67: How Long Will It Take to Sell My Dental Practice? Part 1—with Matt Odgers

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Welcome, everybody, to another episode of our podcast. Today we've got a, I think a valuable podcast for those who are considering selling their practice anytime in the near future. And as my guest here today in my office is Matt Odgers, dental attorney and also colleague in my software company called Practice Orbit. Welcome, Matt, to the show.

Yeah, thanks so much for having me. I always love doing these podcasts.

So today we're going to talk about how to sell your dental practice quickly. And let's just say why we are authorities on the subject. We kick off with that. So I'm a dental cpa. Most of our listeners know that I am the founder of Practice CFO. We work with about 350 dentists and, and a lot of the dentists that are now clients of ours, we helped represent them through the purchase of their practice. We've also done a lot of seller representation as well. And you've been involved on a number of these practice transitions as the attorney. So bio yourself really quickly, Matt.

Yeah, absolutely. So at Audra's Law group, we focus primarily on dental transactions, either representing the buyer or the seller. And we've been strictly dental for the past six years. And, yeah, have been through a lot of these transactions. And on the seller side, timing is really one of the most important events. The longer a transaction drags along, the more likelihood for issues coming up. Now, the buyer might drag their feet a little bit and they might not be as motivated to have a short closing process, but I think today we're going to kind of go through some of the tips and tricks to be able to kind of balance those interests between the buyer and the seller and then all the related parties and how to get the practice closed on time or early.

Potentially, what I've noticed, Matt, you tell me if this has been your experience, but when I'm working with a dentist and they're approaching the time to sell, it can take a long time to psychologically and also from a financial planning standpoint, be ready to sell. But I have noticed that there is this point at which they've decided to sell, and as soon as they've crossed that point, they want the sell to occur yesterday.

Oh, absolutely. And it's very personal, depending on the seller with when that point is crossed. And you know, it can be difficult, but you're right, as soon as that point's crossed, if the deal drags on, it ends up killing the goodwill. So you want to be prepared if you're on the buy side or if you're the seller side, you Want to prepare your expectations, to realize that there's a lot of moving parts and not to get impatient or not to have it harm the goodwill if it ends up taking a little bit longer than you'd like.

If you haven't listened to our recent podcast that I did with Dr. Kevin, Kevin Kenny, it was a story of a dentist who sold their practice and he talks a lot about his own timeline and how he actually had to go through first set of buyers that did not work out. It backed out at he backed out close to the finish line and then how it worked out smoothly the second time. It's a really great podcast of somebody's journey through the practice sale. So here's what we want to talk about today. Number one is what are common timelines? What to expect when you decide to sell your practice. That's number one. Number two, how do you stage your practice for a sale so the timeline is more condensed when the transaction begins? Number three, what are some of the common delays to the practice sale closing? And lastly, you want to talk about how Practice Orbit, the our practice sale technology and brokerage firm can help dentists sell their practice quickly?

Yeah, absolutely. And going back to the point about common delays, I want to focus on some of the things you can do ahead of time to try and avoid those delays to keep the transaction moving along and close on time. So that sounds great.

Great. All right, let's jump into this common timelines for a practice sale. I'll just share my experience. Matt. I have seen some practices close probably the fastest from the time of the nondisclosure agreement being signed. And maybe we should step back and just outline the mile markers on the journey of a practice sale. Number one is you. You list the practice. You either put it out there on your own or you have a practice broker. Or if you use Practice Orbit, there is a self directed option using the software which gives you access to a pool of buyers and a workflow inside the system, a user friendly workflow along with a human being coordinating that transaction. On the self directed option, it's only 2%. You don't have access to somebody like you and me or you know, a full broker. You don't have access to that, but it is a great option. If you feel you can handle that and you have a good accountant and attorney helping you, you may be able to do that and save some costs. The other option is the fully brokered option which depending on the sale price is between 4 and 6%. And then you do get access to a Full broker, very experienced broker, essentially to do almost all of the work for you and hold your hand throughout the process. All right, so what are the mile markers? Number one is you get your practice listed and that means just like a house on Redfin or Zillow, it's out there and it's ready to be sold, number one. Number two is now you have buyers coming in and they sign non disclosure agreements to gain full access to your practice and to not disclose any private information to other people other than their professional team, like their accountant and attorney. Once the NDA is in, then there's usually a lot of back and forth around pricing and questions and that kind of thing. And then if they, that's like the test drive a little bit. And then if they're serious, they. Now you sign a letter of intent. And the letter of intent means you're exclusive, like you're engaged. You put on the rings, it goes off market, the buyer doesn't keep shopping and the seller doesn't keep looking for another buyer.

Yeah, and let me backtrack just a little bit. So once the NDA is signed, I think you mentioned that the potential buyers get access to everything. In my experience, after the NDA is signed, it's more of a 30,000 foot view of the financials. It's more information that's available than what's available to the public. But it's after the letter of antenna signed that you get kind of into the nitty gritty and really get to dive into the details.

Yep. Let me give an analogy here. So my son bought a motorcycle recently. He's 19 and I have been losing sleep over the issue. He's been working at practice CFO as a part of our payroll team and made a little bit of money. And so what does he want to do without telling me? He buys a motorcycle. Yeah, he's 19. He goes, he gets his two day training and he gets his license. He goes and he buys this motorcycle. It's a used motorcycle. And I asked him if he had got it checked. He did not get it checked. It looked like a new motorcycle. Honestly, I looked at it, I said this thing looks sweet. It was a 650 bike and everything looked good. I mean, he did the test drive, it looked great. Two days after he buys it, he's on the freeway and the transmission locks up and he skids, rolls off it. He's okay. Rolls off it, Bike is totaled.

Yeah.

All right, how does this relate here? Thankfully, he's okay. But how does this relate here? When the Non disclosure agreement is signed, you're basically going on a test drive. But you're not lifting up the hood, you're not taking it to a mechanic. You're not looking at all of the potential risks that are unseen. That's what happens after the letter of intent is signed.

Yeah.

When the letter of intent is signed, you're now engaged. You go off market. You should be paying some money to a professional team like an accountant and an attorney and maybe a consultant to do that mechanical check to lift up the hood and start looking at things, if you're a buyer, at bank statements and payroll returns and tax returns and production reports and all of that to validate the information on the financial statements. And then you can move forward with actually purchasing. Because now you feel it's going to drive. Well.

Yeah, I absolutely love that analogy because if you go and test drive the motorcycle, anything can work great on a test drive or a practice visit or just seeing the big picture for a very short period of time. But after the letter of intent is signed, you get the professionals or the mechanic in there to really dive in and look at all the things that may not occur over a day period or over a test drive, but that are potentially problematic in the future that are really going to impact the profitability of the business.

Yep. One thing that I wish occurred more often is I wish that the buyer and the seller, especially the buyer, would hire their accountant, their CPA and their attorney at the point of NDA, rather the point of loi, because I find that the journey from non disclosure agreement to LOI can be as long, if not longer, than the journey from letter of intent to closing.

Yeah, well, and on the legal side, there's nothing worse than when a buyer or a seller waits until the 11th hour to bring you on as the attorney and then it's on you to get all the documents reviewed and back and negotiated. And it really does the client. They've done themselves a disservice because they're up against the deadline of when the closing is supposed to happen, which impacts the ability to negotiate and thoroughly review each and every term. Where if you bring your attorney in early in your CPA to do the due diligence as early as possible. That extra Runway allows for thoroughness. And you're not making decisions based on the target close date. You're making them based on, you know, a complete understanding of what's going on.

Yep. It's almost like the negotiations don't get fully real until the attorneys and the CPAs have had a full evaluation of the numbers and the legal terms in the contract.

Yeah.

And that's why the sooner you can bring them in to start having those conversations, the fewer surprises you're going to have after the LOI or letter of intent is signed and the faster it can go.

Yeah. So to kind of frame, you know, the topic of the podcast today is how long does it take to sell my practice? And right now we're talking common timeline. So the idea of listing your practice and finding a buyer with practice orbit, we try and make that as short of a timeline as possible. But for what we can talk concretely about today, let's start after the letter of intent has been accepted and signed by both parties and kind of measure the timeline from letter of intent to close.

Good point. Let me make one comment about the timeline leading up to the letter of intent and then let's get into the letter of intent to closing, how long it takes you from the moment you have a mental trigger that says I'm ready to sell, and finding your team, getting all your documents ready, posting it out there, you're going fishing to bringing in a buyer at best. That's probably.

A four to six week period.

Yeah.

Because it takes a while to gather all the reports, to prepare the proper profile for your practice, to sort of showcase out to the marketplace. Also to start getting potential buyers, fielding various questions, getting the NDA signed, getting your team in place. All of that I would say is probably four to six weeks at best. Sometimes I've said I could see this taking longer.

Yeah. And on the seller side, if you're motivated to get the practice sold quickly, the more work you can do during that phase, the quicker it's going to go after you get your letter of intent signed.

Yep.

So, and we'll dive a little bit more into that. But I agree, I think four to six weeks is probably realistic to gather the information needing to provide an accurate.

Listing with the sort of asterisk that it could take a lot longer than that, depending on how much effort you put into staging your practice. Which is what we're going to get to in a moment. Then from the loi. So now we're back to the letter of intent.

And so this is after a buyer is interested, a buyer's interested, comfortable with the price, and you've agreed to the price.

That's right. So they test drove the practice. Now they're ready to put on the engagement ring and start pulling out sort of paperwork to move forward toward a sale. Yeah. So from LOI to Closing. What are you seeing in terms of timelines?

So on average, I would say 60 days, 45 to 60 days is kind of the sweet spot. That's where everybody's kind of moving along and getting all the due diligence done and nobody's really stressing when you get into 30 days. There's a little bit of stress that goes into it. People have to respond the same day. There's a lot of moving parts, but it's still doable. I've done probably one transaction that closed in a week and a half, but with that said, there was a lot of work that had gone into it and there wasn't a bank involved. And the seller owned the real estate. So the seller was the landlord for the lease back.

Yeah. You and I were just involved in one that took from the LOI to closing exactly one month. Yeah, but that was the case in that one. The seller owned the building and was selling the building. They had already agreed on upon a price at the point of LOI and selling. The practice already agreed upon a price, and the buyer was able to use his own personal investment account to leverage for the loan and therefore didn't need to go through underwriting.

Yeah. So I would say the sweet spot in the average is 45 to 60 days. It can be done sooner. And when you start extending it longer than 60 days to maybe 90 days, what have you seen that are some of the consequences of having that prolonged transition period? And what are the reasons to avoid that other than the seller just being impatient to get their money and retire and kick their feet up on the beach?

Yeah, I think there's just a lot of impatience. It's already an emotional period for buyer and seller because the seller is letting go of this thing that's been so important to them for so long, and they've mentally made that decision. And now they're already have one foot in that next phase of their life. Let's take the assumption that they're retired, They've already got one foot. And you don't want to see the practice start to decline because as soon as you let off the pedal in a practice, those collections can start to drop. Your staff notice it. It's just a bit of a delicate period of time. And then everybody's sort of frustrated. The banks want to close on it. The buyer's ready go. They've maybe put in notice with their current employer. Maybe they don't have a job now because they're waiting to close on this. So timeline is important here for everybody.

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Touching on the legal aspects of the timeline. The longer that you're in that transition period between letter of intent and closing, the more opportunity there is for changes to happen in the practice. You mentioned a reduction in revenue, but there's also liability concerns. There's the potential that a patient could bring a malpractice claim against the seller or that key employees could leave. So the longer that Transition timeline is open, the more potential there is for issues that arise that could derail the deal. So from a seller's perspective, the shorter that period, the better, because you can't have a material change from the letter of intent date to the date that you actually hand the keys over. Or if something does come up, you need a good explanation for it, otherwise the bank's going to not be able to fund.

And the more time you give the buyer, the more opportunity there is for cold feet. I have seen that happen before. And there are some buyers who are serial exeters. What do I call it? Just serial back out or like get out of the deal?

Call them tire kickers.

Yeah.

Okay.

But you think they're serious.

Yeah.

And they'll even sign a letter of intent. And then they start to get marked, though. Banks are like, okay, this buyer's always backing out after we put in so much work in the underwriting on the loan and all this stuff. So there are those buyers out there, which is why this is a separate podcast. And you and I have talked about this, why I think it's a pretty good idea to do some earnest money from the buyer so they got some skin in the game so they don't back out there. Look at our previous podcast, we talk about escrow. The. The importance of escrow was one of our podcast episodes. Okay, so now if we have. Our total timeline is probably ranging around three to four months from the time you say, I'm ready to list and you start the process of gathering your information, hiring your team to the time of closing. I would say it's probably a four month process. If I had to choose an average. Now what can we do to make that faster? And what are some of the potential causes of delay? Let's start with the first one. How do we make this accelerate? Kick us off.

Yeah. So the acceleration period on this, I'm going to break it down by seller and buyer, what each side can do to speed the process up. On the seller side, the more information that they can provide and gather and have packaged and ready to go to provide to the buyer even before the buyer asks for it. Having everything packaged, all the financials, having all contracts, having the equipment working and in good shape, the more that you could do on the front end. That way, as soon as the letter of intent is signed, you just hand that over. And one of the issues that I see for sellers is that they'll sign the letter of intent and. And they wait for the buyer to make the requests for the information they Wait for the buyer to make financial requests, and then at that point, the seller starts the process of gathering that information. This is all causing delays. And there's usually a timeline for due diligence, so it can add stress to the deal, but there's no reason why they can't. Why a seller can't already prepare all that information the second they start thinking about selling the practice and have it packaged and ready to go so that upon the low being signed, they can just hand it over.

Yeah. I will say to the defense of the seller, I think sellers don't get proper guidance.

Yeah.

On how to prepare their practice and their documents. And so what happens is the buyer's team ends up being the one to essentially create the checklist for the seller. And so it feels very reactive.

Yeah.

And I've never liked that because it slow. It very much slows down the process, especially if you got a period of time for the buyer to complete the due diligence. Let's say it's 45 days and the due diligence is lifting up the hood. Make sure that the P and L data is accurate. If at the point of loi, the buyer is having to ask for the documents for the due diligence, like production reports, for example, and bank statements and payroll reports, then it takes time for the seller to gather that. You're already eating into the due diligence timeline and it's not fair to anybody, really, the buyer. So this is why in Practice Orbit, what we've done. I'm going to just touch on Practice Orbit, Matt here, real quick. Yeah. We've spent a lot of time in developing the software to create the workflow or the checklist. So it's very clear what you have ready when you list your practice. So we built into the technology a requirement that certain documents be uploaded at the point of listing the practice and certain documents be uploaded in order for an LOI to be signed. And gives a very clear delineation of what those documents are, very specifically. And you can pull Those from your QuickBooks software, you can pull them from your bank, you can pull them from your Eaglesoft or Dentrix, but it outlines all of that. So it's ready to go. And then what the software does is it automatically releases those documents at the juncture they are passing through in the sale. For example, the NDA, when that sign in the system electronically, it automatically releases financial statements. When the letter of intent is signed, it automatically and only at that point releases bank statements, production reports, payroll documents, other due diligence related documents, and that way we're not being held up throughout the process.

Yeah, absolutely. And these are documents that are required in every single transaction where the goodwill is being transferred and where the past financials are a part of the purchase. You know, it sounds like with the idea that everything automatically goes to the buyer, everything that is involved in every single transaction. So keep that in mind as well.

Yep. So let's talk about staging it. What do you need? Or how you prepare ahead of time? So everything is already ready to go. Think of the analogy, Matt. You and I were talking about this analogy. So actually, I'll let you about prepping for a dinner with a whole lot of guests.

Yeah, yeah. So just maybe two weekends ago, we had our family reunion, and I got tasked with barbecuing for everybody, and we had about 40 people. And I was up the night before, and obviously I had my mom there helping me out, and she's the queen of prepping. And so the night before, we went out and we went to the grocery store, kind of did all the prep work. So that when the reunion started, it was just a matter of firing up the grill and throwing the tri tip on and pulling stuff out of the fridge and putting it on the table. That prep work that we did the night before made the actual reunion and the task of cooking for everybody. I mean, it felt. It was amazing how simple it was. So putting that analogy to the practice sale and staging the practice, you want to do all the prep work at the time, you list your practice so that when the actual letter of intent is signed and the transaction happens, it's just a matter of handing it over.

The legwork has been done, which includes getting the documents. And that's usually one of the most common reasons why the process takes a long time, is just getting all the documents to the buyer's team. So you know what this reminds me of? The cooking channel and somebody's cooking. You see the kitchen island that they're cooking on, they have everything already measured out. Yeah, it's already measured out. So it's like super fast.

And they make it just look so easy.

They do. It's like, wow, that looks easy and fun and smooth. Well, that is true, because they took a long time already measuring everything out and getting them in their little dishes and ready to go. So the same thing applies here. I think, for you sellers, just really get your checklist. What are the documents that are needed for the whole process? And meet. If you have a broker, meet with your broker, get everything lined up and Here's. I can't emphasizes this enough. You gotta, you gotta be the one owning this. You gotta be proactive about this because so many of the service providers out there are just busy. The I'm busy, Matt's busy, we're all busy. We're gonna try to be very proactive, but at the end of the day, nobody's gonna love it and care for it as much as you. So if. Engage your team regularly. This is one of the most valuable things that I recommend that if a seller or a buyer does this, the process will go a lot more smoothly. Schedule a huddle every week, maybe every two weeks, every week. And it might be a 15 minute huddle, it might end up being an hour. But in every huddle, ask where are we with the lending? Where are we with the lease? Where are we with the legal documents? Where are we with the buyer's concerns? What's holding us up? If you do that every week, it's going to move forward a lot faster because one thing that just holds everybody up is not knowing where the ball is.

Yeah. Oh, absolutely. And I know that in the Practice Orbit system we have a transition facilitator and her job is exactly that. She checks in every Friday, sends out a group email. We've got a messaging platform within the system to keep everybody on track with managing your practice or if you're a buyer and working as an associate, you'll get these requests and, you know, life happens and it's. If it's not top of mind and if you don't have those reminders, it really can delay things and the bank's not able to proceed and you know, it could just be. It leads to delays.

Yeah. What we've done in Practice Orbit is when the letter of intent goes in, there's a dashboard. And the dashboard outlines three phases, the due diligence, the legal documents and closing. And in each phase it says, here's what the buyer's team does and here's what the seller's team does. And then the buyer and seller can invite their team in, the attorney and the accountant and the banker, and they can check off what they've done. And then our transition coordinator, who works here with us at Practice Orbit, one who sort of just shepherds it along. It's nice to have somebody who's like constantly looking, constantly moving it along, and that's their only job. And that combination of the technology and the dashboard that everyone can go in and see and work off of, it's like a console. And then having A human who's going in there and pulling other people in who aren't checking it regularly. That's the best equation for a smooth flow.

Yeah, absolutely. Now let me kind of shift gears and go to kind of a concrete takeaway for the listeners when we're talking about the staging. Generally, I look at due diligence in a practice sale and break it into three parts. Legal due diligence, financial and tax due diligence and then clinical. So I'm going to let you start on the tax and accounting side. What can the seller do at time of listing? Have everything packaged so that it can go right out.

Yeah, that's good. That's really good. So what is the document that tells the story of the financial health of a dental practice? It is the statement of income and expenses, colloquially known as the profit and loss statement, or P and L. And the P and L is what needs to be clean. Here's the problem, sellers, you all know that you are running a lot of personal stuff through your corporation. Costco, Amazon Travel, Automobile, Kids on payroll, big pension contributions to 401k and defined benefit plans. There's a lot of stuff in there that really clouds what is the cash flow going to be to the buyer? Because they're not going to assume all of those costs. They'll have their own, which may be and likely will be a lot different. Also, what the banks are willing to lend is what is the cash flow profit. And so if you can ahead of time, talk, sit down with your cpa, have a meeting face to face or virtually and say, I'm getting ready to sell my practice, I need to go through my financials for the current year and for the last three years. And I need to sift out or export from QuickBooks to Excel and add back or sift out those expenses that are personal. Now, if you're a client of practice cfo, we always want to know what is your true cash flow? Always. And so our standard financial statements put at the very bottom all of the personal stuff so that above that we see what's called operating income. And that's the punchline of the financial statements. But most CPAs are not sifting out the personal from the true business. And so that's a project that somebody has to do. And if you don't do it, the banks are still going to have to do it, the buyer's still going to have to do it. So if you can meet with your CPA and you can go through and aggregate all of the personal stuff, you're doing two things. One, you're going to make the sale happen a lot faster because you're going to make the buyer team and banker a lot. They're going to be able to get to the profitability a lot faster because you told your story more clearly. Second of all, you can get a higher price. And this is really important to the extent that it's not clear what the true profitability is. To that same extent is the bank not going to be willing to lend. So you want to go through there and parse out all of the personal stuff that you can because then what happens to your true profit? It goes up because you're pulling out a bunch of expenses that are not true business expenses. If you remove expenses, then your profit goes up. That's the math. If your profit goes up, what happens to the valuation? The valuation goes up. So this is a win, but it's kind of a pain in the butt because your cpa, you may need to pay them a couple thousand bucks to spend a couple days and go through your transactions and make sure that's very clear. Business versus personal.

Okay, so that's the profit and loss statement. So having a clean P and L, that's number one.

Number two, you don't necessarily need this for the letter of intent, but the banks will require this and it's current tax returns completed. This gets a little complicated if you're in like right now, July, August, period and you have extended your tax return. The banks aren't going to lend until they get your prior year tax return. So you've got to go to your CPA and try to get them to file your tax returns on time for the year prior to the sale. So that's number those are the primary documents needed in order for what I call the pre LOI analysis on the buyer side to occur. So the buyer feels comfortable signing a letter of intent.

Yeah. And it's a good idea to talk to your CPA or accountant and let them know the second that you're considering selling your practice and ask them if they're going to be able to, number one, have those tax returns completed depending on the time of year. But also give them a little bit of a Runway and let them know that you're going to need to have year to date financials up until the closing and make sure they have the capacity every single year around tax season. I get sellers who are reaching out to their CPAs, not at practice CFO and not with us, but who are reaching out to their CPAs and their CPAs are just swamped with filing tax returns, and they don't have the time to give that extra energy and prepare these reports in a timely manner because they're so busy with the tax returns.

So if you try to contact. You've got to empathize with us. If you try to Contact us on March 15th, you're not going to get much special attention. Why? Because we have an inevitable deadline that the IRS has given us. Even if we extend, we still have to file an extension and calculate what we estimate you're going to owe. And so it's extremely busy. Now, what we do at practice, cfo, is every December, we prioritize our clients into A, B, C, and D. And the ones who are selling, we always put in a priority A because we know we got to get that return done. But a lot of CPAs, they're just not going to make it a priority for you. Unfortunately, unless you're really a squeaky will on that one clarification, too. The buyers only need the corporate or business tax return. They don't need the personal return. The only time they need the personal return is if you, as a seller, are a sole proprietor and not a corporation. If you're a sole proprietor, then your business income and expenses are on schedule c of your 1040 tax return, and the banks will need the schedule C. Okay.

Yeah.

Sam.