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Dental Practice Sales: Get Ready for the Fight of Your Life by Jay Geier

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Categories: Practice Transitions;
Dental Practice Sales: Get Ready for the Fight of Your Life 

Don’t lose the edge when it’s finally time to sell your practice

Part 1 of a two-part series

by Jay Geier

Privately held dental practices are under an all-out assault. If you’re an independent practitioner, make no mistake: You’re in the fight of your life. Forces are challenging your independence and trying to rob you of your freedom of time and money and sabotage your long-term financial well-being. You’d better realize this before it’s too late so you can prepare for it—and overcome it.

If you haven’t already been approached by someone wanting to buy your practice, you will be. What happens next will determine your fate. You’ll either have a good handle on the value of your business, control the process and make a well-educated, fact-based business decision about your practice and your future, or you’ll unwittingly sell your life’s work for less than it’s worth, or cave during a moment of weakness because you believed everything the buyer told you. You’ve seen it happen in other industries and probably to some of your own colleagues. It’s time to make an action plan and muster your defenses.

What’s happening and why

Large profits are made in real estate by what’s called “flipping”—buying a property, making some improvements and fairly quickly reselling for much more than the investments that were made. The buyer has no personal interest in the property other than its capacity to be leveraged for profit.

The same strategy is used by private-equity firms and venture capitalists who, in essence, flip businesses. They make significant money by paying as little as possible for the business (or stock shares of a public company), then cutting expenses, stripping out “overhead” (aka team and patient amenities), investing little to nothing, then selling for as much as possible. This is done without regard for the ramifications on employees, patients or communities; bottom-line profit is the one and only consideration..

Dental service organizations (DSOs) and private-equity groups know that few practice owners have a handle on what their businesses are truly worth, making it that much easier to buy low, then sell high. It’s not illegal or unethical—in fact, it’s a great strategy, given their business priorities. Unfortunately, it’s a lousy strategy for you, your employees and your patients. Unless you have some extenuating circumstances and need to exit immediately for personal reasons, the best bet for you is to follow the advice on the next few pages to make sure your legacy is in good hands after you leave the practice.

Knowing your numbers

Why don’t more doctors know what their practices are worth? Because doctors naturally gravitate to the clinical aspects of the practice, not the business aspects. Hopefully, you also focus on things like team training and patient experience, but how much time do you spend on business management and finance functions?

Another thing you may not realize is that when you first incorporated your practice, you may have declared a certain number of shares of stock, or perhaps used the typical default of 1,000 shares. As you’ve been growing your practice, producing more income and making profitable investments, the value of your business has been steadily increasing over time. And while you may not think about it this way, the value of those shares has been increasing simultaneously. But since that first day, have you reassessed the value of that stock? Probably not, and those approaching you to buy know that.

In private equity, the people with the money will likely never step foot in your office. Do you think they’ll care about your employees, your patients and your community the way you did to grow the practice? Not even close. Regardless of what you’re told, none of that has anything to do with why they want to buy your practice.

As a first line of defense, these critical do’s and don’ts will help protect you against such an attack:

DO pay to have your business professionally appraised

You’d never sell a house, nice car, boat or other big-ticket item by letting the buyer set the price. You may negotiate on it, but first you’d do your homework to get a good sense of what the asset is worth. So why would you sell your biggest-ticket item of all—your business—without getting a handle on its value?.

Yes, it does cost money to have a business professionally appraised, but the result will likely be a pleasant surprise because most doctors undervalue their practices. If a buyer says they’ll get it appraised for you, that’s a clear conflict of interest, and your interest is not the priority. The private-equity buyer wants you to sell for as little as possible, so they can resell for the biggest profit, or keep the practice running at a high profit margin for a few years, before stripping out the heart. Having the buyer do the appraisal is just allowing the fox in the henhouse. You’ll be given allegedly fact-based information but you can’t trust it, because the business wasn’t assessed from your vantage point as a steady revenue stream or for its long-term growth potential. Private equity couldn’t care less about the long term.

DON’T sign a confidentiality or nondisclosure agreement

A DSO buyer may ask you to sign a confidentiality or nondisclosure agreement as soon as you start a discussion, no matter how introductory it may seem to you. This is their way of closing the gate behind you so you can no longer seek advice from others as you try to make a well-informed decision. Every clause of these lengthy and daunting agreements is biased in the buyer’s favor. And there’s no oversight organization that governs if the buyer actually delivers on their claims, or if what they say is even true.

They’ll give you reasons for why this is the absolute best time to sell … but then you can’t talk about that with anyone else to compare notes. They’ll tell you they’ve helped many other practices achieve X,Y,Z results … but you can’t talk with anyone else to find out if it’s true. They’ll tell you they handle all the administrative functions— training, marketing, hiring, billing, etc.—so you can focus on doing only what you love to do … but you can’t talk to others to find out how accurate that is.

Be informed, be on guard

The sales and marketing techniques being used by DSOs and private-equity firms keep getting better and more aggressive. In other words, they keep getting better at taking independent practices away from their owners. Many of you may wonder if a DSO or private equity will even let you get by without the upfront NDA or appraisal. My advice: Get the appraisal before someone comes knocking, so you have the knowledge you need. Also, if someone won’t even start the conversation without legally placing a gag in your mouth, do you really think that they have your best interests at heart? I’d think not.

UP NEXT: More behind the business of buying a practice

In Part 2 of this series, Jay Geier will share more about techniques that private-equity and DSO buyers often use during sales, so dentists can be informed, on guard and prepared when a buyer shows up at their door. Look for it in the August issue of Dentaltown.


Author Bio
Author Jay Geier is an advocate for independent dentists and a world authority on growing independent practices. His mission after 25+ years of coaching doctors is to help them preserve and protect their legacy and their financial future. Geier is committed to helping doctors become financially free so that they can live the lives they dream of and help people in more ways than they originally planned. Educating dentists on how to stay independent and grow a successful practice while creating work-life balance is the topic of the two-day events he is hosting this year. Go to schedulinginstitute.com/townie to see dates and availability of upcoming events. He also advises on this topic often on his Private Practice Playbook podcast— subscribe at podcastfordoctors.com/townie.
 

 

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