QUESTION: I'm getting a lot of solicitations from local dental chains to buy my practice. What types of good signs or red flags should I look for if I start talking to any of them?
Allen M. Schiff, CFE, CPA
This is a great question! It’s certainly indicative of the times we’re living in. We’re hearing from clients that the dental chains have ramped up their marketing efforts post-pandemic. Many of the chains are preying on small dental practices. You might wonder why this is the case.
Operating your dental practice in the current climate is certainly stressful. Many dentists have reported that some of their team members have not returned to work due to fears of the coronavirus. This is certainly true in the older hygienist population. Many dentists are working at less than 100% capacity. Many are struggling to find adequate personal protective equipment and supplies.
In addition to these factors, dental practice owners are up to their ears trying to understand PPP loans, EIDL loans, HHS provider relief funds, local and state grants, as well as satisfying the Centers for Disease Control and Prevention and the American Dental Association guidelines to operate practices in a conducive environment during all of the new challenges.
The dental chains get this. They understand the stress solo practitioners are under and the needs that they have in order to satisfy additional government requirements. All of these stress factors weigh down dentists, and they wind up questioning whether it’s worth it to be a dental practice owner right now.
This creates the perfect storm for dental chains. They’re looking to grow and penetrate your marketplace, and what better timing than now, when they can take advantage of the current situation? They understand your vulnerability.
The signs you should look for from the dental chains could be in the form of aggressiveness because they sense your desperation and stress. I would suggest that you entertain the inquiry, but keep your awareness up, because “all that glitters, is not gold.” Let me share why this is the case.
Many dental chains propose to purchase a practice beyond your perceived understanding of what the fair market value of your practice may be. Initially, this is very enticing. It is exciting because you never perceived the value of your practice, let alone what one of these dental chains offers you. However, you need to take the time and engage a dental CPA and a dental-specific attorney in order to decipher the small print.
There will be three components of the offer: 1. initial cash at closing, 2. earnout, and 3. rollover equity. If all of these offers translate into cash for you, you’ve made an excellent financial deal. However, the likelihood of all three offers happening is slim, and the most likely one that will happen is cash at closing. This could come to 65% of your practices value. Earnout may or may not happen, depending on the annual production requirements that the dental chain places on you. You need to evaluate whether you can obtain the production levels the dental chain will budget for you.
Finally, rollover equity will happen only if the dental chain is successful in selling its portfolio to a larger dental chain, which may or may not happen. So, as you can see, you will probably end up with 65% of the total offer. If this is the case, you should consider weighing the economics of this against simply working another two or three years. Then at the end of that period you can consider selling your practice in an “arm’s length” transaction with a buyer whom you believe will carry on your philosophies and values. After all, you’ve established those values during the last 20 or 30 years, and quite frankly, you’re proud of them!
Good luck, be careful, listen, engage the proper professionals, and see where this takes you!
Thomas L. Snyder, DMD, MBA
The pandemic has certainly not slowed down DSO activity as there has been an increasing number of regional and local group practices emerging who are aggressively looking for sellers. They all have a good story to tell, but it can become very confusing for you to differentiate their offerings, making it difficult for you to determine which company makes the most sense for you.
Here are a few points to consider. First, how long has the company been established? How many practices do they have in their network in your area, or will you be the first practice they plan to purchase in your locale? If the latter, this may give you some negotiating leverage. Does the company have a centralized management structure, for example, do they have a human resources department, a centralized call center, and centralized billing? Companies without proper infrastructure may find it challenging to achieve the growth goals that they have established in their business plan. This could impact your ability to be as productive as possible, perhaps inhibiting your ability to achieve your earnout goals.
Another key point is the Letter of Intent (LOI), which you will be required to sign at the outset. The LOI should not only contain the sales price but specifically spell out the payout terms. Since most companies have reduced their upfront cash payments to between 60% and 70% of sale price, this can affect the amount of risk you’re willing to take if you accept the offer.
Another mistake many sellers make is not knowing whether the sale price includes your accounts receivable (AR). This can be a significant financial oversight that lowers your prospects for a lucrative financial deal. Conversely, in most private practice sales, AR is not included in the sales price. Another key point is for you to understand all of the terms and conditions of your employment agreement, as well as the metrics that must be achieved to receive your earnout.
More companies are offering sellers an equity position in the parent company as a component of the purchase price. So, make sure you understand the terms for that equity being converted into cash.
Finally, it's fair to ask the company what their plans are during the next three to five years. How they are financed may have an impact on the company's growth. If the company is financed primarily by debt via commercial banks, the lender may decide not to provide additional funding for a period of time, thus impacting the company's business plan for future growth. If private equity is involved, understanding their plans for selling to another venture may be important to know, especially if you plan to be a long-term employee. This also becomes more important if you have equity in the DSO.
In summary, there are many situations when selling to a DSO will be in your best interest. However, you should decide to sell only after properly analyzing all aspects of your personal financial situation and considering your overall time frame for retirement. Retaining experienced transition consultants to assist you in analyzing these DSO offers may reap additional proceeds not only in your sale price, but also with future payout.
ALLEN M. SCHIFF, CFE, CPA, is a founding member of the Academy of Dental CPAs. This group of very knowledgeable CPA firms specializes in practice management services for the dental industry. Schiff serves on the ADCPA executive committee and is the current president of the ADCPA. Reach him at (410) 321-7707 or [email protected].
THOMAS L. SNYDER, DMD, MBA, is the director of transition services for Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or [email protected].