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Roundtable: Getting Your Practice Transition-Ready — From a Lender’s Point of View

As one of the most tenured teams in practice transitions, we have been fortunate to build strong relationships with national lending institutions that specifically focus on dental practice transitions. In an effort to share their collective experience, we are starting a series of roundtables whereby you will hear directly from each of them on the same topic. If you would like to speak directly to any of our resources, we have included their names and contact numbers at the end of the article. Further, if you have a question that may be appropriate for a future roundtable (whether for bankers or other professionals such as attorneys or accountants), please let us know at newsletter@ADSflorida.com.

Question: What advice would you give to a doctor who is considering a sale within two to five years?

 

Bank Of America Practice Solutions
Sellers need to understand how banks look at deals and what information is used to determine if a deal is acceptable to the lender. Banks rely on historical financial data to determine if the practice (as it looks on paper today) makes enough money to pay back the loan, the buyer’s personal expenses, taxes, and a calculated living expense, and still have some money left over for the buyer. The more profit your practice shows on paper, the more you can ask for your practice, the easier it will be to find a buyer who wants your practice, the less hassle you will get from the buyer’s advisors, and the easier it will be for you to get a lender to approve the deal. Buyers don’t want to overpay for a practice, and a buyer shouldn’t have to hire a forensic accountant to find the true net income for your office.

As the economy improves, the sellers who were forced to delay their practice sale will soon feel comfortable enough to make the decision to sell, which means practice sale inventory will soon increase. Buyers will have more practices to choose from, and, if your financials are not “clean,” a buyer may move on to a deal that on paper makes more money, which will force you to reduce your sales price. If you are thinking about selling your practice in the next few years, you should work on cleaning up your tax returns and show the true cost of operating your business and the true profit of your business. Please consult a qualified tax advisor regarding any tax or accounting questions.

 

Capital Source
The market value of any business and a buyer’s ability to obtain financing to purchase said business will always be in some way tied to profitability. Often we see practices with either flat or declining revenues, which reduces profitability. This of course also affects the practice’s fair market value, making it either flat or causing a decline–both resulting in a loss to the seller.

A practice with flat or especially declining revenues can also create uncertainty for an underwriter evaluating the projected future profitability of the business. This may lead to difficulty for a borrower in achieving financing to purchase the practice at full fair market value. Therefore, a practice owner who is concerned with receiving 100% of their practice’s full market value should sell prior to allowing revenues to flat line or decline. This happens most often when a practitioner reduces the number of days they work from five to four or even four to three days per week.

Another consideration when evaluating profitability/market value is maintaining a clear line of sight to profits. If, for example, a practice owner has multiple practices on one tax return or lumps several expenses into one category, it can become difficult to see the true profitability of the practice.  Therefore, keep this clear line of sight to profits in mind as you approach the sale of your practice.

 

Wells Fargo Practice Finance*
Developing a game plan and exit strategy years prior to a transition is instrumental in what a doctor realizes from the sale of the practice. A common mistake sellers make is slowing down and cutting back on days versus retiring. Remember, the higher the revenue, the higher the purchase price. Plan and work with your ADS broker now to develop the best exit strategy for your practice. Investing in technology now provides practice efficiencies that increase revenues as well as makes the practice more attractive to purchasers who are already working with the technology in school or other practices.

Another area of caution is being overly aggressive on practice write-offs to minimize tax liabilities. Remember these expenses will be reviewed and often looked at as practice overhead when selling the practice.

*ALL PRACTICE FINANCING IS SUBJECT TO CREDIT APPROVAL.

 

Contact the Lenders

Bank of America Practice Solutions
Matt Adrian at 855.266.7221

Capital Source
Kurt George at 855.252.3735

Wells Fargo Practice Finance
Wendy Catone at  866.817.9253

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