Wednesday, March 1, 2017

The Profitability Factor in Selling a Practice

At the ripe old age of 52, I am starting to consider selling my practice and pursuing other opportunities that have been presented to me. As may be the case with most of you, I am a planner. No final decisions have been made, and we’ll see what the future brings. However, I want to share some things that I have learned because, eventually, each one of us will be selling our practices.

Let me begin by explaining that last year, my office had the best production numbers ever. We also had the best collections ever. By far, our numbers exceeded anything we had done before.

When I contacted a well-respected practice broker in my area, I was expecting to hear how wonderful my practice was, how lucky any potential buyer would be, etc. Do you know what she told me instead? “We will have a difficult time selling your practice.”


This is the reason: profitability. While your practice may be generating enough income to meet your needs, it needs to generate enough income for the new dentist to collect a salary and pay off the new practice note. Additionally, these days, it must also cover student-debt payments. In other words, your practice needs to be very profitable. Unless you are willing to sell your practice at a steep discount, you need to be extremely profitable. As an aside: This profitability needs to be apparent on at least three years of tax returns. It does not matter what your practice-management software says; the only thing that is considered are your tax returns.

Without this high profitability, a buyer will not be able to convince a bank to lend him or her the money to purchase your practice. Older practitioners may have thought that today’s high dental school debt did not affect them. It does, unless you are willing to significantly reduce the sale price of your practice so the buyer qualifies for a loan. By significantly, I mean at least $100,000 off your asking price but probably much, much more.

As I discussed my surprise (no, better said: shock) with my broker, I came to realize something important. You need to work at getting your practice so successful that you don’t want to sell it because it is generating so much income for you. When you get to that point, you know that is the time to sell. Yes, ironically, the day you don’t want to sell your practice is the best time to sell it.

During these conversations, I remembered when I was trying to buy my office all those years ago. I, as the buyer, had a difficult time qualifying for a practice loan. In fact, the practice I was finally able to purchase was the third office on which I had placed an offer. The first two deals ended up falling through. For a long time, I believed the problem was with my qualifications. After a few years in practice, I came to realize that the practices I was looking at were not profitable enough. That is the reason why banks refused to finance those purchases. The banks were protecting their investment. They wanted to make sure that I, as the new practice owner, could draw a salary and pay back the loan. Several years later, the tables are turned. Now, it’s your turn to make sure whomever takes over your practice can draw a salary, make the office note and pay off those expensive school loans.

So, for now, I’m off to the daily grind. I’m going make my practice so profitable that I don’t want to sell it — so that I’ll know the time has come to sell it.

Andy Alas, DDS


Anonymous said...


Great, great post.

I have a single dentist practice that produces $1.2 million practice and I bring home 410,000/year.
Now I have almost brought it up too much.

What did you find out how much a practice is worth?
70% of your production?

So if that is the case than my practice would be worth $840,000.
I think I might have brought this up too much.

Rod Johnston said...

That's correct, profitability is most important in a valuation and in getting a loan. As a broker, I often hear the rule of thumb valuation and I even see some brokers use XX% of last year's collections. But if you're not bringing any money home, the rule of thumb method is bunk.

Also, banks typically look at a debt-coverage ratio. Banks like to see debt covered by 1.2x. (this can vary from bank to bank). That means if your debt payments are $100, they like to see your cash flow at $120 in simplistic terms. Your debt is covered by 120% of cash flow.

-Rod Johnston


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