Halloween is right around the corner, and that means trick or treating, ghost stories, and scary costumes. Selling your dental practice in the wrong way can be scary, too. Whereas ghost stories and scary costumes pass with the season, falling into a transition pitfall can lead to permanent and unpleasant consequences. These are some of the worst-case scenarios we see in practice transitions, and advice to help you avoid them.
Assuming the Sale Proceeds Will Fully Fund Your Retirement
Although selling your dental practice is one of, if not the, biggest transactions you’ll undertake, in most cases it won’t be enough to fully support your lifestyle in retirement. Start by getting an independent valuation of your practice. Unless your retirement accounts are fully funded and you’ve undergone financial planning with a seasoned professional, don’t expect any more than a big payday. If your practice is your only asset, you’ll need to reevaluate your retirement plan.
Worst-Case Scenario: Your dental practice has gross annual revenue of around $1 million. You’ve partially funded your retirement plan, and count on the sale of your practice to almost fully fund your golden years. Your practice sells for around $700,000. Subtract the commissions, legal fees, and taxes. Your take-home is less than $500,000 – enough to fund your current lifestyle for a few years, followed by monthly Social Security checks. You return to work for another practice to pay the bills.
Hiring an Associate Without a Formal Contract
Many dentist owners bring on an associate with the intention of selling the practice to them after a specified length of time. While this is an excellent strategy for dentists who are a few years or more from retirement, doing so without a formal contractual agreement is a disaster waiting to happen. You should have established and documented contracts in place to cover compensation, non-compete, buy-in, and more.
Worst-Case Scenario: You hire an associate, you two get along great, and you have a verbal agreement to transition the practice in two or three years. Without a formal contract, when it comes time to sell, the dental practice is valued for only your portion of the revenue, not the total practice value with the associate’s revenue. You try to negotiate with the associate, pay extra concessions or don’t, and you either lose a significant sum in goodwill if the associate leaves and takes his or her patients; or you lose money negotiating with the associate to buy him or her out. You also have little leverage.
Most dental practices are sold as asset sales. This also means that any previous employment agreements with staff end when the new dentist takes ownership. For long-term staff who are key to the practice’s success, this can become complicated if handled poorly. For example, once you sell the practice, the new owner is not obligated to re-hire the existing staff. If they lose their jobs, under law they were terminated when the practice sold. Unless you have new employment agreements in place, you could be held liable for termination without notice.
Worst-Case Scenario: A part-time hygienist was paid $25,000 in a lawsuit that resulted from her termination following the sale of the dental practice in which she worked. The amount equaled six months’ salary, factoring in her time at the practice. Refer to the case Dechene v. Dr. Khurum Ashraf Dentistry Professional Corp for more information.
Selling Your Practice on Your Own
Although it’s tempting to want to keep as much of the proceeds as possible, selling your dental practice on your own is probably one of the worst decisions you can make. A qualified dental broker will appraise the value of your practice, help you market it and screen potential buyers, assist you with preparing all required paperwork, and guide you through the entire process. When it’s done, the commission is a small price to pay for peace of mind and the knowledge you received the best possible price.
Worst-Case Scenario: You try to sell your practice on your own. You lose confidentiality when you must place ads in dental publications and vet potential buyers on your own; patients and staff get scared and leave. Or, you receive an offer that is less than market value; you take it not knowing your practice’s true worth, and you leave tens of thousands of dollars on the table. Or, the transaction falls through completely and you must start over.
Avoid making these transition mistakes. Talk to an expert dental broker about your options, even if you’re not ready to sell yet. With some planning, your dental transition will be anything but scary!