by John F. McDonnell
For more on this topic, go to www.dentaleconomics.com and search using the following key words: selling a dental practice, seller's market, capital gains, John McDonnell, Practice Transitions.
One of the hardest decisions for dentists to make is when to sell their practices. This decision is often not totally rational but can be driven by emotions. We normally find that the choice to sell is five years later than the seller prefers. Many different factors come together that motivate many to sell their practices now.
Reasons to sell now
Practice values are now at their peak — Because of the impact of the economic downturn, dental practice values are also being impacted. At this time, dental practice values in many parts of the country are at their peak. Because the current economic climate has caused practice revenues to stabilize or decline, and because the mature practice owner tends to work fewer days, values are likely to decline.
Boomers are selling — Starting in 2007 and for the next decade, baby boomers are selling their practices. Those who sell during the early part of this period will likely receive a higher sale price. As more sellers list their practices, sale prices will likely decline.
Financing is available now — Today there is still excellent financing available from dental lending companies. The rates and terms are still positive for buyers. Because of the current negative financial situation, this is likely to change. In the future, buyers may find it more difficult to get favorable rates and terms. In addition, as fewer dentists choose to start practices due to the current economic climate, they are choosing to buy practices.This circumstance can force values down and make practices harder to sell.
Still a seller's market — As projections for the U.S. population are 400 million by 2050, and the number of yearly dental school graduates is currently equal to the combined number of retirees, deaths, and those with disabilities, there is a severe shortage of dentists in many parts of the country. This has allowed practice sale prices to remain high in those areas.
Capital gains is still favorable today — The capital gains tax for sellers is currently very favorable at 15%. Also, buyers are now able to depreciate and/or amortize the entire amount of the purchase price. These tax laws, though favorable now, could change in the future.
Sellers are tired of running their own businesses — Many dentists are tired of being business owners. They do not like managing staff issues, dealing with insurance companies, and increasing operating expenses. These sellers in many cases like doing dentistry and interacting with patients, but do not like the daily responsibility of running a practice.
Example of selling a practice at the right time
In an initial transition planning meeting, a client stated that he wanted to sell his practice in two years. This practice had a 10–year, full–time associate who was moving across the country. The owner planned to hire a new associate that would hopefully purchase the practice in two years.
The first step in his transition planning was to perform a practice valuation. When we presented the valuation, the owner was surprised to find out how high his practice was valued. With no debt on the practice, the realization that its value would likely decrease, the possibility of a capital gains tax increase, and the likelihood that future financing for the buyer could become more difficult, he decided to sell now.
Because this practice was in a popular area, there was plenty of competition for it, and it sold quickly and for a price higher than valued. The new owner immediately took over the four days that the associate was working in the practice, and the seller has been able to stay and treat the patients he has seen for more than 25 years.
The seller is still earning income as an associate, but without the burden of running the business aspect of the practice. The practice revenue increased 15% during the first six months of the transition. Both the seller and buyer are extremely happy.
Because of all of these factors, it's likely that there will never be a better time to sell a dental practice. Practice values, now at their highest, are likely to decline as more practices go on the market and the financial impact on the economy continues to be a factor. Why not plan to sell now?
John F. McDonnell is the founder and president of The McNor Group, a dental brokerage and practice–transition firm, and is the immediate past president of American Dental Sales. He can be reached at [email protected] or (888) 273–1014, ext. 103.