Top 10 Mistakes When Selling Your Dental Practice

Selling a dental practice is one of the biggest financial decisions in a dentist’s life—and it’s easy to make costly mistakes. In this episode, Brian Hanks sits down with Wes Read, CPA and founder of PracticeCFO, to break down the top 5 most common mistakes dentists make when selling their practice. From bad timing to poor team assembly, Wes and Brian share the insights every seller needs to avoid leaving money (and sanity) on the table.

Key Points:
Why selling too late can hurt your practice value
The hidden danger of “just listing with your CPA”
What happens when your staff finds out too soon
Why selling to the first buyer is often a trap
How working without a strong team can sabotage your deal

PracticeSale #SellYourPractice #DentalBroker #DentalCPA #DentalFinance #PracticeCFO

Transcript:

Wes Read: [00:00:00] Welcome everybody to another episode of the show. I am gonna talk about something I'm heavily involved in on what feels like a daily basis, and that's dental practice sales, so both as A CPA and having a. Platform, a technology platform and a broker team that helps dentists sell their practice to a buyer IE, that's Practice Orbit.

I have been involved literally in hundreds of dental practice sales, both representing buyers and representing sellers. So today I'm gonna talk a little bit about the 10 pitfalls that I have found sellers to. Uh, be victims of when selling their practice, and if you are thinking about selling your practice.

Therefore, this podcast is going to be very, very valuable if you're considering buying a practice as well. This could also be valuable to understand some of the issues at [00:01:00] play when it comes to selling a dental practice that the seller should be mindful of. And I think that would be additional really valuable education for a buyer as well, or really anybody in the process involved in the sale experience of a dental practice.

That could even be dental attorneys, dental accountants, dental consultants as well. And of course, uh, brokers. And the dentists. So here we go. Number one, top 10 selling pitfalls. When selling a dental practice, number one is inadequate planning. How early or how ahead of time should you, as a dentist start prepping for the sale of your dental practice?

I would recommend three to five years. Beforehand because there's a lot of things you need to stage if you want to maximize the sale of your dental practice, you wanna get it so ready to the banks. To the, for the broker, [00:02:00] for the buyer, you want to have it really staged so that everyone understands what is the value of your practice and what they're getting into by buying your practice or by lending to the buyer for your practice.

Also, there's a lot of sort of emotional and psychological aspects to selling a dental practice, and you want to be ready for those as well. You really want to optimize the business. And by optimizing the business, I mean making the business perhaps a little more process driven, A strong culture, having a stable team.

If you lost half your team in the year or two leading up to the sale, that's not gonna be a good look to a buyer or a bank. So you're really wanting to stabilize your. Practice. You really wanna prep your financial statements the right way. I'm gonna talk about that here in a moment. You wanna get an appraisal ahead of time.

I think you should do it three years beforehand or even more so you know [00:03:00] what you're starting with, at what, what's your starting point here with an estimated sell price of your practice. And then there's a lot that you can do from that moment in time. To fast forward when you eventually sell three to five years down the road.

Tax planning also sometimes requires that you do things with your tax accountant in the year or two years leading up to the sale to optimize the reduction in taxes when you do sell your practice. So. Number one mistake, and these aren't necessarily in priority order. These are just 10 mistakes, but the number one I'm listing off here is inadequate planning.

Starting with enough cushion between the time when you're, you're starting to pivot your mindset and pivot your practice to be staged or ready for a sale should be three to five years beforehand, number two. Is over or [00:04:00] underpricing your practice. Let's talk about overpricing, which is typically the more common pitfall here that occurs is simply believing that we're pr, our practice is valued more than what the market.

Will actually pay for, or what a bank will actually lend on that practice. And there's many reasons for this, and they're all very understandable. You know better than anybody how much blood, sweat, and tears you have put into this thing known as your dental practice. And therefore you feel that you should receive a X amount or some, some amount financially.

Out of it from the equity in the practice, and so we end up listing it a bit high or maybe, maybe you bought the practice only five years ago or seven years ago, and you believe that you should be able to sell it for more, at a minimum, what you bought it for or more than what you've bought it for because you've been working in it during that time, however.

At the end of the day, the [00:05:00] buyer and the bank, the buyer's team, to them, it doesn't matter if you worked evenings or came in on Saturdays or had to put out a bunch of fires as a business owner or dealt with a lot of stressful issues as a business owner. What the buyer and the bank care about is the stability of the cash flow.

How stable is the cash flow? And are they gonna be able to maintain that and even scale it more because of the healthiness of the practice, both financially and operationally, and that's all they care about, and that's what's gonna drive the value of the dental practice. So my advice is to be. Very real with yourself on what the value proposition is.

It really should not be a function of how you feel about your practice or how you feel about the price. It needs to be purely business transaction and if it is a business transaction only, and you approach the analysis of the [00:06:00] appraisal or the price with that understanding and sift out. Some of the psychological attachments or beliefs that you have, then you're getting a more realistic idea of what you can sell your practice for.

On occasion, I have seen the opposite underpricing. A dentist feels that the practice is worth x, when really it's worth 125% of x. And why does that happen? The only time I see that happening is because the seller really doesn't understand what the market rates are. What the, the sort of the, the, the comps.

The comparables. You hear that term in real estate sometimes, but they, they don't know what the going rates are for a dental practice and uh, or perhaps they just want to sell it really fast. There is. Absolutely a correlation. It's really an inverse correlation between the price and the speed of sale.

The lower the price, the faster the sale, [00:07:00] the higher the price. Perhaps the lower or the slower the sale. And so getting a good appraisal beforehand. And what I recommend is getting both an appraisal from ideally not a dental broker, although I think many dental brokers will do a great job at this and have, I think, an honest outlook for you.

I do think getting an appraisal from, uh, somebody who is not, does not have the. Economic interest in putting it higher in order to lock in the listing, which is consciously or subconsciously. What happens with dental brokers a lot is we all want the listing. The dental broker wants the listing, and if they appraise it at a hundred thousand dollars more then.

Maybe what it's worth or what the next broker is valuing it at, then you may go with that listing only to find out that you're then succumbing to what is commonly a a landmine or a pitfall when selling a dental practice. Is it just lingers on the market longer and [00:08:00] longer and longer. Or buyers come in, they wanna lower the price, you're unwilling to do so, and the practice slips out of escrow, which is a.

Somewhat common experience, so be very careful on the way you over underprice it, and the best way to do that is just some really good due diligence by working with a dental appraiser. There is one on the Practice Orbit directory, which once you log in at the very top, you can click on uh, the directory and go to Dental Appraisers and you will see that@www.practiceorbit.com.

Also, I think it's a great idea to reach out to a few dental lenders, bank of America, Huntington provide US bank. P and C and there's others, all of whom would be willing to get your p and l for the last few years and tell you what they believe the practice may be valued at, or at least what they would lend on.

Assuming there's a qualified buyer who can, has a good credit score and can replicate your sort of production, and that will also, I think, give you a much more [00:09:00] realistic check. On what the value of the dental practice is. 'cause at the end of the day, for most buyers, it's going to be what a bank would lend on.

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It's a highly customized approach, we call the CFO model. Historically, having a CFO or Chief financial Officer was an [00:10:00] advantage of large corporations only, but today, practice CFO gives. Same advantage to private dental practice owners. As a client of practice CFO, you'll be assigned one of our dedicated CFO advisors.

You'll receive insightful financial reports each month, have regular financial review meetings, reduce taxes, grow your wealth, and fill more in charge of your numbers because we believe that in. Competitive landscape of dental practice ownership today. You have to be an effective business owner, not just a capable clinician.

Reach out to learn more@www.practicecfo.com. Alright, let's move on now to number three. So number one, in inadequate planning. Number two, over and under pricing. Number three, poor accounting and separation of business and personal accounts. I am a CPA, so maybe I'm making this a bigger deal than it should, but I strongly believe this, that poor [00:11:00] accounting.

What's gonna happen if, if you have poor accounting, you're giving this profit and loss statement to a buyer and to a bank, and you're making them do the hard work of screening it, filtering it, and ultimately trying to distill down what is the actual economic value of this practice? And in other words, what is the cash flow after paying Labor Labs, facility marketing.

An admin, labor lab, supply facility, marketing and admin. These, these main categories of expenses that virtually every dental practice has. Some of the specialists have, may not have labs, but most dental practices have those key expense categories. And if you don't have clear accounting for the buyer and the bank, you, you're gonna make them have to figure that out and they're gonna take the more conservative route.

Now let me elaborate on this a little bit more. When [00:12:00] a. An appraiser, a broker, a buyer, a bank, whenever they're trying to understand what is the net cash flow, the net profit, which is your collections, less those expenses. What is the net profit coming out of this business to pay the buyer's debt, to pay the buyer's lifestyle, the buyer's, taxes, all of that.

Is there sufficient money coming out of it to justify that price and. If a bank doesn't know what that number is, they're always going to be conservative. But when you're doing that exercise, what you're trying to do is say which expenses. This is, this is a really important point here, so I wanna punctuate this.

Which expenses in your dental practice are true business expenses, and which ones are personal expenses or hybrid expenses that you're running through the practice in order to get tax [00:13:00] deductions? If you're a practice owner, you know exactly what I'm talking about, your car. You might have kids on payroll, you might have a spouse on payroll to fund a 401k.

And by the way, these are all great tax planning strategies. We do it with virtually every one of our clients at practice CFO, where our motto is to tow the line. Don't cross the line, but if you're towing the line, you're gonna have a lot of this kind of. Stuff. Maybe if you're really stuffing a lot of money in a 401k profit share plan or a defined benefit plan, the buyer is not going to be paying 80,000, a hundred thousand, $300,000 a year that you've been paying into your retirement plan.

Your 401k and db, they're not gonna pay that. So that you wanna make that really clear. All of these expenses, these car costs, maybe certain travel costs that are really personal in nature. Maybe your Amazon, your Costco, kids on payroll meals, stuff like that, all that stuff. These are called add-backs because let's [00:14:00] say in a given year, all that amounts to, let's say a hundred thousand dollars, those types of expenses, you're gonna wanna add that a hundred thousand dollars back to the profit of the practice per your profit and loss statement.

So if your profit and loss statement says this, a million dollar collections, 400,000 in actually let's say, let's say $500,000 in overhead expenses, $500,000, but of that 500,000, a hundred thousand dollars, is that slush stuff, those personal kind of perks or tax planning items, if that's a hundred thousand dollars and the profit and loss statement.

Showed at the bottom a hundred thousand dollars in profit. When you add those other things back, what's the true profit of the practice? It's 600,000. So now your overhead, instead of being 500,000, it's actually only 400,000 because a hundred thousand of those [00:15:00] expenses, if I'm buying your practice, those aren't my expenses.

Those are your expenses. And so those are what are called add-backs, and everyone who does an appraisal. And, and the truth is this is with any type of business that's a private business that's being appraised or a buyer's looking to buy it. They go through this process of sifting out from the p and l, all of those kind of owner expenses and adding them back.

They're also gonna add back depreciation. They're gonna add back amortization, which are not cash flow expenses. Those are really accounting or tax expenses. And so by doing that activity for a buyer or a seller, you are. You're making it so much easier for them to understand the story of your practice.

In other words, what is the story telling us as to the health of your financial, of, of your practice? And so what we do at practice CFO for all clients, whether they just bought a practice yesterday or whether they're selling tomorrow, it doesn't matter. They all have [00:16:00] a p and l that has the true expenses.

And then it calculates what is the profit called? Operating Income. And that operating income is the punchline of the profit and loss statement. That's the most important number because that's the true profit collections. Less true. Labor labs, supplies, facility marketing and admin. Notice there's no Costco or Amazon in there.

There's no personal travel to Hawaii. There's no car costs on there. There's no kids on there. There's none of that. So there's, there's no amortization, there's no depreciation. All of those items, they come below that operating income line, and if they come below that operating income line, when you give your p and l to a buyer or to a bank.

You've already done the work, you've already staged it to be really easily understood what is the profitability of your practice? 'cause then they can look at that operating income and all that slush stuff down [00:17:00] below. That's just for tax planning. That's all that is really. And so that is a, that, that is a great way to structure the format of your profit and loss statement.

Okay, so that's number three as a huge pitfall is poor accounting and separation of business and personal accounts. Number four, declining production. Declining production scares everybody. Well, why is it declining? Is it gonna continue to dec to decline after the sale? Is there something fundamentally wrong with the business, or is it just.

You know, you have one or two months of a decline because it's seasonality and you can look back last year and the year before then, and there was generally a similar decline during those months for whatever reason, depending on where you are. Maybe in the country. For example, in Palm Desert here in California, a lot of people leave during the summer.

And so collections drop during the summer, [00:18:00] or if you're a pediatric dentist or an orthodontist, sometimes, uh, the cycle can change when school is in, when school gets out, that kind of thing. And so if there's a decline in the most recent few months, you'll wanna. Make sure that you can show the bank and the buyer, uh, the reason why.

And that it's a legitimate reason why and it's not something that's gonna continue as a decline, but it's just a seasonality cycle and they'll be fine with that. But a declining production, uh, risk goes up. If risk goes up, lending goes down, valuation goes down. Alright, let's go on to number five, not disclosing Delta Premier.

Now, this is probably sift out at this point. Most, um, most states, Delta premiers essentially got rid of the Delta Premier only fee schedule, where you would get, say 1300. 1350 as a reimbursement for a crown under the delta in network. Delta Premier only, um, provider contract. Um, as most of you [00:19:00] probably know, if you've bought a practice anytime in the past, I think 10 years or so, um, the buyer was not able to grandfather into their contract that same Delta Premier, only.

Contract. 'cause now the buyer has to take both Delta Premier and Delta PPO, and they're always gonna be reimbursed at the lower of the two, which is gonna be Delta PPO. So instead of getting $1,300 for a crown, now the buyer is only getting 650 or $700 for a crown, and that's a huge. Huge reduction, and this is the one area really where I've seen lawsuits is the seller did not properly disclose the amount of Delta Premier that they had, and the buyer gets the practice and they see a 10 or 15% reduction in collections.

And because they have the same overhead that might translate into a 30% reduction in profit. I hope that you follow, you follow that sort of math. If your, if your collections fall by 10% because your overhead is the same, your [00:20:00] profit may fall by double that or more. So it's really important as a seller that you do disclose your Delta Premier, and the buyer's typically gonna ask, okay, well what, what portion of your revenue, what portion of your patients are Delta Premier?

And try to back into some number. So that they understand what is gonna be the, the, the sort of adjusted downward collections to the buyer who is no longer in that contract. Now again, I think most of that's already filtered out at this point, so this may not be a huge issue for most sellers, and I do believe there are some specialists that still are, are able to be grandfathered into that Delta Premier in network only contract.

Alright, number six. Communicating at the wrong time and the wrong way with your team, you don't wanna give too much time. Staff get very jittery, and if you give them too much time, like a year, two years, three years, and you let them know that you're gonna be selling your practice down the road, a lot of times they think worst case scenario, what if the buyer doesn't want me?

What happens if they lower my pay? What happens if I lose benefits, yada, yada, all that stuff. [00:21:00] You just don't want to create that sort of anxiety. And concern across the, the team. So instead, uh, when is the right time? Depends a little bit on where you are. I mean, if you're 80 years old, your team's gonna know that're selling.

Shouldn't be a big surprise if you're 50 years old. That might come as a surprise. So whether you tell them right at the point of closing, maybe a week beforehand or the day of, or the day after, really, I'm gonna leave that to you and your team to assess, given the specific circumstance of your practice.

But just be very careful in communicating this at the wrong, at the wrong time. All right. Number seven A. Not planning for a lease assignment. This one's quick and easy. If the buyer cannot get at a minimum five years on their lease, preferably 10, since most banks want 10 years in order to lend to the buyer, you've gotta go and work with your landlord to get this ready.

Uh, ideally you can ask for an extra option or two of five years so that when the buyer. Buys the practice [00:22:00] and the lease is assigned to the buyer, which means they're taking over the existing lease rather than redoing a completely new lease. That's not gonna be complicated. Now, most leases will say that the landlord cannot unreasonably.

Prevent an assignment of the lease to a buyer. I recommend, highly recommend this as one of the most important takeaways from this podcast is let's say two to five years before selling, that you have an attorney who understands leases and specializes in leases or perhaps sort of just a lease.

Consultant, review the lease. Make sure there's no sort of landmines in that lease that could prevent you from selling. And sometimes landlords will. They'll add some really self-serving, uh, provisions in that lease that you may need to clean up. Before that, the lease is one of the biggest culprits for a broken or a [00:23:00] delayed sale, so please get your lease reviewed well beforehand to make sure that when you do sell it will one be assignable.

And two, there's enough time on the lease for the buyer to qualify for a loan that has to be a minimum of five, preferably 10. Are you looking at buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales in such a fragmented market with transaction costs so high, many dentists selling their practice feel discouraged.

That's why I built practice orbit.com. Practice orbit is modernizing how dental practices are sold. It's an online marketplace platform and it brings together buyers, sellers, and their teams to smoothly navigate a transition. When you list your practice for sale on practice orbit. You'll present a detailed and polished profile of your practice to a large pool of potential buyers.

Think of it like a Zillow home profile, [00:24:00] but for your practice. And importantly, that profile will remain anonymous, which means you can showcase your practice without worrying about the public or team members finding out only after an interested buyer's. Signs and NDA will that buyer see your name, address, and practice pictures.

And at Practice orbit, we have a team deeply experienced in dental practice sales. Our broker and support team will hold your hand each step of the way when you combine the power of marketplace technology with the highly qualified team at Practice orbit the result. Is a maximized sale price and a smooth transition timeline.

And hey buyers, you can search for practices. Submit NDAs and tender offer letters directly within the platform. You can even create saved searches and be auto notified when a new practice comes for sale in your market. If you're thinking about buying or selling a dental practice, create your free account today@www.practiceorbit.com.[00:25:00]

Okay, number eight. Eight. The eighth pitfall when selling your practice is not having a dental specific team. I can't tell you in those how many times in those deals where a buyer or seller has an attorney or accountant who has not been in any or many dental deals, that it takes longer. They don't ask sometimes the right questions.

They don't know what the norms are. For a dental practice sale, for example, how much of the sale price is typically allocated between goodwill and equipment? What are the standards around redos? How do you handle ar? There's about 20 to 25 specific provisions in the purchase and sale agreement that if you're not dental and you haven't done a lot of dental deals, you're gonna have to do a lot of research.

So you may end up paying a lot more to a dental attorney or accountant to represent you. So on Practice Orbit's website, if you uh, click on the directory at the top, you'll see a really good handful of dental attorneys. There's a dental accountant from practice [00:26:00] CFO, who has done a lot of deals as well.

And, um, and so please get a dental specific team. It will serve you well. It will serve the buyer well. Number nine, not doing a retirement and tax plan beforehand. Can't emphasize this one enough. Also, it is all too common that the seller. Once the deal closes and they pay their taxes and they pay their selling costs, ask themselves, wow, how did I get it so wrong?

The amount that I would be keeping once the dust settled, depending on what state you are, you'll end up paying somewhere around 25 to 35% in, uh, in taxes on the gains. How much gain you have depends on what your basis is in your, uh, in your, your business, your tax basis. And so there is absolutely a right and a wrong way to do this.

A good dental CPA is gonna look at your basis in your equipment. They're gonna see if you have any basis in any intangibles like goodwill, and they're gonna, what I call, allocate the [00:27:00] purchase price to the ideal. And the ideal is how much should go of the, of the price should be allocated between the equipment, goodwill, non-compete supplies, et cetera, in order to minimize the amount of tax you pay as a seller.

Now there's a little bit of a tug of war between the buyer and the seller, but if you do this, uh, a year or two ahead of time, you'll get a really good idea of what the taxes are gonna be. Now, in Practice Orbit, if you log in, create a free account on the bottom left, there's a Price Estimator. If you click on the Price Estimator, get your most recent business tax return, and within about three minutes, you'll have a really good, low, medium, and high.

Valuation or price assessment of your practice. And if you put in the debt that's on your business balance sheet, how much debt do you owe in your practice? It will calculate or estimate after the debt. Yeah, after the selling expenses and after the taxes, how much is left for you to keep as a seller and give that to your retirement planner, your financial planner, [00:28:00] and that will really help you know whether or not you financially are ready to pivot outta your practice and into a, uh, a sale, a retirement situation, or if you're selling and just sort of moving to a different state or transitioning your life, you'll be able to see how much you net out of that.

Number 10. Lastly, mismanaged accounts receivable. Are the accounts receivable included in the sale price or not? Accounts receivable are when you do the clinical work already, patient leaves, and then you have to collect that money and you may collect it within 30 days. Ideally, you collect it right when they leave, but a lot of times you have to collect from the insurance companies or the, you have to collect from the, from the patients themselves.

And what you have not collected on after the patient walks out of the door. That's what call accounts receivable receivables, and you'll wanna make sure that you've discussed with your attorney whether or not that's included or not. In the sale price. Usually it's not. And so you get to keep the money that keeps coming in after the sale for clinical work done prior to the sale, and that's added to the sale price.

And also you really want to try to clean that up. [00:29:00] If there's, uh, any that you know you're not gonna collect on, probably write it off in the system. Also, your, uh, ar credits where the patient overpaid. Are you gonna reduce your AR by that? This, the buyer's gonna want to know because they don't want to have to do free work.

So those things need to be addressed by your team ahead of time and agreed upon, and the narrative of that should be in the purchase and sale agreement. Alright, everybody, those are the top 10 selling pitfalls. There are others for sure, but these are some of the key ones. If you're looking to sell your practice anytime soon, I hope you find this helpful.

Until next time, sign in. Out.