The length of time it takes to sell a dental practice varies greatly depending on several factors. A dental practice can sell as quickly as six months or it could take five years. In most practice sales, there are three primary factors that impact the timing of a practice sale: Location, Annual Gross Collections, Representation by an Experienced Broker. Understanding how these factors affect the timing of a practice sale can help you plan your future transition.
The old adage, “Location, location, location” is probably the most relevant factor in the timing of a dental practice sale. On average, a seller in a metropolitan area can expect their broker to take six to twelve months to locate a qualified buyer. In a rural area, locating a qualified buyer can take the broker one to three years. Once the seller accepts the buyer’s offer to purchase the practice, the parties will need approximately two additional months to prepare for the transfer. This time allows the parties to finalize negotiations and draft the purchase agreement. If the sale includes a real estate transaction, the lender will typically need an additional month.
Doctors that begin their transition planning early can evaluate whether relocating their practice will improve patient flow, profitably, and buyer demand. Relocation could move the practice closer to the patient base, reduce the lease rate, and improve the practice’s visibility. Factors the buyers consider when selecting a practice include: community amenities, proximity to a major airport, reputation of public schools, and demographics.
Annual Gross Collections
One of the major criteria a buyer has when searching for a dental practice is the annual gross collections of the practice. Practices with annual gross collections of $600,000 to $1,200,000 are attractive to a large majority of buyers. Practices collecting less than $500,000 or more than $1,200,000 appeal to a much smaller pool of dentists in the practices acquisition market. Smaller practices provide less revenue for a young dentist with student loan debt. Practices with very large collections are very desirable, but qualifying a buyer for financing is more challenging.
Buyers, as well as the lender, are interested in the trend of the gross annual collections over the last three years. A steady increase is ideal, but at a minimum, buyers prefer to see this number remain steady and not decline. Doctors who are closing in on retirement oftentimes reduce their work schedule and marketing budget, which results in a decline of annual gross collections. This decline can impact the desirability and the time it takes to sell the practice.
Buyers and lenders also consider the percentage of the practice’s overhead. Practices operating with a low overhead realize a greater profit which increases its marketability. For example, a million dollar practice operating with 70% overhead is less desirable than a practice with annual collections of $500,000 and operating with a 45% overhead. Bigger is not always better.
Representation by an Experienced Broker
A selling doctor will likely consider two questions as they contemplate a transition:
- Will I save time and money selling my practice without a broker?
- If I chose to hire a broker, which broker can I trust?
Selling a dental practice requires extensive preparation and knowledge. No two practice transitions are alike. Each practice, buyer, seller, and transition strategy is unique. Because each transition varies significantly, an experienced broker will guide the client through the transition process while avoiding negative consequences or setbacks. A broker will qualify the buyer, secure financing, and negotiate on behalf of the client while also protecting the goodwill between the parties. A broker’s role in representing the seller during negotiations is essential in protecting the goodwill. Simply put, an experienced broker knows how to close the deal while representing his client’s interests in a timely manner.
Our firm is often hired by selling dentists who have either attempted to sell their practice without a broker or who have hired an inexperienced broker but failed to sell their practice. Failed attempts to sell a practice can cost the selling doctor a qualified buyer and add months or even years to the time to complete the transition.
A competent broker understands how to:
- Maximize the likelihood of completing a successful transition;
- Minimize the time it takes to complete the transition process; and
- Secure the best possible price for the seller.
Other factors that can affect the timing of a dental practice sale are aesthetic qualities, equipment, sales price, and lenders.
A clean and aesthetically pleasing practice is enticing to buyers. A fresh coat of paint with up-to-date décor and furniture in the reception area can go a long way to improve the first impression of the buyer and increase the marketability of the practice. These updates will have little effect on the sales price, but will reduce the time the practice is on the market.
Buyers are typically very interested in the age, type, condition, and quality of the equipment. Buyers also look at equipment inventory to determine the need to purchase additional equipment. For example, digital radiography and recognizable practice management software are two items that buyers are commonly seeking. If you plan on selling your practice in the next five plus years, it might be worth upgrading your equipment and technology.
Dental practice owners often place a high premium on certain aspects of their practice, but when an informed buyer or lender reviews the seller’s financial records and practice data, the numbers may come up short. Common points of error for owners typically involve equipment and gross collections. For example, the cost of a new equipment purchase does not automatically translate to an increase in practice value. Also, while gross collection numbers certainly affect the value of a practice, other factors such as the number of operatories, overhead rate, and equipment age also play a role in determining value. Expert brokers can provide you with an accurate and well-documented appraisal that will hold up to the reviews of both buyers and lenders and allow for a more timely sale.
Lenders specializing in dental practice sales often make 100% loans and can complete the closing within a one-month time frame. Banks unfamiliar with dental practice acquisitions can take up to three to four months to close the sale.
There is no guarantee on how quickly your dental practice will sell. However, hiring a professional broker and planning early for the sale are two of the most important aspects toward a successful and timely transition. The most successful practice transitions are those whose owners seek professional transition advice early on (between three to five years prior to the sale) and communicate their goals and their desired timeframe for selling their practice. By starting early, you and your broker can work together to build a strategy and be prepared when the time comes.