Lack of planning may result in you selling your practice for a lower figure than its potential value, possibly to the wrong acquirer, and perhaps even at the wrong time, says Nick Stewart
You may own only one practice during your career, although you may own a number. Irrespective it is only right and proper to maximize the capital value of each particular practice as you should and would with any other major asset, eg your domestic property. This may sound obvious, but in my experience far too many dentists come to a sudden realization that they would now like to sell their practice asset. This may be worth many hundreds of thousands of pounds but often such principals are ill-prepared to maximize its worth.
This lack of planning may result in you selling your practice for a substantially lower figure than its potential value, possibly to the wrong acquirer, and perhaps even at the wrong time. What I would suggest is that you should draw up a plan for disposal five years in advance of the date that you wish to complete the transaction.
When a principal buys their first practice the focus is not generally on when the practice will be sold, more the immediate requirement of taking ownership and dealing with all the issues that a dental principal has to face.
Over your working life you will no doubt have viewed your practice as a capital asset which will be sold one day, the initial focus, is and must be the performance and continuous development of the practice which provides you and your dependants with sufficient income. However, in due course, if you carefully plan your eventual disposal you will have the opportunity; to not only increase the capital value of the practice but also to earn more income in the years prior to that sale.
One of the first steps is to take a long, hard honest look at your practice and draw up a list of areas for improvement. Perhaps the practice should be redecorated and/or refurbished or there are various minor repairs that you have been putting off. If the practice has a garden then has it been regularly maintained or does it deserve a makeover? Often there is some reluctance to spending money on these things as the seller thinks that they will not get their money back, but these areas are likely to be relatively cheap and will not only provide a more pleasant working environment and patient experience but will help ensure a smoother and more profitable sale.
The five year plan should ensure that this final period of practice ownership allows legitimate maximization of income from the practice, which of itself will improve the asset value on sale. One particular approach is to set a benchmark of income generated by each fee-based clinician within the practice as to their current performance, with a view to increasing individual gross fee generation year after year. I can assure you such an approach is not only highly motivating to the individual but also works as far as overall practice performance is concerned.
Your patient base is of course the essential part of the Goodwill of your practice, and in most Business Sale Agreements the Goodwill is the largest part of the overall practice value. You may decide to carry out a detailed demographic analysis of your current patient base and decide whether you need to develop a revised marketing plan to attract new patients to the practice. In terms of marketing generally, it is now accepted that all practices, without exception, must have a practice website which is regularly updated. In the age of the internet no website means zero credibility as far as prospective patients are concerned.
One key essential in your planned sale is a strong dialogue with your accountant. Not only can they help you set the income targets for each provider and monitor them over time; they will also give you an objective view about the process which should be invaluable.
In respect of your prospective acquirer, the three most likely buyers will be:
- Dental corporate group
- Dental associate or associates currently working in your practice
- A dentist or number of dentists not previously working in your practice.
Most dental corporate groups have been more interested in multiple surgery practices and therefore if you are of a smaller size this option may not be open to you. However, there still remains a significant number of individual dentists who would wish to buy a smaller practice. As the banks are more able to support a smaller acquisition, there continues to be a strong market for practices of such size. In the main, corporate bodies are not overenthusiastic to buy freehold property but there are other investment companies who wish to buy such property: if your retirement requirement is to maximize capital value from all your business assets, the sale of your practice to a corporate and the property to a separate organization should be achievable.
One of the great virtues of an associate or associates currently working within your practice to buy is that they know exactly what they are taking on. It is easier for such individuals to understand the nuances of that particular practice compared to an external acquirer who has a much bigger learning curve in that regard.
Irrespective of who is the actual acquirer, there will be a significant amount of information to be provided to satisfy the accountants, lawyers and bankers who may be involved in the transaction. It is fundamental in the current market place that annual financial accounts and monthly management information are right up-to-date. Once again this an area in which the role of your accountant is fundamental to assist the sale process.
Recent developments, eg the Care Quality Commission, compliance with HTM 01-05, Information Governance, etc have a major impact in terms of the overall requirement of the disposal process. These important areas need to be dealt with at an early stage for the satisfaction of both vendor and purchaser.
Once the whole process is complete, your practice has been sold and the proceeds are now residing safely on deposit in your bank account of choice. At his point you must have a strategy as to what to do with the sale proceeds, and perhaps more importantly, what will happen to your life now that you are no longer the practice principal. This can be a tricky area for the previous practice owner if they have not prepared carefully for the new reality. Many ex-principal dentists go on working far longer as part time, mature associates, often in the practice they used to own and sometimes elsewhere. If the mature associate does stay within the practice it can be an ideal opportunity for him or her to assist the new owner to manage and develop the practice. In addition loyal patients who have a strong relationship with the ex-principal are particularly appreciative of the dentist staying on board for as long as possible.
Tax planning is essential in any practice sale and the opportunity to maximize Goodwill value must be pursued. Under current legislation, Capital Gains Tax is generally levied at a rate of 10% on the growth in Goodwill. Once this reduced CGT has been paid there is normally an excellent opportunity to reorganize your finances generally. One important issue is that post sale you may be able to reduce the level of your insurance covers, as your debt and protection requirements have been significantly reduced.
Detailed forward planning, taking advice as early as possible, and a clear route for the final years of ownership prior to sale, all add up to a successful disposal. Simple but effective.
See the published article in November Private Dentistry (page 46).
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