Practice sale myths

Aug. 1, 2004
There are many misconceptions about dental practice transitions. Based upon my actual transition results, dental practice transfers are highly successful for both sellers and buyers.

Gary Schaub

There are many misconceptions about dental practice transitions. Based upon my actual transition results, dental practice transfers are highly successful for both sellers and buyers. My more than 1,300 practice appraisals and the transition of more than 350 practices provided data for this article.

Myth:Patient loss will be 20 to 30 percent.

Fact:Less than 2 percent

For an ADA table clinic presentation, my buyers kept track of patient loss data for 16 of my practice sales. Patients who indicated they were leaving the practice and requested chart transfers to other dentists or nonactive clients identified by the staff counted as lost patients. This number, divided by the number of active patients (seen by the dentist within the past 12 to 36 months), gives the average patient loss. The average patient loss was less than 2 percent within six months of the practice sale.

Myth: The buyer will fail.

Fact:No failures in more than 350 sales

Of more than 350 practices sold over the past 20 years, no seller has had to take back the practice because of buyer financial failure. Financial results were available in 11 practice transitions studied in depth. Production by the buyer increased by an average of 25 percent within six months after the practice transfer. The range was +1 percent to +60 percent. I believe the financial health of the seller's practice determines the buyer's success. It is almost impossible to fail when the practice is financially solid and the transition is well-planned.

Myth:Practices are worth 100 to 150 percent of annual collections.

Fact:46 to 84 percent

My data from actual sales for several months indicates that the average general dental practice sells for 60 to 70 percent of collections. The range for the majority of practices is from 46 percent to 84 percent. American Dental Sales has a data bank of about 1,500 dental practice sales. The average sale price, plus or minus one standard deviation, is 42 to 82 percent of collections.

However, these numbers are not valuation "Rules of Thumb." Variables in each practice, such as financial health, location, type of equipment, clinical nature of the practice, staff continuity, etc., determine value. A professional appraisal is the only way to determine actual value.

Myth:A practice transition takes six to 24 months.

Fact:16 days

The short transition time for general dentistry practice surprises many dentists. In a general practice, one key to a successful transition is a good letter of introduction to the patients. Another key is the attitude of the staff. Their opinion of the new dentist and how this opinion is transmitted to the patients greatly enhance the success rate.

My most common scenario is a younger dentist assuming a retiring dentist's practice. The new dentist has ideas concerning patient management, clinical procedures, and even the decor of the office. The retiring dentist is going through emotional traumas concerning the loss of the practice and the unknown stresses of retirement. Together, these two factors can create severe conflicts. The bottom line is that patients will respect the seller's recommendation and continue in the practice. The physical presence of the seller is not required to assure the transition.

Myth: The sale will be 100 percent cash.

Fact:80 to100 percent cash down

Fortunately, for both sellers and buyers, this myth is almost a fact. In the past, commercial lending sources would only make a loan on the physical assets in a practice. The intangible assets — the majority of the sell price — were not considered as collateral. Now, funding sources dedicated to dental practice transitions realize the essential collateral in a practice is the patient charts, not the equipment.

Even though it is typical to get 100 percent cash down for dental practice sales, some sellers may prefer to carry a substantial note from the buyer. Sometimes, this can have tax advantages, and some sellers prefer the "annuity" approach. Luckily, both the buyer and seller now have considerably more options than in the past.

Myth: Appraisals are not accurate.

Fact: Average sale price — 98 percent of appraisal

Professional appraisal of a practice can accurately determine the final practice sale price. A professional appraisal is the foundation of any successful practice transition. Many lenders will not fund a practice sale, and most astute buyers will not buy a practice, without a professional appraisal.

By separating the myths from the facts, you now should be able to plan for your successful transition.

Gary Schaub is the founder of HELP Appraisals & Sales Inc., a dental and medical appraisal and brokerage firm in Portland, Ore. He has done over 1,300 health care appraisals and more than 350 transitions. He is a member of American Dental Sales and can be reached at (503) 223-4357, or email him at [email protected]. See the ADS classified ads for names and phone numbers of ADS members in your area.

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