If you’re in a dental practice that is valuable and in need of a transition or exit strategy, then this post is perfect for you. In part 1 of this 3-part series, Xite VP, Philip Ranger goes through why the transition strategy is important and the team players involved in the transaction. Now, let’s begin part 2.
When Planning Should Begin
One of the earliest decisions to make is when to start planning. Ranger advises clients that they will need a good three to five years to plan their exit strategy.
“At some point in their career, every doctor or business owner out there gets tired as they get older, even if they enjoy what they do,” he explains. “Often, they say ‘I can’t do things the way I used to do them, so I think it’s about time for me to retire.’ When that point in their life comes, and it doesn’t matter if they’re 50, 55, or 60 years old, there still may be some opportunities within that practice the doctor could capitalize on, that could make him happier while also increasing the value of the practice before leaving.”
It can become a long, stressful process if the clinician doesn’t have all his or her ducks in a row, the right financial advisor, transition specialist and the right lawyer helping with the appropriate strategies. “It can be very daunting process to go through without support,” Ranger says.
The first thing Ranger delves into when he starts analyzing a practice is looking at their financials. “That’s going to give me a gauge of what kind of practice this is, and its position in the market,” he says. For example, he explains, say there is a million-dollar practice with a solo owner who makes $500,000 a year. And there is another million-dollar practice that at the end of the year has a net income of $250,000. Which practice is more valuable? Not all million-dollar practices are the same. The most important part of the financial analysis is understanding the revenue and how the dentist is operating that revenue. And the bottom line is net income. Ranger advices that the net income sweet spot be between 30% and 40% of the revenue. He considers that a very solid, valuable practice.
Next, Ranger looks at some of the moving parts within the practice to find areas that could be worked on to enhance the value and net income. In the average practice, the biggest overhead expense is staff, which he says should be around 25% of the revenue. If staffing expenses are running at 35%, a broker or potential buyer will see that too much is being spent on staff. The easiest way to fix that is to eliminate one staff member, which is never recommended, but the practice could also increase revenue in other ways to make that number look better. So really understanding the financials of the practice and determining how strong that practice is, based on the cashflow, is the first priority.
Next is identifying and deciding what can be done to have a positive effect on the net income. Ranger then starts looking at areas for improvement. He analyzes how the practice compares to others in the local market to ascertain if there are opportunities that can be incorporated now, or whether they can be changed later. A practice evaluation identifies how income is being generated and identifying procedures they may be performing that are outside of the standard “bread and butter” dentistry. It may be that the owner is referring the endodontics out. Today, younger general dentists are doing the majority of the endodontics within their general practice. So, if a buyer is comfortable performing endodontics, that becomes an opportunity for the buyer to capitalize on, immediately gaining more revenue within the practice. Another example might be same-day dentistry. If the buyer is already offering that service, lab and other associated costs will go down immediately.
Other considerations for the team as well as the buyer are the location of the practice, the mix of patients, and the size and condition of the facility. Does it have good visibility with easy access? Is there room for additional operatories and to house new technologies? Is there adequate parking for more patients?
If the practice opened 30 years ago, have the dynamics of the community changed tremendously? That will dictate what the future of a new practice will be in that location. For instance, if the demographics of the patients within a 3- to 5-mile radius has declined, then it may be harder for the practice to grow or even continue to thrive. Will a new owner be willing to have a base of Medicaid or insurance-driven patients or want to attract more fee-for-service patients? What if the demographics do not match their practice philosophy? These considerations will all factor into the marketing plan developed for selling the practice.
Time to Start Marketing
Once Ranger and the other team members have done their due diligence and have gained the seller’s trust, it’s time to start marketing the practice. There are a variety of ways to do that, so it is important for the broker to have a full understanding of every detail about the practice and to be capable of conveying accurate information to prospective buyers. They must also know how it compares to other practices and be able to promote existing and future growth opportunities to the buyer. The broker also needs to have the knowledge and experience to detect any negatives within practice because he or she must be transparent throughout the process.
“This can be a tricky area. What I think is a negative may not be a negative to the buyer,” Ranger explains. “It just depends on the confidence of that buyer and their bank. So, it’s our job to control the narrative about the practice performance. Basically, that means understand all the positives and negatives about the practice as well as the opportunities within it so we can talk about that information with a potential buyer. The banks must be very transparent about that information as well. No hidden agenda.”
Go back and read part 1 or stay tuned for part 3 where we discuss other considerations and why you should partner with a Broker.
About Xite Realty
Xite Realty helps healthcare professionals in through every stage of their career including opening their dream offices to practice sale for retirement. Founded in 2013, Xite Realty has six offices in three states, staffed with professionals to assist our clients open, sell, or purchase a medical practice in the United States. We equip our clients with tangible evidence for their startups by using tailored demographic data and tested healthcare real estate expertise. For more information, visit https://xiteco.com