10 Considerations For Selling Your Dental Practice – Strategy

Selling a dental practice can be a daunting task at the best of
times, and many owners may not be aware of the relevant
considerations when preparing for and carrying out such a
sale.

Whether you have entered discussions to sell your dental
practice or wish to sell your practice in the coming years but do
not know where to start, the 10 considerations below will help
ensure you get what you want out of a sale while maximizing the
value of your clinic and allowing for a smooth transition to the
purchaser.

1. 
   

   Ownership Structure

A major consideration early on is the ownership structure of
your practice; specifically, consider the number and type of shares
owned by individuals. If your dental practice is structured
correctly, you may be able to minimize the tax payable on a sale
significantly so that you keep the vast majority of your sale
proceeds.

For instance, having certain shares owned by family members may
have beneficial tax consequences in the event of a sale while
complying with the applicable legislation regarding the share
ownership of dental corporations.

2. 
   

   Agreements with Other Dentists

Have you had discussions with or made promises to any associate
dentists at your clinic or any outside dentists with respect to the
sale of your practice? Be mindful of such discussions and promises
as they may restrict the ultimate value of your practice or your
ability to sell. Although granting someone the right to match any
offer for the purchase of your dental practice may not have
short-term implications, any such arrangements become material
concerns as you move forward with a sale.

3. 
   

   Expectations Following the Sale

Upon completion of the sale, do you intend to fully retire,
reduce your work hours or continue on as a full-time associate at
the clinic? Consider what you would like your professional life to
entail following the sale, as that will tie into the timing of the
sale and the value of your practice to a purchaser.

Note that, in almost every instance, a purchaser will require a
non-competition covenant limiting your ability to practise for a
competitor for a period of time following the sale.

Agreeing to remain at the clinic in a full-time or significant
capacity for a number of years following the sale will typically
help increase the value that a purchaser is willing to pay. On the
other hand, walking away permanently once the sale is completed
tends to significantly reduce the purchase price. As such, it is
often beneficial to consider selling your practice before you
intend to retire. While the ideal timing of a sale and the
valuation of your clinic will be nuanced depending on the nature
and structure of your practice, it is common to see an owner agree
to continue practising at the clinic for five to seven years
following the sale in order to maximize the purchase price.

4. 
   

   Increasing Valuation

Because most of the value of a dental practice comes from the
clinic’s goodwill, there are a number of ways to help increase
the value of your clinic to a purchaser. In addition to staying on
as an associate dentist following the sale, you should consider the
following best practices to maximize the value of your clinic :

1. keeping staffing costs in check in the years leading up to a
   potential sale;




2. ensuring that your balance sheet accurately reflects your
   clinic’s business operations and nothing else; and




3. ensuring that your dental business is sustainable following a
   sale by properly documenting agreements with associate dentists
   working at your clinic and entering into other contracts as
   appropriate.

5. 
   

   Choosing a Purchaser

Three types of potential purchasers for your dental practice
generally include:

1. associate dentists currently working at your clinic;




2. outside dentists (who often already have clinics of their own);
   and




3. dental service organizations (often referred to as “dental
   consolidators”).

Selling to another dentist typically comes with a lower purchase
price due to availability of financing, but may offer more
flexibility insofar as deal terms are concerned. Alternatively,
dental consolidators are generally able to offer more cash up front
and often additionally offer equity in their company.

There are, of course, exceptions to the above, and each
prospective purchaser will be able to offer different terms. The
ideal purchaser for your clinic depends on what you want out of
your sale and is ultimately a personal decision you must make from
weighing the options available.

6. 
   

   The Clinic Premises

An important aspect of any sale is the premises from which the
dental clinic operates. If you own the dental clinic premises, the
sale of the practice may present an ideal opportunity to sell the
real property as well. Alternatively, you may want to retain the
property and act as a landlord to the purchaser of your clinic.

If you lease the dental clinic premises, note that a buyer will
often want to ensure there is a long lease term remaining, such as
five or ten years. Another pertinent consideration if you lease the
premises is whether there are onerous assignment or change of
control provisions which may allow the landlord to withhold its
consent to a transfer of the lease.

7. 
   

   Stabilizing EBITDA

Dental clinic valuations are almost always a product of the
earnings before interest, taxes, depreciation and amortization
(EBITDA) of the practice. A stable EBITDA in the years leading up
to a sale tends to indicate a lower risk for the purchaser which
may often equate to less of the purchase price being dependent on
an earn-out mechanism and, instead, a greater portion being paid on
closing.

The COVID-19 pandemic has substantially affected business
stability, as further discussed in the last section below.

8. 
   

   Due Diligence

The due diligence process involved in the sale of a dental
practice is usually onerous and has many components. Well-organized
records and efficient management systems will allow for an easier
due diligence process and, in turn, lower transaction costs for the
selling dentist. To that end, keep a copy of all service contracts
and other third-party contracts on file, keep employment
information up-to-date and make sure the clinic’s financials
are accurate and clear.

9. 
   

   Liabilities

Purchasers and the lenders of purchasers typically require all
debts and liabilities of the dental practice to be paid out (either
prior to the sale or on the closing of the sale using the purchase
price funds) and all related security to be discharged. Consider
this when making financing and equipment leasing decisions relating
to the practice in the years leading up to a sale.

10. 
    

    COVID-19

There is no doubt that the COVID-19 pandemic has created novel
considerations for anyone who is considering selling their dental
practice. One of the primary concerns is how the dental practice
will be valued; will the EBITDA from prior to COVID-19 be used or
will the valuation account for the uncertainty surrounding the
practice’s ability to generate the same EBITDA once the
COVID-19 pandemic has passed? Many dental practice sales occurring
since the onset of COVID-19 have addressed this by allocating a
larger percentage of the purchase price to an earn-out
mechanism.

Another consideration in light of COVID-19 is the effect that a
mandated shutdown of all dental clinics will have on the scheduled
closing date or on any earn-out mechanism subsequent to the sale.
Given the material risk of mandated closures, these matters require
careful thought and should be addressed by the parties early on in
the sale process.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.