Our thoughts . . . 01-25-08

ARE YOU READY TO SELL?

I don’t mind telling you that I am a long term believer in Michael Gerber’s E-Myth philosophy. There was even a sequel entitled The E-Myth Physician that was so relevant to the dental profession that no one interested in the value of their business should go another month without reading it. I can boil it down to this central tenet: spend a portion of your time working on your practice as opposed to working in your practice. Separate yourself from just being the producer and become the CEO or Board of Directors. Ask yourself what steps need to be taken to maximize the value, productivity and profitability of your practice. At no time are these concepts more important than when you begin to imagine the point in time that you will be ready to retire and sell your practice.

Discounting those cases in which the seller may have little or no choice such as sudden illness, permanent disability, and death, I believe there are three components in evaluating a potential seller’s readiness to sell. Let’s call them the three “F” factors; financial, facility and fun, and examine each in some detail.

Financial Factors:

This area has two main components; the practice financials and the owner’s financials. The owner has to ask if he or she can afford to retire. Are the accumulated assets sufficient to continue an active lifestyle without the ongoing practice revenues? Are the proceeds from the sale a critical component to a retirement portfolio or is it just the icing on the cake? Make note of the fact that putting the tax consequences aside, in most cases a potential seller will generate more income by practicing two more years than they will realize from the sale of the practice. If money is going to be tight maybe now is not the time to place the practice on the market.

In the January 8, 2008 issue of The Wall Street Journal, Arden Dale says that “small businesses often lack key elements that buyers look for – such as proper financial records or detailed documentation about how the business runs. Moreover, lots of owners go into the selling process without researching the market, so they have unrealistic ideas about the price their business will fetch.” As Dale points out, the result may be that the business lingers on the market much longer than expected, and in some cases they may not be sold at all. He goes on to say that “they should get professional help to figure out how much the business is worth and how to handle the sale.” In our experience, overpricing a practice leads to generalized frustration and the perception that the seller may not be flexible in other areas of the transition. Buyers will ask us, “Is he really ready to sell?”

The last part of this factor is the financial health of the practice. What are the annual revenues and are they increasing, flat or decreasing? Is there adequate profit for the buyer to make a living and be able to pay back the bank? Are business records and tax returns in good order with all income and expenses well documented? Will the practice sell for enough to cover any remaining debts or liens? Prospective buyers are more comfortable with practices with good long-term records of production and profitability and their comfort level will generally be reflected in a better return for the seller.

Facility Factor:

In this factor we’ll talk mainly about curb appeal. Is the location still desirable and well kept? Has the building been kept up to code and kept functional without the need for extensive cosmetic updating? Buyers generally want to be able to take over the practice and go to work without having to do renovations. We don’t normally recommend the wholesale replacement of all of the existing equipment unless you made your last major purchase while Eisenhower was still president. However if that is the case, some gradual updates may be in order over the next few years. You may not get your money back dollar for dollar but you will certainly be more apt to attract a buyer. If new patient flow has slowed down, maybe it’s time for some freshening up of the office surfaces. It is amazing what $10,000 in paint, wallpaper, carpeting and upholstery can do for a practice. You might even feel better and more productive while you’re there. Lastly, we have the…

Fun Factor:

This may well be the most important—and yet the most difficult—of the factors to consider. Are you still having fun? How are your back, shoulders and hands? Are you still physically comfortable with the clinical areas of the practice and are you still enjoying the day-to-day interactions with patients, staff and colleagues? Are you prepared psychologically to quit? Do you have other interests you are anxious to pursue after retirement? If you continue to work along side the new buyer, can you tolerate the lack of control known to other “worker bees”? Would two weeks in St. Thomas improve your outlook on your practice or are you really ready to pack it in? These questions and others like them need to be honestly asked and answered.

If after stepping back and assuming the CEO role you discover that it’s time to begin the process toward a sale or transition, assemble a good team of advisors in order to market the practice in its best light. If working a few more years (regardless of your age) turns out to be the best answer—then enjoy it. The world needs practicing dentists who are happy with who they are and what they are doing.

Steve Wolff, DDS
UMKC Class of 1977