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Articles

Volume 73: Is There a Buyer for Every Practice?

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Many practices are not saleable in their present state. Due to the high level of competition in the dental market, buyers are looking for practices that are either: 1) Very well established and have enough critical mass so as not to depend on the location to produce new patient flow, or 2) Are in locations that have proven track record (or clear potential) of attracting and retaining a significant number of new patients. Most but not all, of the current buyer pool prefer main floor, retail strip plazas, in high visibility areas, with solid anchor tenants. This is great news for retiring dentists who own practices in these preferred locations, however we see many dental practices that are located in locations that do not fit this description. 

Many of these less desirable practices were established when there were fewer dentists, and patients would essentially find you. There was no reason to change anything as all the equipment is paid for (and very old!), the dentist has no debt and can live comfortably and is happy. Who wants to endure the hassle and expense of moving to a better location with higher overhead? These locations may be on the higher floors of buildings, be less visible, on side streets, in competitive areas, etc.  Generally, they are smaller practices too. In addition, there are locations which must be moved as part of a sale, as the lease may have expired or the building is being demolished. 

In these cases, practices could be sold as patients only. This process of merging patients to a nearby practice is one the best strategies to create value and create win - win - win transitions for the buyer, seller and the patients.

The reason that mergers work and are win - win - win is due primarily to the fact that patients are fundamentally loyal, and if requested by the current owner, will most likely follow him/her to another practice.  This patient loyalty is attributable to multiple factors which include the convenience of the location, skills and personality of the dentist, and the quality of the staff. In addition, most people 
prefer not to change dentists unless given a good reason to change. With this in mind, for a merger to work, the new location must be reasonably close, have equal or better amenities, some staff should follow and must have similar treatment philosophies. The selling dentist should plan on staying for a year or so to assist with the transition.

The reason that these mergers are win-win for both the buyer and seller is due the financial benefits. Here is a specific example of a recent merger of a 700 patient practice. 

  Stays in same location   Merged
Production $416,000  $416,000
Expenses $264,000 $183,000
Cash flow to dentist $152,000 $233,000
Dentist 40 per cent portion $108,000 $108,000
Net Income (after dentist) $43,000 $125,000

The elimination of rent and other fixed costs, in this merger almost tripled its net income! Further, in this practice because the premises lease was finished, there were no ongoing lease expenses, and all staff was absorbed into the new location.

Most patients transferred, and when we modelled the new practice formed from the merger, its value increased by far more than the actual purchase price of the merged practice.

Further, for the seller of the above practice, they received a 45 per cent associate rate to work in the new practice so in addition to getting a very good tax-free sale price, for the same amount of work, their income dropped by a mere $30,000 to $122,000.

For sellers of these practices, they must be willing to work in the new practice to transition the patients. In addition, they must determine how to deal with any premises lease obligations that may remain in the currents premises.

For the buyers, they must understand the culture and philosophy of the incoming practice, be close enough to retain patients, and have the space to absorb the patients.

This merger strategy requires many factors to be done correctly including matching philosophies, a focus on the patients, a win - win mentality, and an agreement which properly reflects the risk versus reward of this process.    

I know many smart dentists who have utilized this strategy to grow their practices, as they are aware of the incremental value that these mergers can create.

Given the right structure and the willingness on both sides to adjust their expectations and adapt to change there is very likely a buyer for every practice. It just may not be who you think it is.

Colin Ross is a Partner in Professional Practice Sales Ltd. (www.ppsales.com), which specializes in the valuation and sale of dental practices.  He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: colin.ross@ppsales.com

The Professional Advisory

  1. One Year Later

  2. Dealing with Unsolicited Offers

  3. Covid-19 Practice Sales Update

  4. When is the Right Time to Sell Your Practice and Why?

  5. Partnership Pitfalls

  6. The Real Cost of a Dental Practice Set-up

  7. Smaller Practice Realities

  8. Dental Market Update - 2019

  9. Creating Your Own Most Valuable Practice (MVP)

  10. Small Practice Economics

  11. The Market is Very Efficient

  12. How Can Dental Practice Values be Rising and Declining?

  13. Hygiene as a Value Driver

  14. The Value of a Good Team

  15. Is it Time to Move?

  16. Staging A Dental Practice

  17. The High Cost of Dying

  18. Deal-Busters

  19. Patients - Attract and Retain

  20. Should I Stay or Should I Go?

  21. Is There a Buyer for Every Practice?

  22. Good, Better, Best - The Market has Spoken

  23. Smooth-Sale-ing

  24. Buying Time

  25. Patients, Patience, Patients

  26. A Real Patient

  27. Why Do a Practice Valuation? I'm not Selling

  28. Irrational Exuberance or The New Normal?

  29. Do dental equipment and dental technology affect a practice value?

  30. Finding and Being a Mentor

  31. Bigger is Better

  32. Dave's Top Ten List for Buyers (Vendors should read this too!)

  33. How Well Do You Know Your Practice?

  34. Dave's Top Ten List for Vendors

  35. What will happen to dental practice Values in the next 10 years?

  36. Your Premises Lease is an Important Asset

  37. What are Associates Thinking?

  38. There is Life Outside the GTA

  39. When Is the Right Time to Sell My Dental Practice?

  40. Mergers are a Viable Option

  41. Is Your Associate an Asset or a Liability?

  42. Has your Practice Facility Kept Up With Your Billings?

  43. The 100 per cent of Gross Myth

  44. The Past, The Present and The Future

  45. Caveat Emptor

  46. Overpaid Long Term Staff

  47. Selling your Practice in Stages

  48. A Potential Pitfall of Selling Shares

  49. Value in Your Practice Through Balance

  50. Only Trusted Staff Can Defraud You

  51. To Own or Not to Own Practice Real Estate? That is the Question.

  52. Coping With A Large Patient Base

  53. Successful Dental Practice Transitions

  54. Taking Care of Business

  55. The Investing Dentist Phenomenon

  56. Two areas to focus upon that could negatively impact the value of your practice

  57. Organize your Debt in Order to Sell your Practice

  58. Having a Better Team

  59. How Do I Prepare My Practice For Sale

  60. How Do I Prepare My Practice For Sale? Part 3

  61. How Do I Prepare My Practice For Sale? Part 2

  62. How Do I Prepare My Practice For Sale? Part 1

  63. Advice to My Son or Daughter Graduating from Dental School

  64. Transition - What to Expect

  65. Discussion on Digital X-Rays

  66. Partnerships and Shotguns

  67. Strategic Planning - How to Get Started

  68. Calling All Vendors - Practices have Gone Up in Value

  69. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates

  70. Matrimonial Practice Valuations

  71. Purchaser's Guide to Affording a Practice

  72. Location Improvements Throughout Your Career

  73. Small Practice Valuations

  74. Partnerships – The Best and The Worst

  75. Changing Location When the Opportunity Comes Along

  76. Visual Presentation of Your Practice

  77. Presentation of Charts

  78. Your Premises Lease Can Be Your Worst Enemy

  79. How to Select an Appraiser for Your Practice

  80. How Are Your Billing Ratios?

  81. It Pays to Invest in Your Tangible Assets

  82. The Importance of Separate Financial Statements

  83. Five Time Frame Levels to Sell a Practice

  84. 12 Suggestions to Safeguard Computer Data

  85. How to Buy a Visible Practice

  86. Why is there a shortage of good practices today?

  87. The Importance of Equipment in the Purchase of a Practice

  88. The Balanced Practice

  89. Will My Practice Be Saleable in The Future?

  90. Buyer Be Aware

  91. Excess Profit - The Second Key

  92. Patients and Profits are the Keys

  93. Plan Ahead

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