between an asset sale versus a business sale is that you will likely need to wind down and dissolve your business. This may require extra steps of notifying and paying creditors along with filings to the Secretary of State.
Recap: Sale of Dental Practice Checklist
The sale of a dental practice can be a lot to manage in addition to your obligations as a practitioner. Here’s a recap of some of the key issues and steps to take when beginning the process:
- Assemble your advisory team of attorneys, CPAs, financial advisors, brokers, and other business professionals.
- Find a prospective buyer and consider the impact it will have on the sale.
- Gather legal and financial documents related to the business (e.g., tax returns, financial statements, cash flow reporting, contracts, title records, etc.).
- Be aware of the potential timeframe for the sale of your practice. The transition process could take anywhere from a few months to a few years depending on your organization and deal structure.
Final Points on Selling a Dental Practice
Selling your dental practice is a huge milestone in your life that deserves the guidance of experienced professionals to ensure a smooth transition for you, your staff, and your patients. Our job at Cueto Law Group is to help dental practice owners organize a sale process that allows you to realize the equity you’ve built in your practice over the years, limit your liability post-close, and inform of possible risks. Schedule a consultation with one of our business attorneys and start the transition planning process for your dental office today.
Contact Cueto Law Group today for help selling a dental practice.
