Can You Maximize the Valuation of Your Dental Practice in Today’s Market?
Key takeaways
- Know your market, how to improve the practice before the sale, and the transition timeline.
- Take steps to improve cash flow before selling your practice.
- Have realistic expectations.
Dental practice owners looking to sell a dental practice within the next few years may feel more trepidation than in years past, and understandably so. Gone are the heady days of low rates and easy financing, replaced by buyers (and their bankers) digging deeper to find the true value in a dental practice’s valuation.
So, the question now is: ”Have current economic conditions soured the dental practice transitions market?” Not at all, says Christy Ratcliff, Partner at NDP and 7 Pillars, but sellers need to ensure their practice is firing on all cylinders if they expect to get top dollar.
“It’s not that practices aren’t selling, it’s just that with high rates and a tighter lending market, we’re seeing buyers be more cautious,” says Ratcliff. “They’re doing more due diligence to prove the seller’s price.”
For practice owners looking to sell a dental practice in the near future, preparation is more important than ever.
“For practices looking to get top dollar in this market, the first thing to understand is what top dollar is exactly,” says Ratcliff. “Being realistic about what to expect is always the first step in the process.”
She recommends gathering a team of experts to help guide the process, starting with a trusted CPA or financial advisor and a dental practice sales advisor specializing in practice valuations.
“You get one chance to sell your dental practice,” says Ratcliff. “It’s crucial that owners truly know their market, how to improve their practice prior to the sale, and the timeframe around selling a dental practice.”
SETTING REALISTIC EXPECTATIONS FOR SELLING YOUR DENTAL PRACTICE
While it’s impossible to accurately price a practice without diving into the many dynamics that go into it, the long-held litmus test for valuing a private dental practice has been 75% of total collections. In today’s market, however, some factors could affect prices that were not there a few years ago.
Higher interest rates are an obvious factor, as debt service directly affects a buyer’s future cash flow. For example, if a practice shows a $250,000 margin, but the buyer will pay $40,000 more interest than in a low interest rate environment, the margin becomes $210,000.
Now factor in the often-overlooked element of the student loan debt burden many buyers face. In the same example, for a buyer with $40,000 of student loan debt a year, that margin is now $170,000.
“Sellers might consider that the buyer’s issue to bear, but banks are looking at the entire debt scenario when making loan decisions, so it does affect prices,” says Ratcliff.
Location is another factor affecting valuation more than most dentists realize. A practice might be showing excellent profitability, but if it’s in a rural or less desirable urban location where growth may be limited, it might be valued below expectations.
“If it’s hard to find an associate dentist who wants to work in your area, it also could be hard to find a buyer,” says Ratcliff. “So being realistic about your location is important.”
Expectations for selling to a DSO are typically higher, but so are their expectations. Corporate buyers are often more sophisticated, looking for practices that have processes in place that will make the practice profitable regardless of whose name is on the front door.
“DSO buyers are looking for a business that can run without you,” says Ratcliff. “They want to know that when you leave in five or six years, the business will still operate efficiently and profitably.”
IMPROVING YOUR DENTAL PRACTICE’S CASH FLOW
Nothing affects dental practice valuations more than cash flow. Fortunately, unlike location and interest rates, this is an area that practice owners can and should take steps to improve well in advance of selling a practice.
Ratcliff maintains that it’s important for practice owners to look objectively at their practice. They should ask: What can we do better? Where can we be more efficient?
They should start by understanding how their overhead compares to their peers, and look at vendor expenses line by line, such as supply costs, credit card vendors, janitorial services, the TV provider for the waiting room, and then look for alternatives.
“Even the best run practices can find an extra 1-2% profitability by understanding what is being spent and looking for any efficiencies that can be implemented,” says Ratcliff.
Raising fees is a must in this inflationary environment. Ratcliff says practices that haven’t increased fees within the last year are already behind:
“Practices that look at their fees every year and make small incremental increases are better off than raising prices in a larger chunk. Adopting a cadence of small increases will not hit the radar of most patients, but it will be on a buyer’s radar.
Evaluating insurance reimbursements is another area that can improve cash flow. While it can be a daunting process, renegotiating before selling can pay off in a higher valuation down the road.
Trimming off the less profitable insurance agreements or, if you’re still several years out from selling, switching to a fee-for-service model can pay off even more when the time comes to sell. But Ratcliff warns not to wait too long:
“You don’t want buyers guessing what cash flow might be after going fee-for-service. You want a few years to prove your profitability numbers.”
UNDERSTANDING THE DENTAL TRANSITION TIMELINE
This brings us to the final point…individuals who want to sell a dental practice must understand the time it takes to optimize operations and establish new cash flow numbers.
“The time to start optimizing a practice is three to five years in advance of selling,” says Ratcliff. “This gives you the time to prove to buyers that increases in profitability are real and sustainable.”
If you’re planning to sell sooner, all is not lost. While there may not be enough time to increase cash flow to appreciably affect your asking price, you can still take steps to make the process smoother.
“If you’re a year or less out, be proactive and vigilant in your bookkeeping,” says Ratcliff. “Understand every aspect of your business so you can be fully transparent during the negotiation process. This goes a long way in getting the price you want.”
Whether you’re just starting to think about selling your dental practice or in the valuation process, the key is not to try to go at it alone. Lean on your dental transition team to help you get the most out of the practice you worked so hard to make a success.
To gain more insight into practice valuations from a seller and buyer perspective, tune in to Christy Ratcliff’s Transition Talk podcast.
For advice on optimizing or selling a dental practice or any other questions about your business or personal wealth, the CWA team is always here to help. Set up your free consultation today.
