Dental and Medical Counsel Blog

Selling a dental practice is a significant milestone in a dentist's career. It involves numerous strategic steps and decisions to ensure a smooth and profitable transition. This blog will guide you through the essential aspects of selling your dental practice, highlighting the strategies, considerations, and common pitfalls to avoid.

Understanding the Market

Current Market Trends

The dental practice market has shifted from a seller's market to a buyer's market. This change means there are more practices for sale than there are buyers, especially in the post-COVID landscape. However, location plays a crucial role. For example, practices in desirable areas like the Bay Area still attract considerable interest. Understanding these market dynamics is essential in setting realistic expectations and strategies for your sale.

Preparing Your Practice for Sale

Financial Strategies

1. Accurate Valuation: Understanding the financial health of your practice is the first step. A thorough valuation includes reviewing tax returns, profit margins, and revenue trends over the past few years. It's crucial to present a clear picture of your practice's profitability and potential for growth to attract serious buyers.
2. Maximizing Profitability: Increase your practice's attractiveness by maintaining steady or slightly increasing revenue. Avoid significant fluctuations that might raise red flags with potential buyers. Implement cost-saving measures, such as negotiating better rates for supplies and services, without compromising the quality of care.

Human Resources

1. HR Compliance: Ensuring your practice complies with all HR regulations is vital. This includes having updated employment applications, I-9 forms, and employee manuals. Proper documentation not only protects you legally but also provides a smoother transition for the new owner.
2. Employee Agreements: Consider employment contracts, particularly for key staff like associates, to ensure stability during the transition. Clearly outline terms of employment, roles, and responsibilities to prevent any misunderstandings or disruptions.

Key Documents in the Sale Process

1. Letter of Intent (LOI): This initial document outlines the buyer's offer. It includes essential terms such as purchase price, transition period, and working conditions. It's crucial to negotiate terms like whether you will continue working at the practice and under what conditions upfront.
2. Asset Purchase Agreement (APA): The main legal document that details the sale terms. It includes all negotiated terms from the LOI and is prepared by the seller's attorney. This document is legally binding and covers all aspects of the sale, from the purchase price to post-sale obligations.
3. Exhibits to the APA:
   • List of Equipment Being Sold: Detail all significant equipment, such as dental chairs, X-ray machines, and computers. Ensure nothing is omitted that might later cause disputes.
   • List of Excluded Items: Identify personal items and memorabilia you plan to keep, such as diplomas, personal artwork, or family photos.
   • Employee Details: Provide a list of all employees, their roles, compensation, and benefits. This helps the buyer understand the practice's operational structure.
   • Continuing Contracts: Include all ongoing service contracts, such as with marketing companies, HR services, and equipment leases. Clarify which contracts will transfer to the new owner and which will not.

Lease Considerations

1. Lease Assignment: Ensure the lease can be transferred to the new owner. Start negotiating with landlords early to avoid last-minute complications. Understanding the landlord's policies and the lease terms can prevent delays or additional costs.
2. Timing of Sale: Ideally, sell your practice towards the end of your lease term to avoid being liable for rent after the sale. If your lease is expiring soon, begin the sale process early to ensure a smooth transition.

Dealing with DSOs (Dental Service Organizations)

1. Higher Multiples: DSOs often offer higher purchase multiples (5-8 times EBITDA) but require you to work for them for several years post-sale. This can be a lucrative option, but it comes with strings attached.
2. Financial Preparation: Never send tax returns directly to DSOs. Instead, work with a financial advisor to present clean, maximized profit statements. Properly prepared financials can significantly impact the offer you receive.

Tax Implications

1. Allocation of Purchase Price: Divide the sale price between tangible assets (equipment, supplies) and intangible assets (goodwill, non-compete agreements). Aim for an 80-20 or 90-10 split to minimize tax liabilities. Tangible assets are taxed at ordinary income rates, while intangible assets like goodwill are subject to lower capital gains tax rates.
2. Accounts Receivable: Decide whether to sell accounts receivable at a discount or collect them post-sale. Ensure you have enough letterhead and envelopes to facilitate collections under your name. Buyers are typically more successful in collecting these if the invoices still come from the seller.

Avoiding Common Pitfalls

1. Planning Ahead: Start preparing your practice for sale at least two years in advance. This includes getting HR compliant, negotiating lease terms, and maximizing profitability. Early preparation helps identify and address potential issues before they become deal-breakers.
2. Employee Lawsuits: Protect yourself against potential lawsuits by getting Employment Practices Liability Insurance (EPLI) and ensuring all employee-related practices are compliant. This insurance can cover many types of employment-related claims, providing peace of mind during and after the sale.

Human Resources

The number one threat to you in retirement isn't malpractice; it's employee lawsuits. Employees have three to four years to sue after the sale of your practice. To mitigate this risk:

1. HR Compliance: Fix any HR issues before selling. Ensure that all employees are classified correctly, paid according to the law, and have signed the necessary agreements. This step will significantly reduce the likelihood of post-sale litigation.
2. Employment Practices Litigation Insurance (EPLI): This insurance covers various employment lawsuits and is highly recommended. Contact your insurer to add this to your policy.

Due Diligence

Buyers will conduct thorough due diligence on your practice. This process includes:

1. Financial Due Diligence: Buyers will review your tax returns, balance sheets, and other financial documents. Be prepared to provide clear and accurate records.
2. Legal Due Diligence: Buyers will review all legal aspects of your practice, including contracts, leases, and compliance with regulations. Ensure all your documents are in order.
3. Practice Management Due Diligence: This involves a detailed analysis of your practice operations. Buyers may hire consultants to evaluate your practice's efficiency, patient records, and overall management.

Final Considerations

Lease Negotiations

Review your lease terms and understand when they expire. Selling your practice towards the end of your lease term is ideal. If your lease is set to expire soon, discuss renewal options with your landlord to provide the buyer with long-term stability.

DSO Considerations

If considering selling to a DSO:

1. Work Back Period: Be prepared to work for the DSO for 3-5 years post-sale.
2. Deferred Payments: DSOs often pay 60-80% upfront, with the remainder deferred and potentially subject to future performance.
3. Proper Financial Presentation: Work with a financial advisor to ensure your practice’s financials are optimized before presenting them to a DSO. This can significantly impact the valuation and terms of the sale.

Conclusion

Selling your dental practice requires careful planning and strategic decision-making. By understanding the market, preparing your practice financially and legally, and avoiding common pitfalls, you can ensure a smooth and profitable transition. For personalized advice and support, consider consulting with professionals who specialize in dental practice sales. With the right approach, you can maximize the value of your practice and transition smoothly into the next phase of your life.

Contact Dental & Medical Counsel

Navigating the complexities of selling your dental practice profitably can be daunting. Dental & Medical Counsel is here to assist. Our dental law firm specializes in guiding dental professionals through the sale process, ensuring you maximize your practice's value and achieve a successful transition. Contact us today to schedule a consultation with one of our experienced dental attorneys.

Frequently Asked Questions

Q: Why is understanding the market important when selling a dental practice?
A: Understanding the market helps set realistic expectations and strategies for your sale. The dental practice market has shifted from a seller's market to a buyer's market, especially post-COVID. Desirable locations, like the Bay Area, still attract considerable interest. 

Q: How do I accurately value my dental practice?
A: Accurate valuation involves reviewing tax returns, profit margins, and revenue trends over the past few years. Presenting a clear picture of your practice's profitability and growth potential is crucial to attracting serious buyers.

Q: What steps can I take to maximize the profitability of my dental practice before selling?
A: Maintain steady or slightly increasing revenue, implement cost-saving measures, and avoid significant financial fluctuations. This makes your practice more attractive to potential buyers.

Q: What HR compliance measures should I take before selling my practice?
A: Ensure all HR regulations are met by updating employment applications, I-9 forms, and employee manuals. This protects you legally and ensures a smooth transition for the new owner.

Q: Why are employee agreements important in the sale of a dental practice?
A: Employment contracts, especially for key staff like associates, ensure stability during the transition. Clearly outlined terms prevent misunderstandings and disruptions.

Q: What key documents are involved in the sale process?
A: The main documents are the Letter of Intent (LOI) and the Asset Purchase Agreement (APA). The LOI outlines the buyer's initial offer, while the APA details the final sale terms.

Q: How should I handle lease considerations when selling my dental practice?
A: Start negotiating lease assignment with landlords early. Ideally, sell your practice toward the end of your lease term to avoid rent liability post-sale.

Q: What should I know about selling to a Dental Service Organization (DSO)?
A: DSOs often offer higher purchase multiples but may require you to work for them post-sale. Never send tax returns directly; work with a financial advisor to present optimized financials.

Q: How can I minimize tax liabilities in the sale of my dental practice?
A: Allocate the purchase price between tangible assets (taxed at ordinary income rates) and intangible assets like goodwill (taxed at lower capital gains rates). Aim for an 80-20 or 90-10 split.

Q: How should I prepare for buyer due diligence?
A: Prepare clear and accurate financial, legal, and management records. Buyers will thoroughly review these aspects, so ensure all documents are in order.

Q: What are common pitfalls to avoid when selling a dental practice?
A: Start preparing your practice for sale at least two years in advance to address HR compliance, lease negotiations, and profitability. Protect against employee lawsuits with Employment Practices Liability Insurance (EPLI).

Q: What are the final considerations when selling a dental practice?
A: Review lease terms, understand DSO sale conditions, and consult professionals specializing in dental practice sales for personalized advice. Careful planning and strategy ensure a smooth transition.

About the Author

At Dental & Medical Counsel, we've been instrumental in realizing the practice goals of countless dentists. Whether you're looking to purchase, launch, or sell a dental practice, our expertise is your guide. Beyond the initial stages, we're committed to ensuring your dental practice remains legally compliant.

We provide comprehensive support, including employment law protections, dental contract reviews, and assistance with dental employment agreements. Additionally, we specialize in incorporating dental practices and securing trademarks. And for long-term planning, our services extend to helping dentists with succession and estate planning. Trust us to be your partner in every step of your dental practice journey.

About Ali Oromchian, Esq.

Your Dental Lawyer

Ali Oromchian, JD, LL.M. is the founding attorney of the Dental & Medical Counsel, PC law firm and is renowned for his expertise in legal matters

Ali Oromchian, JD, LL.M., is a leading legal authority in dental law and the founding attorney of Dental & Medical Counsel, PC, with over two decades of experience. His deep connection to dentistry comes from his wife's nearly two-decade-long career as a pediatric dentist. 

This personal insight fuels his dedication to empowering dentists to navigate their legal challenges and achieve their practice goals. In doing so, Ali has helped thousands of doctors open their practices while maintaining legal compliance. 

Ali is frequently quoted and contributes articles to dental publications, including the California Dental Society, Progressive Dentist, Progressive Orthodontists, Dentistry Today, Dentaltown, and The New Dentist magazines, further showcasing his commitment to the dental community.