Preparing for A Bright Future
April 1, 2021
As a doctor, transitioning the ownership of your practice to another doctor, group, or dental organization is one of the most important decisions of your career. It’s also highly complex, requiring a significant amount of research, due diligence, and consultation. Along the way, you will be faced with a plethora of questions and considerations. All of this adds up to a decision that, while exciting, is also difficult to make. As you embark on this journey, it’s important to have a good foundation of knowledge on which to build. In this article, we’ll cover the basics of a practice transition and provide a baseline to help you on your way.
What are your goals?
The transition path you choose is largely dependent upon your goals – personally, professionally, and financially.
The valuation of your practice is likely the first thing you think about when you begin considering transition options, and rightly so. A dental practice is oftentimes a doctor’s single largest asset, and the proceeds you receive will have far reaching implications on your financial security and wealth for years to come.
It’s also critical to look beyond the valuation of your practice to identify other important motivations for why you would want to sell in the first place and to understand what more you are looking to get out of an ownership transition. While the reasons for a transition vary widely, we have found they usually fall into one of three categories:
- Planning for retirement or selling as part of an exit strategy
- Achieving a better work-life balance and ability to focus on patient care
- Looking for opportunities to grow and expand beyond what you can achieve alone
Whether it’s maximizing purchase price, solidifying a future for your staff and patients, or even creating more personal flexibility for yourself, clearly and honestly defining your goals will help ensure a successful ownership transition. At Apex, we’ve partnered with doctors from each of the above categories and found that when their goals are clearly defined, the process that follows is much easier to navigate.
What is your timeline?
Many doctors find it challenging to determine the right time to sell their practice. Planning early and establishing an achievable timeline is the key to a successful transition.
Some doctors begin the planning process too late and unwittingly set themselves up to receive less than they otherwise would have for their practice. Doctors nearing retirement or those wanting to achieve better work-life balance make the mistake of lessening their workload while simultaneously seeking transition solutions. The result? By lessening their workload, they lower their practice’s production which in turn negatively affects the valuation of their practice. In short, they end up realizing less profit from the sale.
It’s best to evaluate and pursue your options before scaling back rather than after to ensure the value of your practice is at its highest when it’s time to sell. Ideally, you should seek buyers when your production is growing, not when it’s in decline.
There are also several external factors that can affect timing, including the state of the economy, the real estate market, current and future tax laws, and many others that can impact the value of your practice. Sometimes, these factors are out of your control, but when possible they should be considered as you map out your timeline.
We recommend planning far enough in advance to ensure you position your practice in such a way that you maximize its value at the time of transition.
What are your options?
We find most doctors select one of three different options when selling or transitioning their practice, depending on their specific goals and timeline:
- Transitioning ownership to an associate
- Selling to a new dentist
- Affiliating with a group or dental organization
Transitioning to an Associate
A growing practice will often consider hiring an associate dentist with the expectation that the younger doctor will one day purchase the practice. For this scenario to be successful, the practice owner should have maxed out his or her production capacity and not have the ability to meet the increasing demand for services. As a result, the doctor-owner would bring in an associate doctor to help meet that demand, often with a long-term plan of succession in place. In some cases, associates might “buy in” over time. Either way, associates will most likely want to have a clear path to ownership with a well-defined timeline. This may not be the best option for practice owners or associates when long-term plans aren’t clear. To be successful, this option requires mutual agreement (often contractual) at the beginning of the relationship.
Selling to a New Dentist
Selling your practice to another dentist or independent buyer is a common option selected by practice owners who are seeking retirement. These arrangements can be structured in a variety of ways, but more often than not, a buy out of this type may entail a small transition period. In the absence of a carefully laid out transition plan, this option can potentially have negative implications for both the staff and patients. For doctors nearing retirement who want to scale back their work but still practice dentistry, this may not be the best option for them, given the shortened transition period and lack of production to support multiple doctors.
Affiliating with a Group or Dental Organization
Dental groups or organizations (often called dental support organizations or DSOs) provide various levels of personal and professional freedom and flexibility for doctors. Not only does this option appeal to older doctors seeking a path to retirement, it also appeals to doctors interested in growth and expansion as well as those who are seeking a better work-life balance. For doctors later in their career, the transition time is slower or more drawn out, often allowing them to continue working for years after a sale is complete. Doctors interested in growing and expanding their practice will find that some DSOs are willing to support that growth through further investment. Finally, DSOs typically assume non-clinical responsibilities, reducing the amount of time required to fulfill ownership and administrative functions which serves as a benefit to all affiliated doctors.
We encourage you to explore all of your options and decide which one is best for you. Whether you decide to sell to a new dentist, transition your practice to an associate, or affiliate with a group or DSO, make sure your decision aligns with your goals.
What are Dental Support Organizations?
Of the three options listed above, the newest and perhaps the least understood is that of a dental group or DSO.
As a doctor, you’ve probably heard about DSOs. Over the last 15 years, they have grown in popularity and are becoming ubiquitous in the world of dentistry. But what exactly is a DSO?
Broadly speaking, a DSO is a company that provides non-clinical, administrative, and operational support services to dental practices, either through acquisition or contracting. Many doctors find this beneficial because it alleviates the burden of non-clinical responsibilities, allowing them to focus more of their time on practicing dentistry. Moreover, through acquisitions, DSOs allow doctors to take out the equity they have built in their practice and attain a desired level of financial freedom.
DSOs typically provide a suite of services including finance/accounting, marketing, human resources, information technology, people development, operations, and other business functions that fall outside the scope of clinical work.
Some DSOs offer flexibility and can accommodate the desired transition timelines of their affiliated doctors, allowing them to continue practicing for years following an acquisition. In a sense, this offers doctors the best of both worlds. After taking the equity out of their practice, they are relieved of non-clinical responsibilities and yet are still able to serve their patients for as long as they wish.
As you begin to explore dental support organizations, you’ll quickly notice there are numerous models and levels of support. While the number of DSOs in the industry means there are many options to choose from, it also creates a challenge to find one that’s a good fit for you, based on your goals and values. Some DSOs are extremely large with over 1,000 supported practices, while others are much smaller, supporting only a handful of locations. Strategically, DSOs can differ in a variety of ways. For example, some only focus on specific regions, while others are national. Some focus specifically on general dentistry practices, while others incorporate specialties into the mix. And lastly, some unify their practices under a single brand, while others remain non-branded, allowing each practice to have an identity of its own.
When narrowing down your choices, we recommend you answer a few questions:
- What do my patients value about my practice?
- What does my team value about my practice?
- What do I value about my practice?
The key to any successful partnership is shared values. Once you have a clear picture of what you value most about your practice, it will be easier to sift through the numerous DSO options and narrow it down to those that represent the best fit for you, your staff, and your patients.
How much is your practice worth?
Finally, we arrive at perhaps the most important question – how much is your practice worth? You’ve spent years building and growing your business, and you want to make absolutely sure you receive the maximum value from a sale.
The best way to obtain an accurate valuation of your practice is through a formal practice appraisal. There are a variety of options available to accomplish this. For example, some doctors choose to work with brokers who serve as a third-party intermediary between the buyer and seller, while others work directly with a DSO to obtain a fair market valuation of their practice, saving them thousands of dollars in commission fees. Regardless of which option you choose, the goal and outcome are similar.
It’s important to note there is no single standardized method for appraising a dental practice. There are several different methodologies commonly used, such as net asset valuation, market-based valuation, and income-based valuation. Sometimes it’s a combination of the three. Considerations like location, equipment, staff, reputation, payor mix, and other attributes factor into the appraisal as well. Ultimately, the appraisal will consider both tangible and intangible assets. Without getting too deep into each different methodology, the primary takeaway is that you as the business owner will walk away with an objective valuation of your practice and a better understanding of what your personal financial picture will look like moving forward.
Once you’ve nailed down the value of your practice, it’s important to consider taxes. While this topic deserves an article unto itself, it’s worth touching on. With changes in Washington, we are likely facing a potential increase in taxes. When thinking about your timeline, this could influence when you decide to sell your practice. Specifically, an increase to the capital gains and individual income tax could significantly decrease the amount of take-home profit from the sale of your business. We recommend consulting with your accountant to review the current and upcoming tax laws and evaluate your options.
How will a transition affect your patients and staff?
Once you’ve made the decision to transition your practice, it’s essential you are transparent with your staff. Some doctors are compelled to remain discreet about their choice for fear of losing staff. Often, the opposite is true. Setting expectations in advance with your staff can have a positive effect, especially with a strong transition plan in place.
With some DSOs like Apex, the transition is barely noticeable to patients because the goal is to preserve the existing culture and feel of the practice. However, some DSOs require a full rebranding which could result in a “culture shock” with the staff if they’re not properly prepared, and patients might not realize it’s the same office following the changeover.
What are considerations during a transition?
Once the decision is final and prior to kicking off a formal transition, you’ll need to establish one more timeline. You and your new partner should outline a clear roadmap of the future. Once you have a clear picture of what the transition will look like, it’s critical to share that information with your staff. Make sure you set up regular communication with them, and if necessary, have dedicated onboarding procedures lined up to ensure a smooth and seamless changeover.
As you work through this process, it’s important to prepare yourself mentally. Some doctors worry that “letting go” of some of their previous roles and responsibilities will be a challenge. It’s important that you are emotionally ready to welcome these changes and enjoy your new role, whether as an affiliated doctor or retiree, and embrace the newfound personal and professional freedom your decision has afforded you. Doctors affiliated with Apex consistently express relief following a transition because they are still able to practice dentistry and serve their patients without the stress that comes with practice ownership and administration.
Start Planning Now
It’s never too early to start thinking about the future. Don’t wait until your practice is in decline or you are in failing health, because those circumstances will limit your options. Start planning early, identify your goals, establish a timeline, and begin mapping out the next phases of your career. Along the way, do your research and understand all of your options to ensure you successfully achieve your goals.
The decision to transition your practice is difficult, but once you’ve decided to move forward, the process shouldn’t be. With the appropriate amount of due diligence along with the right partner, a transition should not only be smooth but also one of the most rewarding experiences of your career as a dentist.
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Choosing to sell your practice is a decision that shouldn't be taken lightly. At Apex Dental Partners, we work closely with you every step of the way to ensure you feel comfortable and confident you're making the best move for your future.