Can I sell my dental practice to a corporate?
If I sell my dental practice to a corporate what do I need to know?
The growth of dental corporates in recent years has meant a dramatic increase in the number of direct approaches from them to buy practices. How would you react if you received just such an approach?
There are attractions to selling to a group however they are the same as any other buyer and the most obvious being the capital sum, particularly as corporates can make competitive offers to acquire the right practices. There are others; the management burden shifts to someone else, your overall working hours should reduce, and you can get back to doing the clinical work which is probably the reason you went into dentistry in the first place.
The term ‘corporates’ is a catch-all for groups of practices covering those that have a few practices, owned and managed by a small group of dentists all directly involved in the business and very much hands-on, right through to larger organisations that have secured external investment. It’s this latter group that are likely to pursue an aggressive growth strategy, and an approach to business designed to drive up value for their shareholders. It is important to understand with which type of entity you are engaged, particularly if you continue to work in the practice post-sale.
We are often asked about how to navigate the complexities of selling to a corporate entity. In our experience, if you can get comfortable with the answers to these six key questions you can be confident you can get a positive outcome when considering “should I sell my dental practice to a corporate?”.
Q1 – How important is the ‘upfront’ capital lump sum?
If it is critical to you to maximise the amount you receive on the day of completion, then selling to a corporate route may not be the best option for you. Individual buyers will pay the full purchase price on the day of completion. If this is a key objective from the sale, then the corporate route isn’t for you since there’s likely to be some form of deferral of the sale price. If you’re not prepared to accept a deferral, then selling to a corporate isn’t for you. If you are, then it’s important to understand how much (i.e. what percentage of the sale price) is deferred and how much will be paid on completion (i.e. ‘up front’). The percentages paid on completion typically vary from 60-70%, so on a sale price of £850,000 you may only realise an initial capital lump sum of 60% (i.e. £510,000.). If a deal structured like this works for you, then read on…
Q2 – What conditions relate to the deferred element of the sale price?
The deferred element of the purchase price is typically paid out over a three to five-year period. Terms can vary from the income at the practice being maintained through this period to an annual increase year on year. Understanding the precise terms of the payment structure is critical, for example is it based on income, profit, or a combination of the two? Timing of the payments is also important; some deals have deferred portions that are paid or lost each year and others roll on through the total period to allow for the performance to fluctuate and the seller still receive the full sale price.
Q3 – For how long will I be required to work on as an associate if I sell my dental practice to a corporate?
This will very much come down to negotiation as part of the overall deal. It will be influenced by how desirable the practice is to the corporate along with how critical you are as an individual to the overall practice income. If you are a practice owner who doesn’t clinically work in the practice or only provides a modest contribution to the gross, then your tie-in period could be minimal. However, if you are the major fee earner then you may be required to commit to an extended period, perhaps up to five years. It is important to understand if there are any penalties for leaving early. For many who still want to enjoy their clinical work, this is not an issue and is a positive part of the deal.
Q4 – What is the structure of the deferred element?
Is it purely the purchase price held back and paid against agreed conditions or is it held as equity in the corporate body by way of shares convertible on certain dates, or perhaps a combination of the two? In any case, it is wise to ensure you fully understand the nature of the entity in which you are investing (i.e. the dental corporate), this should cover areas such as their financial standing, their ability to pay out your deferred portion and your rights as a shareholder vs other shareholders. In short, there is always risk associated with a third-party holding funds due to you at a future date as you have little control over those funds being available when required, so it’s vital to understand what the associated conditions and risk are.
Q5 – Could you work on as an associate at your ‘old’ practice?
This is much more qualitative than quantitative as it’s about mindset and requires some careful thought. For many this has been an easy transition and led to the continuation of a fulfilling clinical career. For others, it can lead to frustrations and tensions as they will no longer be setting the direction of the practice they once owned. Naturally your rate of pay will also be a key feature on which to negotiate. For example, if your associate pay rate is 39% and you grossed say, £275k and ignoring laboratory fees this would yield income to you of £107k. However a pay rate of 55% on the same fees would bring £151k, an increase of £44k. Now if the terms of the deal are a ‘lock-in’ for five years, which wouldn’t be unusual, this would equate to £220k over the period. The lesson here is that even an apparently small increase in the percentage pay rate can have quite a significant impact on the overall sum.
Q6 – What is the culture and philosophy of the dental corporate?
You’ll need to be comfortable with how the organisation works, is led and its philosophy. You will likely be engaged with this entity for a few years and being comfortable there really will matter. Time spent talking to others who are part of this same group is time well spent. There will inevitably be changes, big or small, that take place post-completion with which you may need to reconcile yourself. Changes can range from switching the coffee brand and radio station played in the surgeries to team members.
Answering these questions will help you understand if you are wondering “should I sell my dental practice to a corporate” – is it a viable option?. If you feel it is, the first critical step is to get it independently valued.