The Pros and Cons of Both
Whether you’re 100% set on selling your dental practice or just starting the exploration process, there are many factors to consider. Do you have another dentist lined up to purchase your practice? Should you sell to a private equity group or DSO? Is now the right time to sell in the first place? Why do you want to sell?
There’s a lot to unpack here, so we will start with the last question first, because it’s ultimately the most important one of all.
KNOW YOUR “WHY”
At CWA, every conversation about selling a dental practice starts with one word. Why? It’s a simple question, but it’s packed with emotion. If you are selling to enjoy the fruits of your hard work in retirement, congratulations. Just make sure there’s a solid financial plan in place to make sure you don’t go through your fruit too quickly.
Maybe your family is relocating and you’re buying into a practice in your new location. Make sure you have a trusted team of advisors to help you make the most out of the transition on both sides.
Whatever the reason for the sell, Cain Watters CPA Toni Lee strongly suggests first talking through your ”why” with a financial or tax professional who knows the dental business.
“Dentists entertain the idea of selling for lots of reasons. Some are solid, some need to be thought through a bit more to determine if selling is the right answer, right now,” says Toni. “Either way, it’s always smart to talk through the motivation behind selling with your accountant or a transition consultant before starting the process.”
Now that you’ve determined your “why”, let’s look at who you might be selling to. While dentists have a range of transition options to choose from, the buyers for a dental practice will likely be limited to the following types: individual dentists or dental consolidators/private equity.
SELLING TO ANOTHER DENTIST
For dentists in multi-doctor private practices, selling to their dental partners is often the preferred path. In fact, agreements may already be in place. Solo doctors, on the other hand, will be transitioning the practice to either an outside dentist or selling to private equity.
Even with the rise in dental services organizations and large group practice models, transitioning to another dentist is often the preferred path for single practitioners, especially those nearing retirement.
There are plenty of pros to selling to an outside dentist, the foremost being the autonomy to choose the dentist who will eventually take over the practice. The trick is finding the right fit from both a personality and sales price perspective.
“Identifying the right buyer is a vital step in the process, but it’s not easy, and you definitely don’t want to do it alone,” says Toni. “Our advisors have many resources and methodologies to help make sure the new owner is a good fit on both fronts.”
Assuming the right fit is found, another perk is the resulting peace of mind. Knowing that the practice you spent so long to build and the patients you have cared for, will be in good hands is a satisfying feeling.
Selling to another dentist also gives the seller the flexibility to transition on his or her own timeframe. The transition itself can be as gradual or as quick as the selling dentist desires.
Finally, this type of sale gives dentists many options for how the agreement is structured. It could be an asset sale, which has the added benefit of flexible tax treatment. It could be an installment sale where payments are received over a period of time. The selling dentist can even sell a percentage of the practice at first, then sell the remainder at a future date.
Adversely, the biggest con of selling to a dentist is, ironically, NOT finding the right fit to take over a practice. According to Toni, this is why it’s vitally important to do research, educate yourself and talk to a practice transition professional at the beginning of the process.
Selecting a buyer should be based on more than just dentistry. Understanding the areas of the business that are important to you will help you select someone who is either like-minded or rather can complement your strengths and weaknesses. Knowing where both you and your potential buyer stand around factors such as leadership style, administrative roles, marketing investments and staff management should all be taken into account prior to making a selection.
Successful relationships are also based on open communication. Learning how to communicate with someone is not only important for everyday life but essential in resolving conflict.
“In dentistry, if you can find the right transition partner, life is good,” laughs Toni. “At CWA, we put a lot of focus on getting this relationship right, with our own methodologies plus strategic partners that can help take you through the entire process.”
SELLING TO A DSO/PRIVATE EQUITY
As the business side of dentistry has become more and more difficult to manage over the last twenty years, many dentists have chosen the path of selling to DSO/PE groups. Once looked at skeptically by private practice dentists, the recent boom in DSO/PE transitions has brought about changes in ownership structure that have made the prospect of selling to such a group much more attractive.
“The last ten years or so has been the ‘merger and acquisition decade’ of dentistry,” says Toni. “Over time, the dentist-DSO relationship has evolved to become more advantageous to the dentist.”
For many, selling to a DSO provides built-in support services that can help the practice run more efficiently. In this structure, the dentist sells all or a controlling interest in the company, yet retains the right to run the practice under a work-back contract. The practice then benefits from the more sophisticated billing, accounting and scheduling services provided by the DSO.
“Dentists might lose controlling ownership but they gain a more efficient partnership,” adds Toni. “The challenge is determining up front whether the dentist will truly get the value of those services they got in the sale.”
On the flip side, selling a majority interest to a DSO or private equity group means that a dentist’s autonomy only goes so far. It’s important to understand that, depending on the terms of the sale and contract, the DSO/PE group still has fundamental control in running the business. This may be fine for some but a dealbreaker for others. Understanding your “why” before exploring sale options can help determine what is right for each individual.
“Some dentists struggle with this lack of control over time,” says Toni. “That’s why it’s important to understand the exact language and terms of the deal you are signing with the sale.”
Another drawback in selling to a DSO comes when the contract is structured so the seller doesn’t receive 100% of the sale right away. If the business declines or does not maintain production, the doctor may not get all of the proceeds and have to change their work back agreement.
Adversely, if your practice and the DSO are successfully growing, the DSO may be sold to a larger PE group that could provide additional financial benefits to the doctor. An experienced advisor can represent you through this part of the process to ensure your priorities are met.
Finally, there’s the question of culture. As owners of a private practice, dentists work hard to develop a positive culture that permeates through the practice. Even when the dentist continues to lead the practice, the culture of the purchasing group will inevitably seep into the practice, causing a kind of culture tug-of-war that could cause the practice to fundamentally change from the inside out.
“Educating yourself on the group’s culture and track record with other practices is vital, but there’s only so much a dentist can learn from independent research,” says Toni. “Having a team of tax advisors, CPAs and transition specialists at the ready will help make sure you get the information you need to make smart decisions at every step in the process.”
No matter which path you take to selling your practice, CWA offers free resources like our practice transition podcast to start you down the road to a successful sell. Feel free to contact our team to talk to a CWA advisor about all your options during this exciting transition process.