Best Practices for Selling a Multilocation Dental Practice: Part I
March 8, 2023
At a glance
- The main takeaway: Selling a multilocation dental practice is a complex endeavor, one that requires ample due diligence, planning and professional support.
- Impact on your practice: If you wait too long to start the preparation process or fail to follow best practices, you could wind up with a deal that doesn’t meet your needs or delaying your retirement.
- Next steps: In the first segment of a two-part series, we review two essential steps all practice owners should take before embarking on a multilocation sale.
To start the planning process, contact Aprio’s dental transitions team today.
The full story:
Are you a multilocation dental practice owner? You may be curious about how to approach the sale process when you prepare for your eventual retirement.
For any business, major transitions can be complex endeavors, but the process can grow even more complicated when multiple locations are involved. Your time horizon and post-sale employment agreement are also key determining factors to consider.
Over the course of a two-part series, I will review the essential steps you should take when prepping for a multilocation sale. We will cover the first two steps below in Part I:
1. Arrange your practice documents, financials and statistics for potential buyers
Before embarking on a sale, you need to make sure the financial documents and statements for each of your locations are in order. It is important to develop a comprehensive understanding of each office’s financial picture, including their profit and loss (P&L) statements.
Aside from P&L statements, you also need to gather the tax returns for each of your offices and review the filings. Does each office location have a separate tax return, or did you file for three or four of your locations under one consolidated return? If you filed taxes for all of your locations under one return, your dental accounting and advisory team could run into challenges when trying to dissect what types of dental work you performed in each office for each P&L statement. Prospective buyers may be hesitant to commit to purchasing multiple locations of your practice if they don’t understand what is going on at an individual level.
Therefore, we recommend that our clients maintain separate financial statements and documents (including tax returns) for each of their offices, which allows our team to better analyze income, production, debt, employee wages, profitability and supply costs on an individual basis. Doing this also allows the team to break down the revenue associated with each location, giving you the ability to sell one of your offices outright if you choose to work with a buyer who is only interested in one location.
Apart from having clean financial statements and documents, you also need to gather production and collection reports (at least for the past 12 to 36 months) from each of your offices. Buyers will need to complete separate analyses of each location to acquire an accurate picture of how they are performing on an individual level. This exercise is a big selling point for buyers because it allows them to pinpoint areas where they could increase their profit margin.
The final phase of this first step is to keep solid practice statistics. Important statistics to track include new patients per month, average patient type and average type of dentistry performed per location. These practice statistics matter to buyers because they allow them to understand what they’re getting for the purchase price, which can also help you negotiate for more value. For instance, if your practice is referring out a lot of specialty work from one specific location, then a buyer will know what gaps they may need to fill in-house or what types of specialists they should bring into that office before signing the dotted line.
2. Develop the post-deal strategy and structure
The next step of the multilocation sale process is to determine the post-sale deal structure, which includes the type of management and production role you will have in your practice for a period of time after the sale has closed. This is a form of “goodwill,” and it is important to buyers, especially when they are buying multiple practice locations from you.
The longer you stay onboard through the practice transition process, the more attractive your practice will be to a buyer. Why? Post-sale, your buyer will be focused on keeping production at historical levels to continue meeting patients’ needs and revenue goals. To accomplish this, the buyer will expect you to stay and help improve the quality of dentistry that you have performed previously, because that is what the value of your practice is based on.
If your practice fails to adhere to those standards, the practice’s revenue will drop, and your payment will significantly decrease on the portion of the deal that is seller-financed. If you are selling a multilocation practice, you may get anywhere from 60%–70% of the sale payment upfront; the rest of the payment will be disbursed over a three-to-five-year-period via a promissory note that is tied to practice performance. If you want to sell your practice without investing time back into it during the transition, you could inhibit the total maximum value of the business overall.
This is why it is important to set a realistic work timeline before you take your practice to market. Are you planning on retiring in two years, or do you plan to stay onboard for eight years? How long are you willing to work post-close? What revenue numbers do you feel comfortable hitting? Remember that many dental service organizations (DSOs) require sellers to work in the practice for three to five years post-sale. Other DSOs may want you to stay on for five to seven years depending on the size of the deal, the number of locations you have and the revenue targets they expect to hit after they have purchased your practice.
Take the next step
Once you have developed your post-deal structure and strategy, your next step is to assess your sale readiness and narrow the buyer playing field. Stay connected to our Dental Insights for Part II of this series. In the meantime, don’t hesitate to get in touch with our dental transitions team if you are ready to start preparing for your multilocation practice sale.
Click here to set up a quick call with us today.
From Associate to Owner: How to Buy a Dental Practice in Today’s Economy
To Sell or Not to Sell? Best Practices for Assessing a DSO Offer
The End Game: Critical Steps to Prepare Your Dental Practice for a Transition
About the Author
Justin is a recognized dental industry leader with more than 12 years of experience guiding clients through practice transitions, mergers, real estate purchases, banking, debt restructuring and practice financing. His experience with financing dental transitions for two of the largest dental lenders in the nation have provided him with both buyer and seller perspectives on virtually every type of transaction imaginable. Justin helps dental practice owners understand the valuation of their practices for potential sales and the financial impact of selling on long-term personal wealth.