The Top 6 Things you need to know before Selling your Practice to a Dental Service Organization (DSO)
In today’s market, dentists who are interested in selling their practices have several options they can choose from. Yet most of them don’t know where to start or what is involved in the transaction. This article contains the 6 things dentists need to know before selling your dental practice to a DSO.
Understand the nature of the transaction
If you intend to sell your dental practice, you need to start planning for it as early as possible. I say this because the worth of any dental practice is usually built several years before the business can be sold. Where selling is a complicated process, you don’t want to make a rushed decision. One of the most challenging aspects is to know the best time to make the transition. If you do it too early, you will lose a considerable amount of money because you will be selling it at a lower value than it is worth.
Preserving its legacy
Honoring the commitment to the practice’s legacy is a very important factor in selling and it requires working with the “right” DSO. Beacon Dental Partners understands that good businesses are the result of hard work and commitment. Demonstrating our commitment and dedication to your dental office’s continued success, we involve ourselves in the day-to-day activities during and following an acquisition to ensure continued success and that the culture is preserved. Beacon Dental Partners focuses on the long-term value of operational continuity, stable employee relations, and preserving the unique culture that each office has established.
Achieving high exit value for your practice
Appraising a dental practice is a complex process that should not be undertaken alone. You are bound to leave a considerable amount of money on the table if you try to sell your practice without involving experts in the negotiation process. Dental practice appraisers are knowledgeable about the industry and can properly assess the worth of your business.
Typically, dentists don’t know the value of their practice, let alone how the industry experts (accountants, dental practice brokers, and buyers) set their dental practice valuations. Some dentists think their practice is worth 1.5 times their net income, and others think it’s an average of 60-80% of their last three years of collections. Both of these assumptions are wrong and don’t adequately reflect the fair market value of your practice. Quite simply, the value of any business is typically based on its cash flow, the risk associated with investment, and the return on investment for the buyer.
Bearing that in mind, here are the 3 commonly used dental practice valuation methods: income-based valuation, market-based valuation, and net asset valuation.
To be clear, appraising a dental practice is a formal opinion of the practice’s market value based on all the pertinent information, including: collections, fee schedules, staff information, the number of active patients, the number of new patients each month, specialties and procedures done in-house, patient and area demographics, and the practice’s goodwill.
Employee protections
When selling a practice, the dentist is not only approaching the end of his or her professional relationship with their patients, but they are also ending a relationship as the “employer.” The reality is that after the practice changes ownership, the buyer will replace the seller as the employer. During this transition period, employees must be treated with respect, protecting the buyer and seller from potential violations of the federal employment laws.
Any dentist who is involved in transitioning his or her practice and staff should provide a written letter to each employee, advising them of the termination of the practice and their associated employment with that practice. This letter must have concrete documentation that each employee received it. Following this process, the DSO must choose to interview each employee and rehire them (at their discretion). This documented break in the chain of employment will go far to protect both the buyer and seller from employment law claims arising from the actions of their counterparts.
In order to protect your employees in this transition, ask the DSO buyer for retention bonuses or some guarantees of keeping the staff (based on performance metrics). If they fail to do this it is a red flag. After all, DSOs should be willing to do this and are incentivized to do this.
Reliable capital resources
In the process of getting an offer letter, make sure to ask buyers to submit a bank letter or term sheet with the offer. This gives peace of mind that the buyer has the money required for the transaction. On that note, be wary of buyers who are not prepared and will waste your time. Ask buyers up front as to their source of capital and if they own other practices or assets. It is worth emphasizing that a new dentist will only have student loans and low amounts of assets, and it could be difficult for banks to fund them.
Trust and connections
Understandably, dentists want to sell their practices to the “right” buyer, at the right price, and they want to make sure they understand the transition process from beginning to end. Working with the right people is key to a positive experience for the seller. Sellers want to feel comfortable and know that the people they are working with care about them and have their best interests in mind. Working with an experienced, down-to-earth neutral party not only brings peace of mind, it offers what practice owners want the most: trust and connection. Beacon Dental Partners will always be open, honest, and direct with you.