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Don’t Do It Alone: The Top Four Obstacles to Navigate When You’re Ready to Sell Your Practice

February 4, 2022
by Sean Robertson, DDS; Lisa Philp


It’s no secret that the dental practice marketplace has been in the seller’s favour for decades. With interest rates at an all-time low, practice loan amortization periods longer than they’ve ever been and more buyers than sellers, this is not going to change anytime soon. Finding a prospective buyer for your practice in today’s market is typically straightforward. But finding the right buyer and getting the deal from a signed letter of intent to a closed sale takes having the right team on your side. And despite the favourable conditions that exist for sellers, there are many spokes in the wheel that require attention before a transition of ownership can take place.

A buyer has the right to a thorough and independent analysis and due diligence when presented with a practice appraisal. This includes considerations of your team, your patients, the lease of your practice premises, appraisal accuracy and the list goes on. On the other side of the coin, you are likely looking for a certain financial goal to be achieved, a certain transition structure that you feel is ideal, and the right fit of a buyer. To meet these goals means having a buyer that can qualify for the lending structure required to make your financial goal a reality. It means finding a buyer whose transition goals into practice ownership align with your goals out of practice ownership. And it often means finding a personality, leadership style and treatment philosophy that embraces the legacy you have created. The goal should be that your transition period out of ownership is the best period of your clinical practice life, whenever possible.

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That’s a lot to consider, and it doesn’t cover it all. Selling a practice is not selling a piece of real estate. Selling a practice means transitioning your legacy. The strong seller’s market still has obstacles that require navigation by a team that knows you, knows your goals, and arrives prepared to support you. Here we will review the four most significant obstacles in today’s marketplace to turning that signed letter of intent into a signed share purchase agreement.

Financing

Despite the fact that interest rates and amortization periods are the lowest and longest we’ve ever seen, the level of lender scrutiny is higher than it once was. What this means is that banks are looking to support buyers who have relatively lower debt and higher equity positions. Banks also want to see that a given buyer has the business acumen to take on your practice. Often this can require a buyer to have some personal equity, including liquid capital, and a soild business plan, which demonstrates the ability to pay for the loan and take home an income supportive of their current lifestyle. This becomes increasingly important when offers are submitted over appraised value. In practice financing, pre-approvals are not possible. Banks don’t offer a practice pre-approval to a given buyer because each practice differs in cash flow generated and each buyer differs in the clinical and business acumen they can bring to a given practice. A buyer that has fostered a relationship with a lender, has some personal equity, knows how to write a business plan, and has clinical experience brings a different level of brevity with their signed letter of intent when compared to other buyers.

Premises Lease

Often the Achilles-heel of a practice sale, the lease can make or break a practice’s value and successful sale. Arguably, the terms of the original and amended lease are reviewed with greater scrutiny by lenders and lawyers now more than ever before. But with values at an all time high, there has to be security that the amortization term of the practice loan is shorter than the term of the lease. Put another way, the purchase cannot be financed beyond the time that the practice may be in the present location. Therefore, having a 10-year term with at least one five-year renewal option is required if financing is to be attained over a 12-year period. What this also means is that demolition clauses and relocation clauses can not only kill a deal, they can prevent the ability to sell, period. Our team has appraised countless practices whose owners were completely unaware of these clauses in their present or historical lease. In some cases, the owner’s attained financing years ago, unaware that these clauses were in place.

Lease transferability is another important consideration. The pandemic has created challenges in commercial real estate. Retailers and offices have seen fewer people in stores and at work in their offices. You don’t have to drive very far to find a “For Lease” sign these days. Consequently, not all landlords are keen to transfer a lease from an anchor tenant to a new tenant. Without transfer of a lease on suitable terms to each party, a dentistry professional corporation and practice, cannot be sold.

Professional Inexperience

Few things can be more frustrating in a practice sale than paying your advisors to learn. Structuring a share purchase agreement or asset purchase agreement requires experience in dental practice sales and acquisitions on the part of your representative broker, as well as your legal and accounting team. Knowledge of how college and legislative governance regard health care professional corporation amalgamation and sales is required on both sides of the transaction. Having the right professionals is required to get a great deal across the finish line. This is often support your broker can provide in the event you are unsure of your professional team’s experience in this arena. Selling a practice is entering into a marriage, even if it’s planned to be a brief transition. Too often we see inexperienced professionals approach a practice sale in a win-lose approach. And although the intention is to represent the best interest of the client, in a goodwill based business, with seller and buyer often working together, the transition needs to foster that transfer of goodwill to ensure success in the transition.

Moving Goalposts

Understanding and communicating your practice sale and transition goals is paramount when you start the process of engaging in your practice sale. These goals need to be specific so that your team can support you with clarity. “Getting as much as possible for my practice” is not specific. Often, unspecified goals can lead to confusion, which can muddy the waters and complicate a sale. Your broker should be someone you can count on to guide you in establishing clarity and to ensure buyers submit offers that are also as detailed and clear as possible. Letters of intent form the basis of a formal purchase agreement. Major changes between the initial offer to purchase and the formal agreement can create disharmony and jeopardize a deal. In essence, asking for more as a buyer or seller at the eleventh hour, can often lead to getting less.

Owning a dental practice today takes more effort than ever before. When the time comes in which you are ready to transition out of ownership, it’s important to feel confident in the team you’ve chosen to support you. This means having the knowledge, skill, and experience to remove obstacles and get the deal done the way you envisioned.


About the Author

Sean Robertson, DDS, is the Director of Marketing for Transitions Consulting Group. He is also a founding partner of The Dental Broker Team, a national dental practice appraisal firm and brokerage.

 

 

Lisa Philp is the Chief Visionary Officer and founder of Transitions Consulting Group; a full-service coaching company for dentistry. Lisa is an industry leader, author, consultant, coach and speaker.


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