Preparing for retirement and identifying the best way to sell or transition your dental practice takes careful planning — and clear awareness of your specific financial needs.
Many dentists plan to sell their practice as a means of funding their retirement cash flow. Making this goal a reality requires awareness of both your practice’s current value and the sales transaction options that best align with your individual financial goals.
Understanding your buyer base
Most states prohibit the sale of dental practices to anyone other than another practicing dentist. Therefore, your dental practice has a very specific pool of potential buyers: individual dentists or dental support organizations (DSOs).
Recent research by the American Dental Association suggests a growing shift toward the DSO model, which allows dentists to outsource business management aspects of their practice. Currently 13% of U.S. dentists participate in DSOs — though participation is much higher (25%) for those most recently starting their careers.
Identifying best-fit transition strategies
When it comes time to retire, you’ll face four general options for selling or transitioning your practice. It’s important to explore the pros and cons of each.
1. Sell your practice to an employee
Selling your practice to a trusted employee can offer peace of mind and a range of sales options that may not be as feasible with an outside party. These include:
- Arranging for an installment sale, where you receive payments from the purchasing dentist over a period of time.
- Selling a percentage of the practice while you’re still working, while planning to sell the remainder at your targeted retirement date.
- Negotiating the sale of your practice through a stock sale, which may offer certain tax advantages.
Selling to an employee also provides added flexibility by allowing you to transition to retirement on your own timeframe, as gradually or as quickly as you wish. On the other hand, if you don’t already have another dentist in your practice who’s ready to become a potential buyer, you would need to spend time recruiting and training one.
2. Sell to a dentist outside your practice
If you choose to look outside you practice for a buyer, you’ll likely be selling to another, already-established dentist. While this approach strips away the need to train your buyer, working with a lesser- known provider could add uncertainty to your transition until the deal is actually complete.
If you have concerns about your buyer’s ability to obtain financing to purchase the practice outright, consider leveraging an alternative option — such as an installment or percentage sales plan — to ensure the sale is successful.
3. Sell to a dental service organization (DSO)
Given the growing popularity of DSOs, particularly among newer dentists, you’ll likely net the highest price for your practice if you sell to a DSO rather than an individual dentist.
If you go this route, note that DSOs may require you to stay employed for one to two years following the sale, until they can bring someone on board to take over your practice. You’ll be required to follow the DSO’s mandated processes and procedures, which might include replacing costly software and equipment.
Also, the DSO might only pay you part of the sale price up front — say 60% — and roll the other 40% into stock ownership or into an earnout, which could be contingent on your business meeting a certain financial target down the line.
4. Keep ownership of your practice while transitioning work to others
A fourth option involves transitioning your practice operations instead of selling. Retaining primary ownership of your office while bringing in another dentist to run day-to-day demands can offer a reliable long-term income stream to fund your retirement.
This option is attractive to dentists who aren’t quite ready to retire. However, it does not offer the sudden, large monetary influx. Furthermore, this strategy risks diminishing the value of your practice before you sell it — especially if patients flock to other practices when you start reducing your hours.
How to tell if you’re ready to start transition planning
Before you begin weighing sales or transition options, carefully identify your business and retirement goals. Ask yourself detailed questions such as:
- What is my ideal retirement timeline?
- Do I know what my practice is currently worth?
- What sale price will I need to fund the lifestyle I want to keep in retirement?
- What other assets can I draw from to supplement my income, beyond the sale of my practice?
- What backup plan do I have in place if my practice doesn’t receive the valuation I anticipated?
Answering all these questions will help you make an informed decision regarding your practice’s next chapter — and your own.
How Wipfli can help
Thinking about retirement or transition planning for your dental practice? Wipfli’s business valuation services team help you assess the current value of your practice and identify clear financial objectives to ensure a successful retirement. Contact us today to learn more.
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