DMC has been flooded – I repeat FLOODED – with calls from dentists across Ontario wanting to sell their practices as soon as possible. Ottawa, Kitchener-Waterloo, Niagara, Brampton, Toronto, North York, Vaughan, Northern Ontario, etc. Both General Practices and Speciality Offices.
So in this blog, I’m going to be repeating what we’ve been telling these dentists. First, if You Tried to Sell DURING COVID-19, you’d be taking a financial hit. With most dentist buyers and banks largely sidelined from March 15 until very recently, it was very clearly a Buyer’s Market for Sellers who HAD TO SELL. Buyers who had cash reserves and little competition tested the market by offering lower prices and not-so-great terms to Sellers who needed to sell (due to health or financial issues). Comparatively, Dental Service Organizations were aggressively assessing practices but not changing ownership / paying the rest of the purchase price (i.e. formally “close”) anything until after restrictions on practicing were lifted and operations started to return to some level of normality.
And during the Covid-19 (March – June 2020), we at DMC have managed to actually CLOSE (and I mean fully complete purchase / sale transactions for practices that were temporarily shuttered) a couple of transactions that involved very unique circumstances where the sellers and buyers had a close pre-existing and long-term relationship, the landlord gave major concessions, and the seller was refunding the buyer from the purchase price carrying costs until the practice re-opened fully. Even now we are able to fully close transactions but it’s largely based on production and EBITDA levels (discussed in more detail below) coming back to Pre Covid-19 levels.
NOW that Practices Have Re-Opened, prices and terms have gotten much better for Sellers than during Covid-19 because of increased competition for their practices and banks willing to lend again. Whereas purchase prices were based on multiples of EBITDA around 7-7.5 BEFORE COVID-19 hit, they were in the 5s DURING THE COVID SHUTDOWN, and are now back up to 6x EBITDA. The purchase price depends on a multitude of factors, but EBITDA or “CASH FLOW” is a big one.
When I say EBITDA, you need to understand what that means: Earnings Before Interest, Taxes, Depreciation and Amortization. This is typically calculated as follows:
EBITDA = Practice Collections – Lab – Business Related Expenses (including paying all associates)
That’s it. This is also called Adjusted Net Income or Cash Flow. Basically, it’s the amount of cash that would be left over to an absent owner after paying all business related expenses (e.g. rent, supplies, lab, bank, repairs and maintenance, staff wages, sundries, marketing, office, etc.). You DO NOT INCLUDE personal expenses (e.g. auto, travel, meals and entertainment). You DO NOT INCLUDE how the practice was financed (e.g. debt, interest, loan payments, etc.). And you DO take off as an expense all associates’ pay and assumed pay as well (including the selling dentist, assuming they’re sticking around). So for example, here’s how a practice that grosses $1-million with EBITDA of $250k could sell for anywhere from $1.25-$1.75-million:
Gross Collections = $1,000,000
Lab = -$50,000
Net Collections = $950,000
Rent = $70,000
Staff Wages / Benefits = $250,000
Supplies = $60,000
Repairs / Maintenance = $20,000
Office / Admin = $40,000
Commercial Insurance = $5,000
Bank / Credit Card Fees = $10,000
Utilities (Fax, Phone, Internet, etc.) = $20,000
Professional Fees = $10,000
Marketing = $15,000
Associates (including Seller staying to work): $200,000
Total Business Related Expenses: $700,000
EBITDA = Net Collections – Business Related Expenses
EBITDA = $950,000 – $700,000 = $250,000
So Purchase Price at 6 x Multiple = $250k x 6 = $1.5-million
So this gives you a rough idea of the RANGE of what a practice could sell for. What else goes into the purchase price? Other important criteria include:
- # of Unique Active Patients (who come in regularly in a given year for any kind of treatment and who have a tendency to keep coming)
- Hygiene Program (should be around 30-40% of overall production)
- Financial trends over the past 3 years (based on financial statements and production reports by provider / procedure)
- Equipment (is the practice digital and does it have a Pan or CBCT?)
- Location (including signage and parking) and square footage
- Lease terms (long terms, low rent, lots of renewals)
- Team contracts to mitigate liability for the incoming buyer
- Opportunities for Expansion (more treatments / services, days / nights, keeping referrals in house, equipping additional ops, marketing, etc.)
- New residential developments nearby
So with all that said, if you’re thinking about SELLING, here’s the gameplan for the next 1-3 Months:
Get Your Practice (patients, team, etc.) back! That’s what you should focus on. Buyers want to see production levels head back up to pre-Covid 19 levels, so if you can show an upward trend towards 90% or 100% in the first 3 months, game on! At the same time, if you’re planning to sell, know that you need to prepare for a sale – sometimes 2 years in advance (because of trying to put team members on contract or organizing your corporation to take advantage of the lifetime capital gains exemption).
Let’s get into the nitty gritty, shall we?
Here’s what the typical Entire Sale Process Looks like:
Month 1 – Preparation: Talk to David Mayzel (416.528.5280; email@example.com) or Michael Carabash (647.680.9530) about selling your practice. We’ll tell you that you need to focus on getting your practice back up and running. We will also tell you that we want to review the following (so you can organize these things and email them to us or drop them off at our office and we will scan them):
- Financial Statements for the practice for the last 3 years.
- Monthly Production by Provider Report for the last 3 years.
- Monthly Production by Procedure Report for the last 3 years.
- Team contracts (staff, associate) if any.
- Hygiene production by percentage.
- Active Patient count (based on software or a manual audit).
- Lease documents (original, plus any assignment, amendment, extension, renewals, etc.).
- HARP reports for the last 3 years.
- X-Ray Floor Plans, as approved by the Ministry of Health.
- List of service providers to your office, including any invoices and contracts you have with them (e.g. internet, telephone, marketing, software, maintenance, utilities, etc.).
We will review all of the above to make sure that you’re ready to sell. You may need us to introduce team contracts, clean up your corporation or deal with your landlord to remove nasty clauses in your lease (e.g. demolition clause, relocation clause, etc.).
Month 2 – Appraisal: Start the process of getting a comprehensive appraisal from Matt Bladowski at Dental Strategy (firstname.lastname@example.org | 1.519.614.7911). Don’t bother using anyone else to appraise your practice? Why? Because DMC WILL NOT SELL a practice using a Broke-Er appraisal; we don’t have any faith in those appraisal and we’ve had experiences with them in the past – so much so that our selling dentists have had to accept price reductions and have lost a lot of sleep over it. No more thank you!
Importantly, don’t finish the Appraisal with Dental Strategy them until you have at least 2-3 consecutive months of increasing production. At least this way, there’s a case to be made that the practice is on a trajectory to normalcy.
Should you use a real estate salesperson to get an appraisal? Nope. SKIP GOING BROKE-ER. Their 10% commissions doesn’t justify the services that they bring to the table. They can’t do MOST of what we do (e.g. negotiating with your landlord, putting staff on contract, purifying your corporation prior to sale, preparing legal paperwork, etc.). They can only prepare a template appraisal and then run an open house. For 10% commissions? Not worth it. Guess what? We get Matt Bladowski’s team at Dental Strategy to prepare a comprehensive appraisal and we run the open house through our popular dental practice listing website, www.DentalPlace.ca (which we’ve used to save our dentist clients ~$7-million in commissions to date while achieving high prices / best terms for them). And we do eBlasts and will run an open house too! I know, we’re awesome, right?
Month 3 – Find the Buyer: We will at this point hopefully have cleaned up your lease, corporation and team contracts so you’re now ready to sell. And with a comprehensive appraisal in hand, we’re ready to market your practice and help you find an ideal buyer. We do so as discreetly as possible while still reaching out to thousands of dentists across Ontario (and even B.C.) to help you find the ideal buyer. Sometimes the buyer is one or our existing clients who we know is serious and looking to buy and whose personality type / dental philosophy / dental skill set compliment the seller’s. If it’s one of our existing clients who ends up buying the practice, just know that we only represent the seller on the transaction as it would be a conflict of interest to represent both sides.
If you receive multiple offers after we conduct the open house, then we’ll help set up interviews for you (so you’re effectively interviewing your future boss / the buyer of your dental practice). Once you’ve selected your buyer and we’ve agreed upon the basic terms of the purchase / sale transaction, we move onto the next phase.
Months 4-6 – Legal Paperwork, Due Diligence, Close the Deal: We guide you through the due diligence process (recall that we collect all pertinent information at the beginning so there shouldn’t be any surprises / price discounts here). We prepare / negotiate the legal paperwork while educating and protecting you.
When it comes to the lease, we do a review first to find out where you stand with respect to assigning the lease. Sometimes there are tricky clauses in your lease which say that the landlord CAN TERMINATE the lease if you ever ask for their consent to transfer the lease.
With respect to your debts, we run searches on you to find out who you owe money to (if anyone). We’ll need to pay out your practice debts as part of doing the transaction, so we get your creditors to provide us with all the important information so that we can pay them in full as soon as we close.
With respect to your team, they typically will be on contract before a sale and those contracts will carry over to the buyer of your dental practice. Typically team members are NOT informed of a sale prior to closing – well, for the simple reason that until the transaction “CLOSES”, you are still the owner and any number of issues could arise to make the deal either get delayed or terminated indefinitely.
Then when it’s all said and done, you get paid and you’re most likely an associate at the practice. Hopefully you have some good things to say about the process, you’re happy with the buyer, price, terms and you can move forward with the next phase of your life.
Remember: You have one chance to get it done right; so do it properly using professionals who know what they can and cannot control. Protect your pocket-book more than ever. Demand value, service, and honesty more than ever. Cut out the middle-men. Get educated. Get protected. Make and Save $$$. Good Luck!