By Susan Spear
From the Spring 2021 Journal of the Colorado Dental Association
For the last several years, buyers have been experiencing low numbers of dental practices/businesses for sale. This may be changing soon. The American Dental Association (ADA) Health Policy Institute (HPI) reported that among the 201,117 dentists working in dentistry as of 2020, 17.0% are under age 35, 24.0% are ages 35-44, 21.6% are ages 45-54, 21.1% are ages 55-64, and 16.3% are ages 65 and older. In 2020, the average retirement age among U.S. dentists was 68 years old. The statistics predict that the number of dentists reaching retirement age will be increasing substantially over the next several years. This should mean more practices on the market for dentists to purchase.
Today’s new dentists are motivated to buy and are looking to carry on the legacy of retiring dentists. Acquisition lending is still very strong. However, new start-up lending has been paused or slowed because of the risk uncertainty based on the experience of the 2020 financial ups and downs. Buying an existing practice means new dentists can purchase and own practices now instead of later. This is very good news for sellers as well.
Understanding the differences between the types of selling methods and types of buyers currently in the marketplace in 2021 will help sellers make positive decisions for their futures.
To simplify, there are primarily three common methods for selling your dental practice.
- Direct Sale: Selling your practice in a short period of time to either a solo provider/owner, small group practice/owner or Dental Service Organization (DSO). On average, the entire process occurs within six months to one year of a seller’s decision to sell.
- Associate Buy-out: Hiring an associate as an employee and then preparing him or her to purchase the practice after a determined transition period. The seller sells the practice and may either retire or continue in a reverse role. This process usually takes between one-to-three years to complete.
- Associate Buy-in: Hiring an associate as an employee and preparing him or her to become a partner who will share the practice with the seller. A change in ownership percentage is established and the practice becomes a partnership. Associate buy-ins are also used to transition owner partners who are ready to retire. The associate begins before the partner retires for a smooth transfer of care. This process can take one-to-five years depending on the scenario.
With direct sales, the seller is ready to sell now without a transition period with the new owner. The reasons for a direct sale can be many, but most often this method of selling is used when a dentist is ready to leave clinical care and retire. Other reasons may include situations of hardship or illness, or a seller wanting to relocate to another state. The direct sale method is also used to build networks of dental offices for profit.
Types of Buyers
The solo provider/owner buyers are seeking a small business dental practice to manage and operate independent of other dentists. They seek to have an independent relationship with their patients and staff. This buyer will replace the selling dentist and continue operations in a similar manner to the seller. The solo provider/owner buyer wants to build on what the selling dentist transfers. There will be changes, but when managed correctly, the process forward is supportive of the legacy the selling dentist leaves behind. In this scenario, the selling dentist is not required to stay on as a provider. He or she can experience full retirement after a short period of post-sale introduction of the buyer. A solo provider/owner buyer process will allow the seller to participate in the vetting and choice of their buyer. It further provides the patients and staff with the support they will need to continue forward, retire and walk away while offering full “payout” to the seller at closing.
The small group practice/owner sale brings a few more challenges than a solo provider/owner sale because the change process is greater for the staff and patients. The seller is usually replaced with an associate dentist who is not an owner. Each structure has some variations. Some small group practice/owners may want the seller to stay on as a provider for a transition period post sale from a few months up to a couple of years. The objective is to have the selling dentist help with the transition of patients to the new owner/s. For some sellers, this may meet their transition plans. The practice becomes part of several other practices working under the same umbrella or owner/s. For practices that have struggled in the past to stay productive, this buyer may offer new management support, marketing options for new patients, and provide new benefit programs for staff. The group model can help to offset costs and increase buying power for the owner. In competitive markets, owning more than one practice can help dentists increase their ability to earn.
The DSOs have been expanding since the early ’90s operating under similar business models. The basic structure is a company that owns and operates the physical dental practices for the dentists. Dentists are employees or sometimes can own shares in the management company. This buyer often requires the dentist seller to stay on for two-to-three years (or longer) post sale. Each company has variations of their management structures, but they usually involve outside support services that provide the management. The purchase structure may be different from a full buy-out when the seller transfers ownership. The payment includes a partial payment of the seller’s selling price (commonly 70%) with a post-sale working relationship (30% risk) to payback the seller’s remaining balance. This lowers the buyer’s initial investment and requires the seller to take on some of the risk of the sale by staying on to help with the outcome of the transition. There are some sellers who are not totally ready to leave the practice of dentistry, but who want out of the ownership role. For these sellers, the commitment to stay may be an option, but they should be prepared for major changes to how the practice will operate post sale.
The other two most common methods to sell your practice are associate buy-outs and associate buy-ins or partnerships.
For a seller who wants to mentor and transfer his or her practice over a designated period of time, this can be an ideal way to control the outcome they desire. If a seller can support more than one provider, this method is used to develop a bonding time for the seller, buyer, staff and patients. Associate buy-outs are complex and require structured action steps over the associate period to be successful. In some cases, the selling dentist may remain in the practice in a reverse role after the practice is sold. For the seller with the time, resources and willingness to work toward a successful outcome, the associate buy-out can be very rewarding.
An associate buy-in is very different from an associate buy-out. The intent of this type of sale is to sell to a dentist who will become a partner/owner. The selling dentist/s sells an equal portion of his or her practice to another dentist or a partner/owner will sell his or her share when leaving the practice. In most situations, the associate buy-in requires an associate employment period and process similar to an associate buy-out. There are partnership buy-ins that occur without an associate period, but these transitions are less common. Successful partnerships require strong compatibility and relationship building between the owners. Specialty sellers may find the transition easier when there is already a potential buyer on board to replace them.
2021 is a great year to consider selling your practice if retirement is close in your future. There are wonderful buyers looking for what you have built over your tenure. The time has never been better to protect and transfer your legacy! Is it time to do it your way?
Susan Spear is owner/broker of SAS Transitions Dental Practice Brokers. She is a licensed broker/business intermediary and certified negotiation expert (CNE). Contact her at 303-973-2147 or firstname.lastname@example.org, or visit sastransitions.com.