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Ontario Dentist - September 2005
by Timothy A. Brown, A.L.A., Dr. Jeff Williams BSc, DDS, MBA
In our experience with almost 900 practice sales since 1974, we have witnessed some dramatic errors that seriously affect both the saleability and the sale price of a dental practice. While there are always exceptions, we disagree with the advice being given by some in the dental marketplace, and offer a strong rationale for our position.
In preparation for the sale of a dental practice, dentists should be aware of these three big DON'TS:
1. Don't load up on high technology and major equipment.
Despite what the selling (usually older) dentist thinks the buyer (usually younger) may be looking for in a practice, it is generally not a wise investment to spend heavily in upgrades within a year or so of a practice sale.
Buyers want systems in place and equipment that is fully integrated into the practice. A new piece of technology might be" de rigueur in today's modern dental office, but if it is hastily purchased and ends up in the corner of an operatory and under-utilized because the dentist, the staff and even the patients don't understand (or even accept) the benefits it can provide then what is the point? Further, the equipment may not have been what the buyer would have chosen had he or she been making the purchase decision. (The buyer may prefer a different model or manufacturer or even an altogether different use for the money.)
2. Don't subscribe to the kitchen and bathroom conspiracy theory.
When selling a residential property, vendors are frequently advised to make upgrades to these two areas of their homes - because that is what home buyers deem to be important. However, no Realtor will deny that there is very often much less than a 100 percent 'return' on this investment. Therefore, while a dentist may decide to spend $100,000 on new equipment and/or leasehold improvements, there may only be a corresponding increase in the appraised value of the practice in the order of perhaps $75,000. And once again, the improvements or additions may not be what the buyer would have chosen.
3. Don't put your practice into debt.
While there are proponents of 'equity take out' schemes (essentially entering into a reverse mortgage situation), there are risks to this strategy that also act as detractors to potential buyers. Essentially, in order to free up some cash from the practice, lenders (leasing companies and/or banks) will offer to lend you money against the equity built up in the practice. This is accomplished by promising to repay the borrowed money by means of an equipment lease. In support of these strategies, the advocates of such ideas will tell you that the resulting leases are transferable. However, not every buyer wants to be bound to the terms of an agreement made by someone else. Further, there can be unanticipated transfer fees and early pay-out penalties should the buyer not wish to take over the lease. Besides, if money is needed, a line of credit is often an easier and cheaper way to access funds.
So, does a practice need to be prepared for sale? Yes, absolutely. But we would promote the adoption of a lowcost high-effort approach. (See Timothy Brown's article, Preparing Your Practice for Sale, in the ]an/Feb 2005 Ontario Dentist).
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