Phil Cole
Welcome to the dental education podcast with KLAS Solutions. I'm your host, Phil Cole, and today we're diving into a topic that every dentist needs to think about, whether retirement is right around the corner or if you're a decade away. And today we're going to see how you can increase the sale value of your practice. You know, even though practice values are thought to be on the rise, according to some, not every dentist will fully benefit from that. And without proper planning, you could leave half of the practices true value on the table, and that's a big mistake, and so we want to help you avoid that. And so today, what I wanted to do was put together 10 key strategies that can help ensure that you're going to get a good dollar amount, I hate to say top dollar, because I think that we always need to have a fair price, but to get a good quality dollar amount for the practice that you work so hard to build. So let's jump right in the first and foremost one, the biggest one. It's on number it's, it's, I put it as number one, and it's number one for reason, because as we go through these 10 items, you're going to see where it's always going to be. Relate, relate back to this very first one, and that is, start planning early. That without a doubt, the biggest mistake that we face is that in dental consulting transitions is that doctors wait too long to plan their exit. The reality is that preparing for just a short time period puts us many times into a quandary of how we're going to sell the practice we I would say that the the minimum that you need to give yourself for planning on a transitions is three years. We want at least five years, but three years, I guess minimum, three years, five years, 10 years. But we're going to see throughout this thing where you know you should be doing a valuation on a regular basis. For us at KLAS Solutions, we have a lifetime practice valuation, so you pay once and for the rest of your career, you get it. And some of these reasons that you're going to see in these top 10 reasons is why we developed a lifetime practice valuation, because we want to make sure that you're planning early and that you're setting yourself up for a good retirement. The earlier you start, the more control you have over increasing the value and also making sure that the transition is smooth. You know, when there's there's three things that you got to worry about when it comes to a transition First and most importantly, which is a lot of times, I don't think people realize the emotional piece, right? This is your baby, your your your sweat and tears have gone into this. You have a family that surrounds you with your with your team and your staff. And so to take that and now just throw it to the next guy in a matter of seconds, or in the signing of an agreement is not as easy emotionally as what you think. And second of all, then there's the practice itself, and then there's the financial piece. And that's why some of these 10 items we're going to go through. But once again, starting early. Planning early is so important. And the reason for that is is is, like I said, there are so many times just had a meeting last night with a teams meeting with a doctor out on the East Coast that wants to sell their practice, and they have the husband and the wife and the husband has a different business, but they're tied under one LLC and using the same books. That is something that needs to get cleaned up, and we can't clean that up in a matter of just a couple days or a month or so. That's going to take a while for a CPA to be able to separate all the different expenses and different things that go on inside those two businesses, to make sure that we have a clear number for the value of the dental practice. So that's just one little idea, and we'll give you some other examples throughout this. But number two, increase marketing efforts to grow new patients. This is another one that I'm just going to tell you, is is always neglected. The practice has to have a steady flow of new patients. I get doctors a lot of times where they're like, Oh, I'm very I'm very happy with the fact that I have, you know, 10 new patients a month. The kind of the norm, I guess the standard is 26 new patients. We believe at KLAS Solutions, it should be 30 new patients a month per doctor. So when looking at that, I think it's important for you to know that, if you're at 10, what that does to the buyer is know that they have to work at bringing in new patients. It's another thing that they have to put possibly working capital to we still have doctors, believe it or not, that that don't have websites. So investing in that now so that they have a base to go off of. And the other thing is investing in online marketing, social media, having referral programs, all these things can help boost that patient acquisition. But what it does do is it makes the practice more attractive for the investment. And I think that that's the the thing is, is, right now there's, there's a ton of buyers out there, and so we have buyers. But the thing is, is the buyers have become more savvy to what they're buying, and so there's a lot of them out there that also have a fear. I don't know if I'd say complex, but you know, are fearful of man, I'm already got to go in and run a new practice, and I'm not quite sure what to do, but now I got to do marketing, and I got to do this, and I got to do that, and as we go through this list of 10, if they got to do five of them that are that's going to rely on them to make this practice go successfully, you can see where the fear or where the anxiety can kind of pick up. So increase those marketing efforts. Make sure that you're not falling into the trap of just bringing in a few patients. We have doctors that when we talk to them, we don't have any marketing. We don't do any marketing. We're not worried about it. We bring in 15 new patients a month. It's not what that's not what the buyer wants to hear so raise number three, raise fees annually. Once again. Cannot say this enough when we do our valuations right now, I would say that, and maybe I should start keeping real track of this through all our transition consultants. But I can safely say, safely say, I know for a fact that 50% of our valuations have doctors fees coming in at a 60 percentile or lower. I would say that 50% are probably 50% the 50th percentile and lower. And then maybe another 20% are in the 6050, to 60 percentile. And then, you know, we have our last 20, 25% that are in a good range. It is something that is that you want to control. It is something that you want to continue to incrementally raise your fees each year. It's not across the board incrementally, though, but what that does is it allows for the buyer to see that they're not walking into a situation where they are going to have to, you know, like to get their fees up. May shock the patients, and then they start to worry about, oh, you know, the new guy came in, or the new lady came in, and now look at they jump their prices up. They must be money hungry, or whatever the case may be. So be very aware of that and make sure that you don't one of the valuations that we just did a week ago, and one of my consultants called me and said, Do you think this is right? And, you know, show me the reports everything. Let's, let's review this. And, yeah, I mean, by time we ran it, it was in the 39th percentile. That's, that's Medicaid, and yet this was a
very limited insurance based practice. So we have to, we have to look at those fees at all times. Number four, review and control your overhead that this is probably could be number two, if we were going to put them in importance. But you know, this goes back to why? Starting early, right? I would say right now, with the valuations that we do across the country, it doesn't matter where. So I get sometimes people say, well, East Coast, that's east coast. Oh, that's west coast and and so forth. It doesn't matter. Are across the country where we're doing them. The average overhead right now we're seeing at around 75% a good overhead 55 to 60 and, and, and. So one of the reasons why these overheads are so high is because no one knows their break even point. No one's paying attention to that. No one's trying to control their overhead. But instead, what we get all the time is is, well, wages are out of control, and these guys just are always asking for too much money, and I can't keep my business open, though, if I don't pay them more money, it's false, especially when you do a break even point because, and this is why it's so vitally important. And anybody that's listening to this podcast, you know, email us. My email is [email protected], email me, and we'll do, I'll get my team to do a free break even point for you. Because when when doctors say that, it is amazing that when we do a break even point, the wages are not out of line. It's, it's all kinds of other things that are out of line because you've lost you're you're tired, maybe you just don't like running the business. You just want to do dentistry as you've gotten older and stuff. And so what ends up happening is, is you start to lose track of those things. And the other thing too is what also creates overhead to or what lowers overhead the most, it's simply production. And we know that, you know there's a the bell curve in dentistry, and we know that when you come out of school until you hit about 45 you're always on that increase. Then when you hit that 45 to 60 range, it just kind of plateaus, right for most. This is in general. So those the doctors that are listening out there and say, I'm increasing every year, and I always have great, you're, you're, you're the exception to the rule. But 5045, say 50 to 60, we plateau and it what's comes next is how fast you drop off, and if you look across and for years, this has been the case that when you hit that age of 65 or so, maybe 6264 to then, it's a drastic drop off. And so when people are when we run the break even points, a lot of times, it's not a case in point of any of the expenses are out of control. It's the lack of production. And you just don't realize, over the last, course of the last five years, that you were at a million and you went to 950, to nine to 850, and so forth. Because I get doctors all the time that sit there and say, I'm million dollar practice. Really, you're a million dollar practice. I just got, you know, five years of your taxes through this valuation, and the last time you did a million dollars was five years ago. Well, I mean, it's close to that. And so the the reason for that, and there's nothing, there's no problem with it. But here's the, here's what it is, that plateau, time frame of 10 years or so. When you plateau, let's say out at a million dollars, that has been, you've been a million dollars for 10 years straight, and that's all you think. I'm a million dollar practice, but you're not a million dollar practice because now you're getting tired. Now you don't want to deal with the business as much. And so in that time frame, you have now gone from a million dollar practice to an $800,000 practice, and you and you just didn't pay attention to it, because, you know, life changes, and there's all kinds of reasons why you don't pay attention to it. I'm an empty nester now all my kids are out of the house. Guess what? My expenses aren't what they were when I had the kids at home. So of course, the dollars in the account, in the bank account, and stuff, you don't pay attention quite as much, because, by human nature, I don't have the expenses, so I'm not worried as much. So I don't look at my budget like I like I used to and stuff. So it happens to everybody, and so I don't want to, I don't want anybody to think that it is that you're unusual for that it's a human nature, I think, to what point. But it also tells you, and shows you how risky it is to not know what your break even point is, because we've also, I know, in the last probably 15 valuations that we've done in the last two months, four of them have been at 93% or higher in overhead. It's an unsellable practice, but Sure And heck is going. Be a hard one to sell. Let's just put it that way without trying to get that so once again, it goes back to this first one, and why I said planning early. Because if you have a 93% overhead, we have some work to do. We got to get that cut down. And so it isn't as simple as just saying I want to sell my practice right now. It might take a year to get that overhead down and get it in order to be able to then sell it. And so now the question is, is, if you wanted to sell this in 12 months, it's not going to happen. So those are the things, once again, why the number one thing I started with is plan early, because that is happening way more than not when we're doing our valuations across the country. So once again, this is not something that is in just one single area. I know the company is based out of Michigan. And so people say, well, that's Michigan. It's not It's across the country. We just finished one in Texas, overhead, 83% we'd have one out in California. Overhead, 94% one in Florida, overhead. 78% it's everywhere, and it's in its fixable but, and it can be done
depending on what is causing it fairly quickly, within a year, but that year, I don't want it to kill you. So enough on that one, I think I've killed the break even point and why it's so important enough for you. So number five, maintain or expand your procedure. Mix, listen. It's just flat out, the more services you offer, the more valuable your practice becomes, because of the ability for you to for the buyer to come in and know that there's work to be done. Now some people say, Oh, I don't do any specialty work, and the buyer is really going to like that. That's true. But once again, it always goes back to and I always say, think on the buyer side of things they would like to maybe do, let's say you do Invisalign, but you don't do a lot, but they really want to do Invisalign. It's the process. Is there, the team is is familiar with it, and they know what they're doing. So to grow it is a lot easier than just come into something and say, I have to now teach everybody how to do Invisalign. We got to get trained. We got to do all this stuff. So once again, it's, it's not that it's, it's necessarily bad, but having more services involved definitely helps with the value of the practice, first and foremost, but also the attraction to the practice number six, evaluate managed care exposure, or, in other words, let's, you know, say what it is, and that's, you know, be careful how many PPOs and how dependent you are on PPOs. Pbos Lower the practice value. And it's just because of a lot of these PPOs and HMOs and all these other ones, pay like crap, I would say that one of the big things too is be careful. Don't go, don't sit there and fall into the trap of, you know, getting into these umbrellas and stuff too. Because, you know, one of our business coaches is an insurance kind of Guru, I say. And she always says that that not one of the number one problems that people don't realize is they don't read the contracts. They just see the price and what they show on this thing to attract you to getting into this umbrella, you know, connection, dental Maverick, whatever you want to and they show that. But in the in the contract itself, it states that if they bring on, you know, things like, if they bring on a new per, a new insurance that they you got to accept the lowest price. And so things shift, and all this other jazz, there's a whole art to it, and it's something that I tried to myself to not even get involved with too much anymore, because it is somebody like our business coach is is really into it and pays attention to it. And it is something that you have to be on top of it at all times. But what I am saying is is review your PPO participation, negotiate if you can better reimbursements, but also review your PPO participation, because Be careful that you're not paying for some of your patients to come in to do dentistry with you, and that we see happen a lot, where doctors don't realize that the fees are so low that they're actually paying to do the work. And so those PPOs you just need to drop, and you just need to go somewhere else, once again. Why I think it's so important to have membership plan so that maybe. If those PPOs are that bad, tell those people. Let's move you off and into another option. Number seven, make sure P and L cash flows look good. Are and they're well done. There's good cash flow and that you don't have a negative income this, I'm telling you, this is, once again, one of those that could have been, you know, number three up there, but I try to space it out a little bit in importance, but a healthy profit and loss statement is essential. I mean, buyers and banks won't find it a practice that looks like it's struggling. We had a practice that was doing a million dollars and then all of a sudden because of a partnership that went awry. You know, it dipped down $200,000 not a bank wanted to touch it. And rightfully so, right? We have doctors that we've come across that basically have showed a negative income for 15 straight years and are proud of it. Those. Those are things that, once again, when we try to do an adjusted income and we try to pull out some of those things, you've allowed yourself to run a negative P and L, so much and and are so proud of it, we can't pull enough to get a good enough cash flow to handle the sell. So got to remember when it comes to the cash flow, it's just as simple as this that the buyer has to show your practice has to show a good enough cash flow to handle the debt services that they have to take on. And here is a key thing, cash flow is is important, but I think here's what's important for every seller to hear out there, because credentialing has become such a pain for these guys, and it's become so the period has been has taken so long their their capital. Working capital. Used to be a working capital the banks would give just to pay for salaries, but now the banks have to extend out the working capital to help also for six months of credentialing. So if you don't have a good enough cash flow, so let's say you practice just real quickly. Your Practice is $750,000 right? That's what it's for sale. And so the buyer isn't going to and I guess before five years ago, let's say the bank would say, Okay, we're gonna give you a loan for $800,000 750 for the practice and 50,000 working capital. But because credentialing is taking so long for these young kids coming out with the insurances, and they're getting the PPO Delta premier PPO and discounted pricing stuff, these insurances put a strangle hold on these guys. And so what's happening is is before their insurances even start to kick in from credentialing, there's a six month span. So the banks know that, and the banks see that these guys are suffering. So what are they doing? They're extending the working capital. So they're giving working capital of $100,000 now, or $75,000 based on that. Well, what that means, then, for you as a seller is, is that cash flow has to be even better. It's you don't have to cash flow something. And I get CPAs even that that don't pay attention to this. They go to their CPA and they say, Yeah, this is what the debt service is going to be. It's not what the debt services are going to be for that 750 it's really 850,000 plus. There's got to be AR if they're going to buy the AR. So now it's 850,000 because there's $100,000 of working capital, and now another maybe 25 to $50,000 for AR. And so you're now at a $900,000
loan. And so the cash flow that you have in your practice has to cover that. And so that's why I think it's very important with the PNLs that when you're getting valuations, those valuations have to cash flow, and why, I see brokers out there throwing out these 85 90% values on practices that that are not sustainable for a buyer, because if they pay 90% and then have to get their working capital because of credentialing and stuff like that. They're overpaying. They're paying over 100% value for a practice. I'm not saying a bank won't possibly do it, but it usually is not going to happen. And so that's why those those profit and loss and. Why we want you to start early? Because if we look at the cash flow, and that cash flows we know is missing by $50,000 we want to talk to you and say, How can we get this up $50,000 so the bank now sees, instead of, say, a $250,000 cash flow, a $300,000 cash flow, and they sit there and go, Yep, no problem. So that's the importance of the profit and loss cash flow being so, so, so important. I guess number eight upgrade office appearance and technology. You know, I do speaking around the country and everything, and I, I've gone back and forth. I'm taking out the the appearance slide, because I'll do the speaking engagement. There's sometimes people like the the doctors, you guys, will roll your eyes at me when I say the appearance because, like, Yeah, whatever. I got a great looking practice and stuff. But yet I gotta, I gotta bring it back into the then I when I take it out, I sit there and I think, man, some of these doctors I talk to afterwards, and they're talking about, Hey, is it important to have digital is it important to have, you know, updated thing? And so it's it just one of those things where I got to remember to always keep it into my presentation, because worn out equipment is, is there's no value in it, it, but it, not only is it no value, it turns buyers away. So here's a prime example. I had a doctor out in New York that said, You got to come and see my office. My equipment is immaculate. And I'm like, All right, I'm so excited to get there. Get out to New York. Look at the practice. He's got many a deck mini trolls with the old black spiral tubing, Chairman chairs, pelman Crane, executive series, cabinetry and stuff. And it was immaculate. There's no doubt about it. It was immaculate, but it looked 50 years old. And so once again, I you know you have to explain that, like you can't fix this stuff. The only people that fix this stuff are the doctors that know that there's no parts for these pieces anymore, and so they buy up old, used stuff and store it down in the basement so they have parts. And it happens a lot, but you have to remember that equipment when a buyer is looking at is like going, I'm gonna have to do a 300,000 if it's a five ops at at $50,000 a piece. You're looking at $250,000 investment they're gonna have to do real soon. So just small improvements, though, make them. We run across doctors. Just in the last three months, we've had two doctors that don't have digital in the practice. You know, those who are listening, there's nobody that's graduating that knows what a processor even is. They don't. They don't know what film is. They don't even know how to work film. And so when you don't know what a peripro three is, or you don't know what an air techniques, you know processor is, then there's in a pan Corp digital, not digital, but pan Corp, pan, and they don't know how to fill the put the film into it. What good is that? So be real careful. And I get this all the time where doctors in there say, Well, I want them to pick out the digital service. No, don't it's you don't let them pick it out. Pick something. I don't care. I don't care if it's, you know, the woodpecker sensor that you know from China, at least put something in there. It's, it's vitally important, because otherwise all you're going to do is your practice. Whatever the value is, you might be happy with the value, but you're still going to have an almost impossible time of selling it because of that number nine, have real estate your lease looked at, and have it transferable. If it's not transferable, talk to your landlord, get it transferable. Make sure that you have clear lease terms and stuff like that. We're not gonna spend a lot of time on it. It's just one of those things, though, that we run across all the time. We got the practice already. Things are going good. We go to talk to the to look at the lease before we list the practice and the lease isn't transferable. Now, we go talk to the landlord, and the landlord is just an absolute pain in the butt and refuses, you know, they got to do this and that and that. So you got to, we got to go through this whole Rick and my role versus, you know, we're selling one right now. We're gonna be closing in April and and the landlord was just like, oh, this is great. Yeah, no problems. They can just take over, or, if you want, we can renegotiate. Blah, blah. That doesn't happen as much as you get the kind of miserable landlord a lot of times. So just be careful that. And then number 10. Uh, identify and track tax avoidance expenses. I mean, it's just making sure that you many dentists, I guess, run personal expenses through their practice. And this is we've kind of talked about with the P and L, but while it's very, very common, and I would say that nothing wrong with it at all, first of all, but it can lower your reported profitability. And so properly tracking the and documenting tax deductible expenses is important, because when it comes time for us to do in the financial or the adjusted income statements when it comes time for the bank to do it, to see clearly what that is. So I'll give you an example. We had a doctor that bought gold, and they put it under the dental supplies, right? And it wasn't recorded properly. So it's just shows this dental supplies is way out of whack, like 25% to him. Who cares? Tax deduction, whatever his CPA told him, and stuff like that, but the tax, but the but the CPA did not clearly state what that was for, and that gold was for his per se retirement purposes, I don't even remember now, but once again, not having that properly reported, really through a monkey wrench into the banks and stuff like that. So it's important just to make sure that you are properly documenting, you know, sub categorizing and different things like that, the clear the P and L and balance, the more, the more tight it is, just the easier it is for everybody just to look at that and say, Yeah, this is, this is a good buy. So with that being said, that's our that's my top 10 things that I think that you should look at when wanting to get a better value out of your practice. So without a doubt, start your practice exit plan today, once again, I'll just tell you we have a lifetime practice valuation. So what we do is, and it's for these purposes, we you pay a one time fee, and we will update it every year for life, so that you can plan and you can get your exit plan ready, and so it's never too early then to start your practice transition. Because for us, we don't care if it's 5, 10, 15, 20 years out, every step you take though will impact your final practice sale. You know, at KLAS Solutions one of our mottos is, is hope is not a strategy. You need to be having a solid strategic plan to ensure you maximize your practice value. Our team is here to help you. We can appraise your practice and provide any information that you want on the lifetime of your lifetime practice evaluation. So if you want to reach out, you can go to class solutions.com or you can email me once again. I will throw that out for the break even point too. If you want a break even point, reach out to me at Phil at class solutions.com, and we'll give you a free break even point so that you can start your planning with that at least. So thanks for tuning in in today's episode of the KLAS Solutions dental education podcast, if you found this helpful, of course, be sure to subscribe, leave a review and share it with any of your colleagues, until next time. This is Phil Cole wishing you success in your dental journey.
