May 2014, Volume 10, Issue 5
Published by AEGIS Communications
What buyers and sellers need to consider before entering the market
A multitude of factors come into play when selling or otherwise transitioning a dental practice. The region of the country where the practice is located, the financial stability of the practice, and the desired outcome of the sale will each play a role in the ease of the transition and its ultimate success. With careful planning and consideration, there are a number of ways to accomplish such a transition.
Workforce demographics are a good place to start, because they reveal important trends that impact the marketplace. Nearly 196,000 individuals are professionally active dentists in the United States, according to the Kaiser Family Foundation.1 The states with the greatest number of these professionals are generally concentrated on the outer edges of the country, with more than 30,000 professionally active dentists in California, more than 15,500 in New York, and more than 10,000 in Florida (Table 1).1 The fewest professionally active dentists tend to be located in smaller states or the more sparsely populated upper middle of the United States, with just under 300 in Wyoming and fewer than 450 in South Dakota (Table 2).1 The majority of dentists are solo practitioners, according to the American Dental Association (ADA), with nearly 60% working in solo practices.3 About 23% of these professionals work with one other dentist, and fewer than 20% work with two or more dentists.2
Deciding to Transition a Practice
Whether you practice in a state with the greatest number of dentists, the fewest, or somewhere in between, chances are that you will be concerned with the options available for selling a dental practice at some point during your career. Dentists who are considering retirement may be the group one thinks of first when it comes to selling a practice, but the need to sell may arise for others as well, such as practitioners who are interested in going from a solo practice to a group practice or those who are ready to relocate.
As the old real estate adage attests, location plays a big role in terms of the ease of selling a practice. In addition to location, potential practice sellers must consider the financial requirements needed to sell a practice; whether they need to modify features of the physical office, such as décor and equipment; and obligations to the buyer. For example, dental service organizations (DSOs) or group practices often oblige the seller to remain in the practice until a replacement can be found, according to Eugene W. Heller, DDS, vice president and chief operating officer for Henry Schein Professional Practice Transitions, the dental practice transition division of Henry Schein, Inc.
“Supply and demand is a major driver of the ability to sell a practice and the price/value of a practice,” Dr. Heller explains. “There are several drivers of supply and demand: number of retirements, location of practice, and features of the office.”
Impact of Retiring Dentists & New Graduates
The current selling environment is being influenced by a number of complex factors, Dr. Heller explains, including the number of dentists retiring; an increase in “preferred provider” dental plans that reduce fees and, therefore, profitability; and the growth of DSOs.
“Over the past 5 or so years, many of the dentists who would normally have retired have delayed retirement as a result of the recent financial crisis and its impact on their retirement savings,” he continues. “Because they lost much of the value of their savings, they had to keep working until they could make back some of the lost money. Now, some of those practitioners will be starting to retire, in addition to the dentists who would have retired during this period anyway. This means there could be an especially large number of retirements (and practices for sale) over the next few years.”
According to Dr. Heller, dental schools have graduated approximately 4,100 to 6,800 dentists a year for the past 35 years. Azar Zaidi, director of associate dentist recruiting and development for Pacific Dental Services, notes that the 2012 class of dental graduates was the largest in the history of the profession, which will naturally lead to more working practitioners. Zaidi also explains that the majority of these graduates are “millennials,” or adults born after 1980, and their choices and circumstances will impact the market in a particular way. For example, fewer than 20% of millennials live in rural areas, Zaidi explains, and 37% of these individuals are currently unemployed or out of the workforce. These trends could have implications on market saturation in the coming years. Additionally, recent dental school graduates are incurring more debt than earlier generations, which will impact their ability to buy and/or sell a practice.
The good news, according to William J. Perry, CPA, CVA, PFS, managing principal of BWTP P.C. and David J. Goodman, CPA, MST, managing partner at Lawrence B. Goodman & Company, is that new and experienced practitioners alike who are looking to establish themselves by buying a dental practice have financing options. “Lending institutions that understand the dental marketplace are more than willing to lend money to a credit-worthy purchaser. Recent graduates can have large student loans. However, I have not seen this adversely impact a loan approval,” says Perry.
Goodman concurs. “Thanks to lenders specializing in the dental market, buyers in search of financing will find it rather easy to obtain third-party financing,” he says.
For dental professionals who are current owners and are ready to transition a dental practice, there are several options available, according to Goodman. These options include the outright sale of a practice (with or without the intention to retire), selling part of the practice initially and transitioning the practice entirely at a later date, or bringing in a partner (eg, establishing a group practice). Dental practitioners can also bring in a management company to maintain a practice in its current state, which is associated with its own unique concerns.
Selling a Dental Practice in its Entirety
Selling the practice outright is one of the primary types of transitions for a dental practice, explains Perry. Some specific issues to be considered by those planning to transition this way include whether the buyer will be a solo practitioner or a group with multiple dental professionals; depending on the situation, this could mean a solo practitioner would be transitioning into a group practice or a group practice would be dividing into solo offices.
The practitioner who is looking to sell a practice to another dentist or a group of dental professionals should determine at what age he or she wants or needs to sell the practice, Perry explains, which may be especially relevant for retiring practitioners. Brent P. Thomas, CPA/PFS, notes that the dental professional looking to sell should find a suitable match for the practice and ensure that the buyer has sufficient credit financing and experience.
Transitioning Out of Practice in Stages
Dental professionals can transition a practice in other ways besides outright sale, according to Dr. Heller. Examples include selling part of a practice to another practitioner and working in concert; selling an entire practice to a new owner and working for the new owner for a transition period; or having a buyer come in and work for the owner until the buyer becomes a partner and buys the original owner out of practice. These options are effective for practitioners who want to ensure that the practice runs in a specific way after the original owner has left, as is often the case for retiring dentists or those in close-knit communities.
Hiring a Management Company
For some, the market conditions or personal circumstances will make a desired practice sale unrealistic or impossible. Dental professionals who decide to maintain their practice have options to make ownership less burdensome, whether the practice is large or small or run by a solo practitioner or multiple professionals. Dental support organizations such as Heartland Dental can provide support and assistance in regard to issues like insurance, accounting, marketing, and more. According to Justin Wendling, director of affiliations at Heartland Dental, engaging a dental support organization to assist with administrative, nonclinical issues allows the dentist or dentists to focus entirely on patient care. Such organizations can also provide benefits such as access to continuing clinical and leadership education and networks of experienced dentists who can work to support and train young practitioners, Wendling notes.
On the East Coast, the outright sale of a dental practice to another dentist or merging a practice into a larger practice is the most common strategy for potential sellers, according to Goodman, who works primarily with clients in the metropolitan New York area. Practice values in the suburbs have remained relatively stable, Goodman explains, but increases are being seen in New York City proper. Practitioners planning to sell in or around other large cities on the East Coast, such as Boston, Philadelphia, and Washington, DC, might expect similar trends.
One of the biggest concerns for practitioners looking to sell a practice in the middle of the United States is the higher incidence of rural areas. According to Perry, rural practices are often harder to sell than practices in metropolitan areas. As previously mentioned, younger dentists, who may be in the market to purchase a dental practice, tend to prefer to live in more metropolitan areas. Despite this, Perry believes that the market in the middle of the United States is an active player in the scope of dental transactions.
Julia Ernst, MS
On the West Coast, Thomas notes that there are currently more potential buyers than sellers, which makes for a sellers’ market. As described earlier, there is a greater number of dentists on the West Coast compared with other areas of the country, which may make another one of Thomas’s recommendations—finding a suitable match for the practice when selling or bringing in a partner—more feasible in this region. In northern California, according to Thomas, a network of practice brokers has established a market for buyers and sellers to meet; resources available through this network include the ability to view appraisals and legal documents.
Healthcare Reform & Utilization
According to Zaidi, there are other broad concerns in the dental marketplace that will play a significant role in whether or not a practitioner chooses to sell. One issue is the uncertain impact that the Affordable Care Act (ACA) will have on dentists’ practices, where dental benefits may be marginalized because the priority will be to sell medical insurance packages, Zaidi explains.
In addition, Zaidi points to a recent report from the ADA showing that both insured and uninsured individuals are skipping necessary dental visits. As a result, because dental spending is expected to remain sluggish, “there could be increased interest among dental professionals to explore an expanded scope of practice so they are much more active contributors, for example, to the primary healthcare network.”3 Interestingly, however, another trend is that dental utilization is actually increasing among children, according to Zaidi. The impact on dental expenditures will be reflected in the different procedures adults need as compared to children, he continues.
One thing about which Goodman, Perry, and Dr. Heller all agree is the need for any dental professional who is looking to transition a practice to plan ahead, particularly in regard to an outright sale. According to Perry, a dental practitioner looking to sell a practice needs to start thinking and planning 3 years in advance of the actual sale, with particular focus on having equipment that is up to date and the financial ability to sell the practice. Goodman notes that selling a practice can take a few years to plan and that practitioners thinking about selling should focus on what the next generation of dentists who inherit the practice will seek. In addition to equipment and general practice improvements, Goodman reminds potential sellers to focus on “the most valuable asset of a practice—the patients.”
From Dr. Heller’s perspective, planning for a transition can’t start too soon. “Ideally, dental professionals start planning for their transition maybe up to as many as 20 years before,” he explains. “While practicing, these dentists always have maintaining or increasing their practice value and salability in the back of their mind. They should know the different scenarios for transition, be maintaining modern technology and equipment, and be sure to do other things that will increase the likelihood of a sale at the maximum price.”
For dental professionals looking to transition a practice, there are a number of options, including selling a practice in its entirety to a solo dentist or a group practice, selling part of a practice and working as a partner and eventually signing over the entire practice, or choosing not to sell and maintaining a practice in its current state. Practical issues to consider when choosing the best transition option include timing, the location of the practice, the financial wellbeing of the practice, features of the physical office, and the potential role of DSOs/group practices to solve practical problems within the practice. Planning ahead is crucial for the successful transition of a dental practice, and, if all these factors are accounted for, a dental professional looking to transition a practice will have the best possible outcome.
1. Kaiser Family Foundation. Professionally active dentists. http://kff.org/other/state-indicator/total-dentists/. Accessed February 1, 2014.
2. American Dental Association. Frequently asked questions. www.ada.org/1444.aspx. Accessed February 1, 2014.
3. Vujicic M, Nasseh K. Dental expenditure expected to grow at a much lower rate in coming years. Health Policy Resources Center Research Brief. American Dental Association. August 2013.
Practice Transition Resources
The following companies offer various services for practice transition and represent just some of the options available today to practitioners.
Henry Schein Professional Practice Transitions
Pacific Dental Services
The Scheduling Institute