I was recently asked to serve on the Sustainability Task Force at my church. It seems that many churches, non-profits and businesses in general are asking members and constituents to sit down and focus on what factors may influence the long term survivability of their organizations and to make plans and recommendations to deal with those issues. This trend is not so much about organizational goals and mission statements as much as it is about the ability to physically survive into the future. Maybe the recent pain of the Great Recession has taught us a few lessons. Topics of discussion might include changing demographics, staff succession plans, physical property needs and management of the organization’s endowments. It occurred to me rather quickly that dental practices could certainly benefit from a similar introspective process.

I see two phases of sustainability in dental practices, the first centering on the career of its current owner and the second, the focus of this article, having to do with the ability of the business to be transitioned to the next generation. Surprisingly, successful management of a practice for the benefit of the current doctor may not always be an indication of the business being able to survive a change of ownership. While revenue levels (which we will discuss in detail) might be the most obvious, there are a number of other potential deal-breakers.

Real Estate – In its simplest form, a prospective buyer must be able to get a market rate lease on the practice space for whatever number of years the lender will demand as a condition for the loan. In most cases that will be for at least five years. The seller may have had a good relationship with the building owner but that is of little comfort to them when a new owner with huge debts and negative net worth approaches them. If the landlord will not offer the buyer a suitable lease, your practice value may be seriously reduced. Further complications may arise if the practice owner owns the real estate. The location of the building may no longer be desirable, which will drag down practice value or (darn the luck!) the value of the building has gone up so much that the new practice owner simply cannot afford the cost of a market rate lease. Remember, the overhead percentage of a general dental practice for space cost should be in the five to eight percent range so it’s pretty easy to calculate what the buyer can afford to pay.

Patient Base and New Patients – Practices that do not have an adequate number of patients along with an ongoing stream of new patients to replace those lost to attrition will have a hard time being transitioned to a new owner. While the definition of “adequate” can vary considerably, 1200 patients (frankly, I like 1500+) who have been in the office for a billable visit in the last 18 months and are known to have not moved away or died is probably about the minimum size for a solo general dental practice. Since turnover in many areas is as high as 20%, the 1200 patient practice would need to attract about 20 new patients a month just to stay even.

Physical Facility – There will always be a market for quality dental practices, especially in metropolitan areas. Conversely, dated and dirty practices with outdated equipment will have a hard time attracting a successor. Most potential buyers have been trained on, and have always practiced with digital radiography. If you don’t have it in place it is almost a direct deduct. Likewise, curb appeal matters as today’s buyers want to be able to come to work and make money producing dentistry immediately and have little stomach for taking on rehab projects.

Staff – On the first day the new owner shows up at the office to start their careers, they will not know a single one of their patients. They will be relying on your staff to introduce them to patients, run the schedule and business and treatment systems, etc. Without a trained, affordable staff ready and willing to assist the new owner, your “practice” is basically a client list and a room full of used dental equipment. Treat them as a valuable asset by keeping them well trained and productive but be careful about letting them become an unreasonable percentage of your overhead. If your total staff costs are over 30% of your revenues, there will be problems for a new owner.

Location – This is a tough one in that you can’t do much about it. This is a reality that many will have a hard time accepting because even if you have done everything else right, you’re still not going to like the result. If you have an otherwise marketable practice in a rural area, there is a good chance (50/50?) that no buyer will ever come along before you decide to just lock the door and leave. Period. Sorry.

Revenue – Of all the factors we have discussed in this article (with the possible exception of the rural location), this is the 800 pound gorilla. If you are a solo practice, general dentist and your collections are less than $400,000 annually, your practice as you know it may not be sustainable into the next generation. Below this level of revenue there is simply not enough money in the mix to pay the overhead, taxes, student loans and any acquisition debt and still have money for the buyer to take out for living expenses. If you can’t make a living, why bother? Some of my accountant friends would go so far as to suggest that $600,000 may be a more comfortable threshold. When we have seen buyers struggle with their new practices, the problem generally stems from the practice just not being big enough. If there are enough other positives about the practice, it can be sold but perhaps as a satellite location or a merger candidate.

Banks tend to view assets in terms of their liquidity or ability to be sold. Unfortunately, if $100 bills rate a “10” and a Chernobyl time share rates a “0”, dental practices are on the lower end of the scale. One of our methods of valuation used in our practice appraisal process is known as the Summation of Assets Method. This technique compares your practice to a marketable plumb line model and assigns a value. You should begin now to maximize the positives of your practice and minimize the shortcomings in order to move closer to the day when you want to successfully trade the practice in for cash. If the reality is that it cannot be sold, you should do what you can to get the most out of your efforts, make solid retirement plans and enjoy it while you can.

Steve Wolff