Selling a Dental Practice

Misconceptions Dentists Have About Selling Their Dental Practice

By Philip Kempler,
DMD, Broker Thomas & Fees Practice Sales

I’m always amazed at how many misconceptions dentists have about selling their dental practice, but I really shouldn’t be. After all, most dentists have never sold a dental practice before, and no classes are offered on the subject. So, they depend on the rumors they hear from their buddies. And like most gossip, it’s a collection of half-truths.

The first misconception is about the price. 

Years ago, you could sell a practice at one year’s gross income. Meaning, if you grossed $400,000 per year, that would be the sales price. But the truth is, practices shouldn’t be evaluated on gross income, but rather true net income. The actual net is not necessarily what the tax return shows. To get the true net you must add to the bottom-line additional items such as amortization, depreciation, owner benefits like medical insurance, automobile expense, etc.

Most appraisers use a multiplier of net income, approximately 1½-2½ times.

If your true net income were $100,000, then the approximate sales price would be $150,000–$250,000. Furthermore, don’t be suckered in by some fast-talking salesman that promises an unrealistic sales price. I’ve seen this happen, and the outcome can be gruesome. In one case, it took over a year to sell the practice, and when it did, it was well below the market. (When it didn’t sell within a few months, Buyers assumed there was something wrong with the practice.) On another occasion, the Broker’s inflated sales price, based on false practice numbers, ended up in a lawsuit.

The second misconception is, the dentist has to carry a note back.

A full-service dental Broker can almost always get the Seller 100% cash as opposed to cash and a Seller’s Promissory Note (take back loan) unless the Seller specifically requests otherwise.

The third misconception, the Seller has to stay after the practice is sold. 

Whether or not this happens is less predictable. The length of time your services will be required depends significantly on whether you are selling a general practice or a specialty practice such as orthodontics. Typically, the general practitioner can shut the door on his way out, other than a brief consulting period in which the Seller usually stays in the background. The specialist, on the other hand, usually stays 1–2 months. The length of stay also may be negotiable. The Buyer may want you to work one or two days a week.

The fourth misconception is the Seller must fix up the practice to sell it.

That’s not the case. It doesn’t make sense to replace the carpeting, repaint the office, or change the wallpaper when the new Buyer may not like your choices. Also, it’s a mistake to buy new equipment—you’ll never get your money out of it. However, it is a good idea to tidy up and make the office look neat and professional.

The fifth misconception, the practice will sell in a month or two.

The fact is most practices take 5–6 months to sell. Even if a Buyer is secured quickly, it takes 4–6 weeks to get a loan. Also, landlords are notorious for taking their sweet time to either assign an existing lease or prepare a new one.   Consultations between your Broker, accountants, and lawyer will eat up additional time. A good deal is a win-win for all concerned. All the angles need careful consideration, including the minimization of the taxes for the Seller.

Should you renew or extend the lease before listing?

Generally, the answer is no, and here’s why:

  • The Buyer may want his own length of the term—longer for more security or shorter to leave his options open to relocating, increasing the square footage, or decreasing the square footage.
  • The Buyer may want to renegotiate the lease himself by offering a longer term to the Landlord in return for monetary considerations for leasehold improvements.
  • In some instances, the Buyer may already have another location nearby and after a short time wants to relocate the patients from the new practice to his existing practice.

Talk to your Broker, first. Because the new lease terms you sign can impact the sale. 

The sixth misconception, I can sell the practice myself and save a commission.

While this is true, so is the following story that happened to me. I had a patient come in and was very proud that he had “pulled” one of his teeth. He went out of his way to show me how nicely the “gums” had healed. He told me he had saved $250. I complimented him and told him I’d do him one better by taking an x-ray of the area for no charge. You guessed it—the radiograph showed half the root remained. He ended up going to the oral surgeon, and it cost him $750.  

Selling a dental practice is no different. There are many considerations to deal with, and unless you have sold a practice before and have a legal background, you may be looking at a future lawsuit.  

The Seventh misconception, all practice Brokers are the same.

When selecting a Broker, ask yourself these questions:

  • Will you be dealing with a Broker or some salesperson? There is a difference.
  • Will you be talking to the same person each time you call the firm or will you have to re-tell your story over again?
  •  What does the Broker know about dentistry? Selling land or houses is different than selling a dental practice.
  • Does the Broker have a good working relationship and contacts with experts in the dental field?
  • Does the Broker have your best interest at heart, or are they just in it for the commission?
  • And lastly, what does the Broker know about the tax consequences of selling a practice? Does he know how to structure the deal to avoid taxes for the seller? If he doesn’t, you’ll be sorry. Because, if you’re like most sellers, you depend upon the proceeds of the sale to fund the majority of your retirement income.

Do your homework. Investigate. Choosing the right Broker is essential.