How does selling a dental practice work?

Steps Towards a Successful Dental Practice Transition

Step 1: Hire a Broker

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Hire a Broker. Hiring an experienced broker is the best way to sell a dental practice. Using a broker will reduce the time and stress involved in selling your

practice while also maximizing the sales price.  Brokers can:

  • Professionally appraise your practice
  • Qualify buyers for your practice
  • Guide the parties towards a successful transition

Step 2: Gather Information

Brokers will need the following items to complete your practice appraisal:

  • Tax returns from the last three years
  • Financials
  • Production reports
  • Accounts receivable reports
  • Lease agreement or real estate documents
  • W-2s for employees
  • Equipment inventory

Other items needed for marketing purposes include photos and a completed Seller profile including such information as number of operatories, number of active patients, number of new patients per month, etc.

Step 3: Complete the Practice Appraisal

Your broker should provide you with a professional practice appraisal that includes:

  • A cash flow analysis and pro forma
  • Market comparables
  • An explanation with the methodologies used to appraise the practice
  • A description of the objective and subjective factors that support the valuation

Step 4: Market the Practice

Your broker should use various online marketing websites to advertise your practice. Classifieds and trade journals are sometimes helpful, but print advertisement is not as effective as online sites. Typically, brokers will advertise just enough information to spur the buyer’s interest while maintaining your confidentiality. After the buyer has signed a confidentiality agreement, more details are shared, such as the practice address and seller’s name.  The broker’s ability to protect the seller’s identity prevents the sale from being affected negatively.

Step 5: Qualify Buyers

When a buyer expresses a serious interest in your practice, your broker will qualify the buyer as follows:

  • Ensure the buyer is pre-qualified with a specialized lender for financing
  • Determine if the buyer is a ‘good fit’ for your practice.  This includes analyzing the buyer’s clinical proficiency, management experience, and practice philosophy.
  • Weed out prospective buyers that are unwilling to submit a serious offer and not ‘lowball’ the seller.

Step 6: Execute the Letter of Intent (LOI)

In a good faith effort to move forward, the parties execute a Letter of Intent. Basic components of an LOI include the earnest money amount, the sales price, and a transfer date. Some LOIs are very basic and contain limited information. Other LOIs, like those prepared by our firm, are more thorough and include information such as the allocation of the sales price for goodwill, lease terms or the sales price for real estate, and how the accounts receivable will be transferred in the transition.

Step 7: Perform Due Diligence

Buyers perform due diligence to ensure their understanding of the cash flow and overhead of the practice. This process actually begins prior to signing the LOI, however, a more thorough analysis should be performed after the signing. This process includes the review of:

  • All tax returns
  • Financials
  • Patient files
  • Staff payroll
  • Existing vendor contracts
  • Lease and/or real estate contracts

Step 8: Secure Financing

The buyer should begin the process of securing financing prior to signing the LOI. After signing the LOI, the buyer will continue to works with the lender’s underwriting team to ensure financing is ready for the transfer day. Brokers may sometimes line up an alternate lender in case financing is denied or delayed with the buyer’s first choice.

Step 9: Finalize Terms

This step involves both parties wrapping up any business terms that were not discussed in the LOI or that arise during the due diligence phase such as issues with the accounts receivable or work-back arrangements for the selling doctor. Your attorney can negotiate and incorporate these terms into the purchase agreements.

Step 10: Prepare Purchase Agreements

The purchase agreements incorporate the terms in the signed LOI. Most brokers are not qualified or licensed as an attorney to draft purchase agreements. You may need to hire an attorney for this task. At ADS Watson, Brown & Associates, our licensed attorney will prepare this document for you at no extra charge.

Step 11: Transfer Day

The transfer day is an anticipated and emotional day, but hopefully most of the actual work has already occurred. Prior to transferring the practice from seller to buyer, underwriting has been completed and funds are ready to be transferred from the lender. Sometimes the purchase agreements have already been signed and staff have already been introduced to the buyer. If not, these additional steps can occur on the transfer day.

Step 12: Post Transition

Following the sale of a practice, some of all of the following may occur:
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  • The buyer may be collecting accounts receivable on behalf of the seller
  • The seller assists with the transition by being available for questions, and in some cases, making introductions to patients
  • The seller may work back in the practice for a short time. If the practice was originally a two-doctor practice, the seller may work back for a longer period.