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What Does It Actually Cost To Sell A Dental Practice?

Posted by Bill Robinson, ADAPT President & CEO on 12/10/20 9:14 AM
Bill Robinson, ADAPT President & CEO

Make sure you understand all the costs of selling your dental practiceUnfortunately, you probably already know the answer to the question “what does it actually cost to sell a dental practice?” – it depends.

Each sale is unique, and there are a number of factors and multiple ways of handling each aspect of the sale. All of them impact the total cost. In this post, we will review some of these factors, offer a range of costs, and talk about ways to minimize or avoid those costs.

First, I want to give an example of the lowest cost, most frictionless dental practice sale I have encountered.

A dentist in the Midwest had been working as an associate for a couple of years and was beginning to think about owning his own practice but hadn’t taken any specific steps to make it happen. He decided to attend a CE event about an hour from his home. While there, he mentioned to some supply reps that he would be interested if they knew of anything. They mentioned a nearby practice that had been closed down for about six months. He drove past the practice that afternoon on his way home and gave the owner dentist a call. They hit it off and decided to meet to see if they could come to an agreement. Over the course of the next few months they negotiated a price, drew up the necessary documents, and completed the sale. They did not use a broker. They did not get a valuation. The negotiations were collegial. Everyone was happy with the transaction. The buying dentist estimates that he spent about $2,000 on legal fees and the seller relied on the documents that buyer and his lawyer created. But the buying dentist will also tell you that he does not know of any other dentist who shares his experience. He says, “My story is a fluke,” and considers himself to be incredibly lucky for his acquisition to play out the way it did. He took the risk to trust the owner, who acted like a mentor to him even though he was on the other side of the transaction. The selling dentist felt he had found the right person to carry the legacy forward in his small town and worked to make it happen as seamlessly as possible.

I’ve also heard of others who report trusting their negotiating partner and eventually coming to regret it.

The vast majority of dentists say that selling/buying a dental practice is complicated and filled with uncertain moments. They lie awake at night wondering, Am I making the right decision? Is this a fair price? How do I know these numbers are accurate? Many dentists end up getting help from a company like ADAPT or a broker, in addition to a lawyer and/or accountants and banks.

No matter your approach, here are the primary cost drivers for an owner when selling a practice.

Valuation

ADAPT encourages all of our clients to have a formal and independent valuation done. “Formal” means that it follows generally accepted principles for business valuations. “Independent” means that the firm doing the evaluation charges a fixed fee and does not stand to gain additional revenue with a higher valuation.

Many banks say that they do not require a valuation in order to provide loan funding, though most would like to see the valuation and prefer to see it from an accounting firm or independent business valuation company.

A dental practice is worth what someone is willing to pay for it – regardless of what the valuation says.

Prices for a valuation have quite a wide range. Some do a basic analysis of the practice performance and assess local data that can influence the range of value. These generally start at $2,500. On the other end of the spectrum, some valuation companies employ elaborate methodologies that involve multiple valuation formulas and then do a weighted average of the outcomes. These can come with nicely bound books that become a selling piece for your practice, essentially a “sell sheet” to share with buyers.

At the end of the day, a dental practice is worth what someone is willing to pay for it – regardless of what the valuation says. We have seen many dentists who stubbornly stick to numbers provided by valuation even when buyers consistently offer a lower price. This is fine if you have the time and resources to wait for the right price. Just be careful not to become too attached to a particular price. If you have a practice where the value could potentially become contentious (if it is an asset in a divorce or a partnership that is breaking up), it is usually worth spending extra money to have a well-documented valuation with rigor behind multiple methodologies, but most practices will fall within a range related to production and profitability. (See: Get Your Paperwork In Order For Your Practice Valuation)

Legal Fees

It is important to work with a lawyer who has experience in drafting and evaluating the legal documents related to the sale of a business – if they have experience in dental practices, even better.

Secure a lawyer in your own state, since many of the regulations vary from state to state. While your spouse’s cousin’s brother-in-law might give you a good deal, if he is licensed in another state, it is best to find a local resource who can provide local expertise, even if it costs more. (You can find this local expertise by asking colleagues or checking with your state or local society – many maintain lists.)

In most cases, you will pay an hourly rate for the services of such a lawyer. Fees can range from $150/hour to more than $400, depending on the lawyer you choose.

At ADAPT, we provide our customers with checklists and worksheets that define all of the information a lawyer will need to complete the necessary paperwork. By compiling and preparing this information ahead of time, you can reduce the lawyer’s needed time – and your out-of-pocket costs.

Business Consulting or Broker Fee

This is typically the largest cost associated with selling your practice. Business brokers generally charge ~10% of the value of the practice as their fee. Some brokers will negotiate this fee downward depending on the circumstances of your practice.

Make sure you understand what is – and is not – included with that fee BEFORE you sign anything, and check for any exclusivity clauses. As with any industry, there are many excellent brokers in the market, but the fees are significant, so it is important to understand what you are getting before signing any agreement. ADAPT offers an alternative process that is usually significantly less expensive.

At ADAPT, we currently charge 4% of the value of the practice. We encourage our customers to build their own team of professionals to manage the transaction itself, but this is generally legal fees and a professional valuation. ADAPT pricing will increase in 2021 – but you can lock in our current rates by submitting your profile before January 1.

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Real Estate

Whether you own or lease your current clinic, the underlying real estate will need to be addressed during the transition. ADAPT connects our customers to a trusted national commercial real estate firm who will seek first to understand the situation, then determine the best means forward, be that:

  • Consulting services: opinion of value, orchestration
  • Leasing services: assumption, renegotiation, relocation
  • Sale services: disposition, acquisition, sale leaseback structuring,
  • Construction & Development: new clinic development (fee or at risk), existing clinic retrofits

The firm leverages decades of experience in commercial real estate, nationwide, and assists in crafting a strategy for your long term vision – be that ownership or leasing. Pricing for real estate services can vary from state to state but traditionally is structured as a percentage of asset or service value. Many selling dentists seek guidance on the value of the underlying lease or owned real estate. An opinion of value – which comes into play during the transition process – is a traditional starting point and can be provided for $2,000. This can typically be completed in a matter of weeks.

Other Costs

A buyer may require upgrades or repairs prior to purchasing a practice, but this is all part of the overall price negotiation. Sometimes these repairs are more than cosmetic and are required in order to meet building codes.

Other costs might include advertising fees if you decide to list your practice on a website or in a dental journal. Some brokers include these charges in their fees; other charge separately. ADAPT does not generally list practices outside our own platform or website; if we do, it is done with the permission of the owner and any charge is included in our fee.

 

Are you ready to sell your practice? Create your free profile now. Submit that profile before January 1, 2021 to lock in our 2020 rates – and save yourself some money.

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Topics: selling a practice


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