Typically, a dentist will only consider the value of their practice twice: when they first buy it, and again when putting up the dental practice for sale. Between the purchase and sale, most doctors are more focused on providing care and the daily operations than on building value in an ongoing enterprise. As a doctor considers transitioning their practice, they may consult with a business valuator or other outside expert who may advise on changes to maximize value in advance of selling a dental practice. There may be lost value, however, where a doctor isn’t thinking long-term about how to build value throughout their career.
When it comes to selling a dental practice, the owner must set aside personal feelings and consider what makes it a successful business, where it can be improved, and what factors really will make it attractive to buyers. Some things can’t be changed—location, for instance—but much of it can. Importantly, using smart business practices and up-to-date technology can improve the efficiency (and value!) of your practice more than you might think.
Location, Location, Location
While you can’t change your location, you can look closely at your location and see whether you are really meeting the needs and demands of your market. If, for instance, you started your practice in an area where the demographics skewed towards young families and addressed those needs, after 25 or 30 years, you will likely have a population that includes more middle-aged and older patients. This means more restorative work, less pediatric. The question here would be, have you adapted your practice—your services, your marketing, your equipment—to reflect this?
If not, your practice may have less value, as a buyer will look at the demographics of your location as they currently are, not as they were when you started. If your practice doesn’t appear well-suited to treat the population in which its located, you may have to accept a lower offer to account for the investment the buyer will have to make in adapting the practice to the current demographics.
If you aren’t ready to sell your dental practice, this is still a good way to adapt and build value. You’ll be better prepared when you do decide to transition. Knowing your demographic market will allow you to communicate to potential buyers how you’ve made the necessary adjustments over time so they don’t have to.
The Right Buyer for the Right Practice
A community can support a wide range of practices— pediatric specialists, ones that focus on cosmetic or restorative work, etc. You don’t need to try and cover all bases for all potential buyers, you just need to be sure that however you choose to focus your practice, that you’re using a good business model and maintaining a solid customer base. That’s what the buyer really wants—a strong foundation on which to build. Knowing your patient base well and having a clear record of services will communicate to the buyer whether yours is a practice they can build on.
But, this means that you should work your niche in a smart way, and you should keep your focus on buyers who are looking for a practice that is like yours. This is where a dental brokerage like DDSmatch Southwest can help. DDSmatch Southwest has buyers looking for all kinds of dental practices in Texas and New Mexico. Our specialty is matching the right buyer with the right practice.
Tangible vs. Intangible Assets
Where is the value in a dental practice? It may include land, a building, equipment, collections, a stable patient base, and growing a growing geographic market. All of these need to be carefully documented for buyers to review. But some of the real value in a dental practice cannot be reduced to spreadsheets—it is found in the intangibles of your brand reputation and the intellectual property of your practice.
Your brand is anything that builds goodwill among your patients, employees, and community. It includes your reputation, customer service (and perception of service), the quality of your work (and perception of that quality), patient loyalty, and employee loyalty. If you are selling your dental practice, you also have to be careful with your patients’ and employees’ sense of security.
The general rule is to not make the sale of the practice public to employees or patients until you absolutely must. Letting the cat out of the bag too early can create feelings of insecurity among employees, leading to potential staff turnover and the loss of team experience, patient relationships, and service quality. These may be traits your practice is known for. Likewise, while there will likely be some loss of the patient base during a transition, it can be reduced by careful communication about the transition once it’s finalized. You don’t want your sale to go south due to employee vacancies and a dwindling patient base.
Again, a dental broker can help in positioning your message for both your staff and your patients. In fact, DDSmatch Southwest brokers have experience working closely with practices and even actively participating in the staff information meeting as part of the process when appropriate.
Your other great intangible asset is your intellectual property. What is your intellectual property? It is the unique business practices that have made your practice successful over time. Even if you haven’t thought about it explicitly, successful businesses don’t just happen. If your practice is attractive to buyers, it’s because you’ve done something right. That “something right” can often be hard to quantify but it can be reduced to a set of policies that guide the operations of your business. For instance, if you have an informal policy for collecting co-pays or deductibles at the time of service (assuring continued cash flow and reducing collections risk), and your employees and patients understand and follow that policy, then you can commit it to writing and make it a formal policy. These policies, when examined in conjunction with your financial statements, show that the good practices can be relied upon, even after the keys to the practice are handed to the buyer.
Take the time to think about how your practice operates: why you do things the way that you do, whether it’s effective, and what improvements can be made. Then, write out a policy manual that describes the practices and make sure every employee has a copy and is familiar with it. Finally, make sure the policies are consistently and correctly applied in practice. If a policy or practice isn’t working as written, revise it until you get it right. This will be a road map for the buyer to keep the practice running a smoothly and successfully as it did under your management.
The Technology Trap
A common mistake doctors make when selling a dental practice is undervaluing the intangible assets and overvaluing technology. If, immediately before placing your dental practice for sale, you update all of your equipment to the latest and greatest, it is highly unlikely that you will recoup the costs of the upgrades in the sale. You may be better off keeping your old equipment and letting the buyer decide whether and what to upgrade (they’re likely planning on doing so anyway).
The exception to this rule is technology that affects income. This basically means technological upgrades that are made not for the sake of looking shiny and new, but because they are bringing something to the practice that translates into better service, higher revenues, or greater efficiency. For instance, business software might not impact your patients’ experience, but it can streamline your back end in a way that saves time and money by decreasing your overhead, accelerating your cash flow, reducing default rates, and lowering your billing and collection costs.
However, this kind of upgrade is something you should be considering at all times during your practice as a way to build your own revenue and asset value, not only as a means before the sale. If you upgrade your software but don’t have the time to create a record of how it builds value, then a buyer may assume it hasn’t.
Don’t Wait Until You Sell Your Dental Practice, Build Value Throughout the Practice’s Lifespan
Building value effectively is a marathon, not a sprint. Trying to boost value right before transition can be somewhat effective, but you’ll get much further if you are working towards it throughout your career. Owning a successful dental practice requires you to be a business owner as much as a care provider. But, being a good business owner can make you a better dentist. Paying close attention to the business side and considering improvements will translate into a better experience for you, for your staff, and for your patients. Also, by spreading the work over years, you’ll save yourself time and stress when it comes time to transition.
If you are considering transitioning in the next five years, it’s not too late to look how you can build value before you sell. At DDSmatch Southwest, we offer a free Practice Transition Assessment where we will discuss the current local dental practice transition marketplace, establish best transition options for your practice, suggest practice physical and image improvements, advise on potential practice investments to increase value, and review present and future staffing integration. Give us a call today and find out how we can help you meet your practice transition goals.