66: When Is the Best Time to Sell My Dental Practice?—with Matt Odgers

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Welcome everybody to another episode of our podcast. I have a recurring guest on the show again, Matt Odgers. Welcome back to the show, Matt.

As always, it's a pleasure. Thank you, Wes.

So listeners, you got the dental CPA and financial planner, that is me. And then you have Matt as the dental attorney. Matt and I, how long we been in the game here?

What was it, 2014 that we started working together?

I think so it's right now it's 2024. So we passed our 10 year mark.

Yeah, yeah. A lot of dental transactions. We have a lot of dentists and.

Matt's been a good friend over the years and we work exclusively with dental. So this podcast is very relevant specifically for the dental community. And today we've got another I'll say continuing subject of dental practice sale podcast episode. And we just did one on one of the common timelines for selling your practice. In other words, how long does it take to sell a practice? This one is going to be on when is the best time to sell your dental practice?

Yeah, so this one's really geared towards sellers or practice owners and anybody who owns a practice is probably a good one to listen to because you don't want to wait until you're ready to be out of the practice next month to decide you want to sell it. You really want to start thinking about things you can do and when that triggering event is that you're actually going to be listing your practice and we're going to be diving into some of the points that trigger that conversation.

And that thought you want to be starting the process of selling your practice when you are on the upper, not when something catastrophic has occurred or when you're starting to get tired and collections are starting to fall.

Yeah, and that's something that psychologically is incredibly difficult because you don't want to wait until you're burned out to exit. You're going to go with selling it versus getting the best deal you possibly can. So there's this fine line of, like you said, doing it when you're on the up and when you've had your best production year versus psychologically being ready to retire or work back and be an associate or moving out of the non compete radius.

I'll tell you what though, the biggest driver for selling a dental practice, I would say is suddenly you are tired or there is a crisis. And unfortunately crises occur and they often drive us to behaviors where we were not motivated properly beforehand. And so like you said, this is kind of difficult because you got to start for it when you don't want to. It's a little bit like, you know, estate planning.

Yeah, absolutely. Well, and similar to estate planning, there's no problem in prepping your practice and being ready to pull the trigger on a sale without actually listing it. And so I wouldn't have the mindset that you have just because you're prepping your practice for sale means that you're selling it. But I would say anybody who's 10 years from an ideal date of retirement should start thinking about this and start treating the practice like what would happen if something happened to me and I had to sell tomorrow. Is your practice, is it packaged up and ready to go?

One of the things that I think about for practice CFO is I constantly think about what would practice CFO say sell for now, I have zero intention of selling, probably ever. Maybe that would be an internal transition at some point down the road. But by knowing what practice CFO could sell for, it is a not the only. But it is an indicator on how successfully I'm running the business. Because if it's run with a strong cash flow and it's run operationally effective, a buyer comes in, they're going to notice those things and they're going to be willing to pay more for that practice.

Yeah. So while you're a business owner, I mean, metrics are everything. And one of the side benefits of knowing what your practice is worth is the idea of tracking metrics and kind of getting an idea for which direction the business is going. And even if you have no intention of selling, it's a good exercise to, at all times, or at the very least once a year, sit down and figure out what's the value of my business.

Yep. And in practice orbit, we've mentioned this on prior episodes, you can go in for free. You create your free account with your tax return. Within a couple of minutes, you could have a good value of what your dental practice is worth. Now, here at Practice cfo, when we meet with our clients to do our CFO meetings with them, we are regularly telling them about what the practice could sell for because we are also their financial planner. So I'm a certified financial planner.

And.

And so when we talk about financial independence or financial freedom, their practice is one of the key assets that they use to fund what is their future when they are no longer working in that dental practice. So we need to know what is the value of it for personal financial planning reasons?

Yeah, absolutely. Now, earlier you mentioned not waiting for a crisis to hit to start thinking about selling your Practice. What have you seen as some of these crises that have come up for practice owners that require an immediate sale versus other crises that just expedite the timeline that a practice owner would need to sell their practice?

So I've seen disability.

Yeah.

Obviously death. I have come across that a couple times and that's a complication for the surviving spouse generally to address that need. Other times there's almost just this mental threshold that has crossed where suddenly the juice is gone.

Yeah.

And that in and of itself is a little bit of a crisis because as soon as you let the foot off the pedal, that practice starts to drop in value.

Yeah, absolutely. I know in my law practice, two that have come up that are a little bit non traditional is dentists who have children, who are also dentists and coordinating with the timing of their children graduating dental school and then working as an associate a little bit and them wanting to pass along the practice that's come up a handful of times. The other one is a landlord in a lease that is not agreeable to assist with the transition. I've got a practice right now where the landlord's requiring the current term is coming up and the landlord's requiring that the seller sign a 10 year lease and is just not wanting to budge on giving him the right to assign the lease. And so the seller or my client is put in this horrible position where he doesn't want to sign another 10 year lease. He wants to sell the practice in the next two years, but he's faced with should I move, locate, relocate and try and establish. But then that's going to put off the sale for three or five years until he levels out from the move or whether he just signs that 10 year lease and kind of rolls the dice with the landlord being agreeable with the buyer that he brings in. So landlords are another potential crisis that can expedite the sales timeline.

Yeah. So there's various motivations that can draw the need to sell. In one case recently we had a dentist who felt moved upon to move out of state, out of California. And so he's moving to a different state. And young dentist. This came really out of nowhere. And it's not for me to ever question the motive, but suddenly we were not expecting to see a practice sale and now we're staging it for a practice sale. And so when, let's go back to the subject. And when is the best time to sell your practice? Ideally you're ahead of the moment when you realize the sale is needed.

Yeah.

Because if you can, if you can start the process before that moment. The process will actually go a lot smoother and faster. So here are some variables to consider, some items to consider. Matt, when is the best time to sell your practice? Well, number one, as a financial planner, I will say that when you are financially independent, financially freedom free, however you want to call that, and a lot of dentists will simply define that as, Wes, what's the pile of cash I need in order to stop working? What's the magic number? And so meet with a financial planner and identify what is your magic number. What do you need to have in your investment accounts and your assets and maybe real estate and so forth, such that if you no longer worked for income, you have income from other sources, which include interest, dividends, rental income, Social Security income, and all of that. That would pay for the budget you have in retirement, which means you have to calculate what is your spending projection in retirement so that you know if you have enough assets after the sale to take care of you. So I would say that's number one, when you are financially ready to sell.

And that's under the assumption that you're psychologically ready to stop working as a dentist.

So that's, to me, that's number two, because I definitely have clients who continue to work in dental, even though they are clearly, and I've made this very clear in the numbers and projections, our financial planning software, that they are ready to sell. Under no circumstance, pretty much unless World War 3 breaks out, are they going to run out of money if they sold their practice today. So number two is, what are you going to do with your time after you sell your dental practice? Because a lot of people really struggle to pivot mentally. What is their role in this world and what wakes them up in the morning?

Yeah, absolutely.

So psychological, psychologically being ready.

Yeah. And that's not just dentists. Every single profession, I mean, a lot of people tie their ego in with their profession. So you want to start giving that a little bit of thought and making sure that you're ready for that transition into something else. If you are one of the people whose ego's tied into what you do.

I would very much call this life planning. It goes beyond retirement planning, which is more about the numbers and more about who you are, what you want to be, what you want to invest yourself in for the remainder of your life. And it's actually been a great, really cool experience for me to see how doctors have transitioned themselves from being a dentist and known as a dentist, viewed as a dentist and called a Dentist to something other than being a dentist.

Yeah. And, you know, we deal in concrete things, me contracts, you, and financials. And those are very easy to map out. But just like you map those out to protect your future, you should really map out a plan for what you're going to do with your time, because that's directly tied to happiness when you're no longer working.

Yeah. And the interesting thing is this is getting a little bit into the subject of the psychology of money, which is an area that I'm personally fascinated in, that money allows you to have access to certain things in life. But a lot of times we're earning money for the sake of stuff. And all this stuff is just a vacuum. It's just a vacuum of your money. And what's happening is I do. I see this very directly in the lives of people, and it's something that I have to be mindful of myself is buying that stuff is not generating the desired result, at least not like a fulfilling, deeper result. It can be a part of the process of having a fulfilled life. But stats have shown if you have too little money, you're gonna have an unfulfilled life. If you have too much money, you run a very strong risk of also having an unfulfilled life. And a lot of dentists, especially successful dentists, they end up more money than they really need for a fulfilling life. And so now it becomes, how do you make sure that money enhances your life and doesn't detract from your life?

Yeah, I couldn't agree more.

So when it comes to when is the best time to sell your dental practice, I would say make sure that you first have your life planning in place, have your financial planning in place. And if both of those are in place and you're ready to hang it up, or at least a pivot out of ownership.

Yeah.

Then now's a good time to start planning. Here's a couple other very practical times to indicate when you're selling. Number one, when your collections are on the rise, even if it's modestly over the past few years, when your collections are on the rise, it gives this very strong, stable appearance to a buyer and to a bank that this practice is going to continue that trend, which makes everybody feel safer. And if everybody feels safer, that means the risk is lower. And if the risk is lower, what happens to the price?

It goes up.

The price goes up.

Yeah.

And so having at least a modest increase in collections is a good thing. If it skyrockets, if it goes up 30% in two consecutive years, that actually could be slightly concerning because is the seller simply, as the phrase goes, taking all the meat off the bone in the practice. I have very much seen this before. Buyer comes in, there's not a whole lot of untreated diagnosis, and they're starting from scratch. So I like to see a nice, modest 5 to 15% increase from year to year. Don't get me wrong, if you want to hit it out of the park and just double your practice, great. And you'll sell it for probably really good money. But one thing you don't want is you don't want a declining collection.

Yeah. And going back to the psychology of money, even if financially you're not looking at the proceeds, you know, the proceeds of the practice sale are not important to your lifestyle. You know, if you're financially sound, having that growth in the years and the couple of years leading right up to the sale is going to decrease the amount of time for you to find a buyer. So if the motivation is not maximizing value for the purchase price, maybe your motivation is being able to find a buyer and exit right away. And the stronger the financials and that growth is going to find a buyer a lot quicker than if you're on the decline. You're going to have to find a dentist to a buyer. That. That is up for the challenge of bringing those numbers around. You know, not everybody's up for that.

So let's park on this subject of collections or revenue.

Yeah.

As we call it in my space, revenue. But Dennis, call it collections. Let's talk about that a little bit more. All right, quiz. Matt, what practice is more difficult to sell? A practice collecting $500,000 a year or practice collecting $1 million a year?

I would say 500,000 is more difficult to sell. Yeah, more difficult.

I find this in pretty much every case. Why do you think that is?

That's a. That's a. That's a great question. I mean, I'm starting to think about the legal aspects of it, But a lot of times when you know, the effort to purchase a practice and the amount of expense that you're putting out and the amount of legwork, the due diligence is almost about the same. For a $200,000 practice versus $1 million practice, you go to a bank and you have to give them all the same financials. The seller has to do it all. The only difference is the amount of risk you're taking on the loan payments. Right, right. And so a big part of that is that these million dollar practice. There's more risk, but there's more reward. And so they get swooped up quite a bit quicker where if you're and I mean 500,000, you're still going to have a decent loan payment. So you're still taking on that risk, but you've got to be fully committed in both scenarios. But the reward that you potentially can get from the million dollar practice is exponentially larger for the same amount of risk that you're taking for a 500,000.

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I think that's well put. I think what's happened over the past, let's say 20 years, reimbursement rates have come down from the insurance companies. And so practices have, there are, there's a set of practices that have essentially maintained their collection level consistent over that time. So let's say 2005 a practice was collecting 500,000 and in 2005 a practice collecting 500,000 was a modestly profitable practice at the time. And now you Fast forward today 500,000. Let's just assume it's a PPO practice. They haven't raised their fees or been able to increase their revenue. The profit margin on that practice is going to be less because their costs have gone up.

Yeah.

Labor costs have gone up, supplies costs have gone up. And so where your take home back then might have been $200,000 and you could live fairly comfortably off $200,000 today. If you're trying to live in certain parts of the world for $200,000 and you have a debt to pay well now because the expenses have gone up, it's probably only cash flowing $100,000 and the buyer has student loans that they have to pay and they have to get a new mortgage on a house. And it's going to be the whole life of a new younger dentist is going to be more expensive than the older dentist. Unless of course the older dentist is spending a lot of money on sort of peripheral non discretionary items. But the older dentist who doesn't have debts, probably has a house that's mostly paid off. Can be okay on that $500,000 practice, but not the younger doctor.

Yeah. Let me ask you this from your clients who you help get into a practice and purchase at practice cfo. You guys stay on as their accountants and you do their financial planning using those two different models. The 500 person who purchases a 500,000 versus a million, what do you see just on average is the time in which they pay off their practice loan. Do you see a $500,000 practice being paid off quicker or as do people pretty much pay it off in the 10 years of the standard loan Is.

So Most loans are 10 years and most doctors are paying it off in the 10 years unless they refinance it which is fairly common to refinance when rates are dropping. I don't see and don't encourage dentists to pay off their practice loans sooner because it's usually at a low rate, say 4 to 5% tax deductible, which means after the tax deduction it's probably closer to a 2.5% to 3, a half percent. That's getting pretty darn close to free money. So I'd rather see them investing in a 401k or preparing to buy a house or doing other things with their money than paying that off. I would say if somebody could pay it off faster, it would be the million dollar practice. Yeah, because the million dollar let's say they both have a 40% profit margin, that's a $200,000 income profit. On the $500,000 practice, 500,000 times 40% is 200,000. And even though they have a lower loan payment, let's say it's 50,000 for the year, they're walking away after debt with 150,000. If you buy $1 million practice and it has a 40% profit margin, that's 400,000. The let's say the loan is twice. So the loan is $100,000 a year on the loan payment, what's the walk away after debt for that year? It's $300,000. You have twice as much that you're walking away with even though your loan payment is higher. For the buyer of the million dollar practice, it just cash flows better. And buyers today need that cash flow in order to be able to pay off student loans, live in this country and to buy a house which is ridiculously expensive. Now that's one of the biggest problems in our economy right now for younger generations is the ability to buy a house is so difficult. So that's why the million plus practices, they sell so much faster than the $500,000 practice.

Yeah. And I have this conversation with buyers who come in and they're looking at practices and they're, you know, they're at it almost like purchasing real estate like their family home that they're going to live in. And they're thinking like, should I be financially fiscal, you know, should I not spend more than my budget? But it's a little bit different because when you're purchasing a practice, you're ultimately purchasing the cash flow which has everything to do with the systems and processes that are built out and the profitability that you're stepping into. And so on the million dollar practice, you're stepping into something that's a well oiled machine that's already making a million. If you go into that $500,000 or a $200,000 practice and you're Thinking that, okay, I'm saving money by spending less on the practice and I'll just build it up. You've got to be confident in yourself or have the skill to create those systems and those processes to increase the profitability, which takes a lot of extra work and it's doable. I've seen a lot of dentists who knock it out of the park and it's impressive. And that perfect storm is really impressive because they've paid less and then they get it up to the million dollars in a year or two. But I've also seen it go the other way.

The buyer should view it in the same way that I would say a bank views it. Banks do not call a dental practice and an asset loan an asset based loan. If you're buying a rental property and you're getting a loan on that as a landlord, the bank looks at that as that's an asset based loan that's collateralized by something they could easily sell and get their money back. For dental practices, it's a cash flow based loan because it is the risk is a function of the cash flow, not the value of the asset per se, the resellable value of the asset. And so bigger risk, bigger reward. As a buyer, I would be focused on the cash flow and because dental practices are fairly low risk, go for the bigger cash flow. Now some doctors will say, why don't have the best of both worlds? I'll buy a practice for 500,000 like you said, and then I will double it in value in two years. And now it's the best of both worlds. Well, maybe if a $500,000 practice has five ops that are just underutilized, that's going to be more valuable than a $500,000 practice that has three ups. A $500,000 practice with three ops is kind of hard to sell unless it's a lifestyle practice where the seller is working two to three days a week. And maybe it's a stay at home parent, maybe it's a dental spa fee for service, 50% profit margin. That's a practice that could sell a lot easier than a PPO practice. Three ops, 500,000. Taking home 150,000.

Yeah, absolutely. So taking a step back into the kind of. The topic today is when's the right time to sell my practice?

Yes.

So I think we started by talking under the assumption of retirement. You know, that you have the, that you're ready to exit or you're going to be ready to exit because you want to stop practicing dentistry. Another Possibility if you're a practice owner is if you have X amount of debt and you just don't have the energy to work to pay that off for the next couple of years and you'd want to sell the practice almost at a break, even when the debt's paid off, and go and work as an associate to build up a cushion. Do you see that very often when.

Somebody is just tired of being a business owner.

Tired of being a business owner, or say that they purchased a practice for 500,000 and they've or they've refinanced and maybe now they have 400,000 and the practice is worth 500,000 and they just don't really see the light.

I have not come across that very often. Yeah, I would say maybe on this subject where they plan to continue working, but not as an owner, DSOs come into play. This is a much more relevant, or I'll almost say pervasive theme today. And this could be answering this subject. When is the best time to sell your practice if you are DSO inclined? And I'm very nuanced about DSOs in that my default answer is buyer beware. But I will say also that there are scenarios where I will restrain my judgment because the uniqueness of that scenario might make sense for the doctor. But DSOs these days require you to stay on for three, preferably five years. And so a good time to sell if you're thinking about a DSO is when interest rates are low and DSOs have easier access to money and they are willing to pay higher multiples for the sale of the dental practice. So most of the clients I know selling the DSOs, they're still in their prime. They weren't necessarily considering a sale. They were pitched with a very high number. Now I always have to go back and frame that number in the context of value because there's a lot of lack of clarity and spinning that finance people do behind these DSO pitches that confuse and mislead a lot of buyers. But that's for a whole nother podcast. I will say a time to sell if you are thinking DSO is when DSOs are offering a lot of and.

I'll add one point to that and keep us on track. But that's also contingent on you being willing to work for the next three to five years for a corporate practice. Don't just jump at the higher multiple because that you only get the value of that if you fulfill your employment term afterwards. So if you're tired of practicing dentistry or you're not sure you can make it then don't go that direction. Go private it with a private sale.

Here's a practical reason or a practical best time to sell is if you know you're getting in that phase of your life where selling is on the horizon. Ideally, it would be in a period when interest rates are low. Because if interest rates are low, then the buyer doesn't have to pay as much loan payment to buy your practice. And if the loan payment is lower, that frees up the bank to lend more money, which drives up the value of your practice. So practices, in other words, practice will sell for more money, typically in a lower interest rate time period. Right now we're running practice loans are in the low fives. Mid fives, they were at about six, six and a half over the past year. Historically, they got all the way down to 3%. That is another factor to consider. If you're like, I'm going to sell in the next two to three years. And it just so happens that the Fed has been lowering their rates and the bank, the bank's lending at around 4%. That's probably a pretty good time to start looking to sell your practice.

Yeah, and let me play the devil's advocate with that a little bit. The inverse of that is not necessarily true when interest rates are higher. That doesn't mean that you can't find a buyer for your practice. When the rates went from the low threes up to high sixes over the last couple of years, my volume of transactions didn't slow down whatsoever. So they're still out there. You've got to be a little bit more patient with the bank, you got to jump through a little bit more hoops, and you got to be a little bit more reasonable with your asking price.

Yeah, I think that's, I think that's true. And I think because the primary driver of when to sell is are you financially ready and are you psychologically ready? Those are the, the two primary drivers. And even when interest rates go up or down, it might shift the price of the practice up or down, say 10. But ultimately it's probably not going to adjust those two primary factors.

Yeah.

So, Matt, this has been a good podcast. Any final comments on the subject of when is the best time for a dentist to sell their practice?

So the last point is you want to time it with your lease. We've talked about this in multiple podcasts, but you want to make sure, number one, that your lease is assignable. And if it's not assignable, then you want to make sure you start the process when you're one to two years out of your lease renewal so that buyer can enter into the new lease.

Matt, that one is a very practical tip there for sure. This has been productive. Matt. We will do more on this subject of dental practice sales. Thanks for joining the podcast today.

Thank you Wesley.

Sam.