68: How Long Will It Take to Sell My Dental Practice? Part 2—with Matt Odgers

Welcome back to part two of How Long will it take to sell my dental Practice? This one was a little bit longer of a podcast and so we broke it up into two. I hope it's helpful. Why don't you talk about the legal side?

So from a legal standpoint, the big picture is that you want to go through and gather any contract that you've signed from the start of your practice. I mean, ideally from the start of your practice up until current day. But what we're looking for is any potential liabilities that could be transferred or any contracts that cannot be terminated. So these include things like if you have a website marketing agreement, when you start to think about selling your practice even five years outer, if you think it's coming in the next decade, try and start negotiating contracts with vendors that can be terminated with 30 days notice, or alternatively that can be assigned to the buyer, but preferably ones that you can cancel with 30 days notice. Any contracts that you're not going to be able to get out of, say you sign a five year contract for your website, the buyer is going to have to agree to take over that contract. And the buyer may not need a website guy, he might be able to do it themselves or something like that. So first step is make a list of all contracts that your corporation is a part of. Secondly, you're going to want to get a copy of your lease and make sure that you have a current copy of your lease with any amendments and addendums and anything you've signed related to your lease, make sure you have the most current version of that. And then you want to have a conversation with your landlord and let them know that this is coming up. In that conversation, you want to see what they need for the assignment. And then you also want the assignment of your lease or if they're going to enter into a new lease with the buyer. So set that expectation. And then also start to talk with the landlord about the timeline and say, we'd like to close by the end of next month or say September 30th, do you think that you'll be able to get this assignment done and start to kind of preempt the timing of that so that you want to be crystal clear with all of that so the landlord knows what the deadline is, because the people that hold up deals are generally the banks and the landlords.

And I'll add one addition to this. If you own your building, it would be good to talk and you plan on not selling it and you're going to be the landlord it would be a good idea ahead of, you know, in the staging process of your practice sale to speak with a real estate professional or an attorney to draft up what would be a future lease to the buyer, because they are going to need that and the banks are going to need that right away. Upon the loi.

Yeah, absolutely. On the other side with legal due diligence is if you have any associate dentists working with you, gather up all of the associate agreements that you have and make sure that those are transferable. If you've had any claims from employees in the past, gather all information related to those claims, whether it be unemployment, whether it be, you know, a litigation matter and any other litigation matter that you have all of that stuff ready to go. You don't want to wait until the letter of intent is signed and start reaching out to past attorneys or the dental board to get information on all this stuff. Anytime you have to reach out and request information from a third party for your practice, you're increasing the likelihood of delays. That person might be out for the entire month on vacation. So the more you can get all of that stuff squared away and have the information, the less likelihood of delays.

Great. And then the last or third leg of the due diligence after financial and legal is clinical due diligence. We could call that operational due diligence as well. The only thing I'll add here on this one, Matt, is it might be a good idea to have a dental supplier come in and go through the operatories and kind of list out the health of the equipment on site. I know a lot of buyers, not all buyers, but a lot of buyers will do that. And if you have that kind of staged, it could accelerate that.

Yeah. And just as the. On the seller side being aware of, you know, you might think everything's working perfectly, but if there's something that might need to be updated, you might want to take that into consideration prior to listing your practice.

Yep.

And when they do that, it might be at the time to have them start to create an asset list which is going to be included in the purchase agreement.

I'm going to add one more thing. On the financial side.

Yeah.

Make sure that as a seller, you have done the analysis of whether you are financially ready to sell, meaning after taxes, after paying off your debt, because, remember, buyers don't assume your debt. You have to take the sale proceeds and pay off any practice debt. After your taxes, debt, and selling costs, do you have enough to, say, retirement or to pivot to that next phase of your life? You don't want to get into it. You find out because the price was lowered, for whatever reason, you don't have enough, you can't sell. That's just a bad scenario all around.

Okay, absolutely. So now let's talk about what leads to common delays and what can be done to overcome them. And I think we've touched on a lot of this, so it might just be more of a summary.

One thing I want to add really quickly is good pictures. Take some good pictures of your practice. This is like, it reminds me of Airbnb. When they started, nobody would move into the houses because the pictures look so bad. And then they got really nice pictures. Suddenly people were showing up. Get good pictures. In practice Orbit, you can upload pictures, mark them as private or public. Private pictures are released after the non disclosure agreement is signed. I'd say that's a really valuable one as well because a lot of people are not going to be local, a lot of potential buyers are not going to be local. And the pictures matter.

Oh, absolutely. All right. So moving on to common delays and how to get past them. Earlier when we were talking about the timeline, we really focused on what the seller can do to expedite the process. But going back to that, I want to kind of touch on what the buyer can do to get a closing on time. And what the buyer can do to get a closing on time is start the conversation with the bank as soon as you start looking for practices and get out of the way the initial credit report to them so that they can do kind of a pre approval without a specific practice in mind. But what they would be willing kind of ballpark to lend on and create that relationship. And talk to the different banks that you're talking to and get a checklist from them of information that you can just hand over to the seller the second you sign the letter of intent. So that can keep it moving. You don't want to wait for the end of your due diligence period to start the conversation with the bank because the bank has, you know, once the salesperson at the bank gathers the information, they have to send it to the higher up, the underwriter, who has to review all of that and either approve or deny it or request additional information. And depending on their workload, that could lead to delays. So the earlier you get that started, the better.

Yeah, that's a great point. Because when they, the lenders look at two things, the seller's cash flow and your universal debt and your credit score, you can cut half of that off before you even find a practice. And a bank will tell you how much of a loan you could qualify for based on your credit situation and also your production history. So as a buyer, that's a great idea.

Yeah. And in the event that you do have something on your credit history that would impact or, you know, harm your potential to get lending, you want to know that before you invest in the team to kind of buy a practice. And you want to have time to fix it so that you can get the loan approved. So the earlier you start that, the better.

One thing I think it's really important to touch on is the price. When it comes to a timeline, there is an inverse relationship to price and closing timeline. You take a million dollar practice with a 40% profit margin, sell it for 500,000, you're going to sell it overnight. You try to take a million dollar practice and sell it for a million dollars, it may take you 12 months and you may never sell it at that price. So for a seller, one of the things I really recommend you to do is to evaluate the price carefully ahead of time. And here's how you do it. Number one, you, you can go into practice orbit and get a free value sort of a price assessment. All you need is your prior year tax return for your business. And then in a couple, in a minute, you could have what is a low medium and a high price. Number two is if you engage a formal broker, or if you engage option two with practice orbit, you'll have a broker walk through that and do an analysis more comprehensively. Number three is you can go to a bank or a couple banks, give them Your P&Ls and tax returns, and they will tell you how much they will lend. And I think that's probably one of the most valuable things you could do before listing your practice so that you have a good idea of what the banks will lend. Because at the end of the day, the price is probably going to be pretty close to what they lent. That's just the nature of it. It's like this gravitational pull on the price will ultimately arrive somewhere around what they lend. And most of the dental lenders use the almost identical underwriting calculations in determining how much they will lend. And then lastly, if you really feel you need it, you could get a formal valuation from a certified business valuation expert. I generally don't see that the case though.

Yeah, yeah, absolutely. Because even if that comes back, the CPA and the accountants are going to be weighing in on what the future cash flow is going to be. And you Know, the. I guess technically that official valuation or the appraisal should have already taken that into account, but I do see those off quite a bit.

Yeah. And one thing that delays timelines a lot is when a seller believes the practice is worth X and everybody else believes it's worth X or 80% of X. Yeah. That's why thoroughly vetting out that price before you list it, so when you list it, you feel comfortable with that and that it's justifiable is really valuable here. The second thing is, if you already have a bank or two that's done that analysis on your practice, when the buyer goes to buy it now, it's already teed up. So let's talk about the common delays of the timeline. One is banking. So this is merging into that subject. Banks have underwriting, and they can take a while because they have to collect a lot of documents and they have a backlog oftentimes. So having the banker already do the analysis before you even list your practice not only helps you understand the pricing, but also stages it. So it's not a delay.

And on this, part of the bank's delay is that they request information. It takes the seller a little while to gather that information and give it. And then once they have the information, they have to analyze it and request additional information. So going back to the staging, the more of that information that the seller can have prepackaged and hand right over to the bank the second it's requested, the less likelihood the bank's going to be giving delays.

And, you know, the cool thing about this is banks will do that for free. Yeah, because they want to have first dibs on the buyer when the buyer comes in, especially on good practices that are collecting at 800,000amillion, 1.5 million. Banks will do that all day long. You could go out to bank of America, provide Wells Fargo, Huntington bank, you go to all these banks, and they will all do that analysis for you.

So second delay is legal documents. And the bank can't proceed until they've had a chance to review the legal documents. So these got to kind of work in tandem. And your attorney should give a draft of the purchase agreement and a draft of the lease and the lease assignment as soon as they have it, even if it's not in final form while it's negotiated, so they can do kind of their initial review. And then usually three to five days prior to closing, you'll have signed the purchase agreement and the lease and hand them over to the bank to do a final check off. So Keep that in mind. And goes back to why you want to get your team involved as early as possible because the bank can't proceed until they've seen some of those documents and you don't want the delay to be there. And sticking on the legal documents side is the landlord. Keep in mind that if the landlord's the seller of the practice, those are the. Some of the best transactions as far as timing goes, because the seller's motivated to get the deal done. But keep in mind that a traditional landlord currently has the seller as their tenant and that seller is obligated to pay rent and so and obligated to be there for the remainder of their term. So they're generally not insanely motivated to be responsive and a quick turnaround and agreeable because they've already got somebody who's paying the bill.

Yeah. If you think about it, they're the only one who really has no interest in this thing closing. Yeah, they're the only one.

No immediate.

Yeah. In fact, they feel like it's a risk, so they don't want to close on it because they're getting paid by this very productive tenant of theirs.

Yeah. So on the seller side, the earlier you can start that conversation with the landlord, the better. And the earlier you can get your lease reviewed, ideally at the time that you sign the lease or the time that you sign the extension by your attorney to make sure that you're able to assign the lease on reasonable terms. That's going to speed the process up.

Now, in terms of staging for the seller, if you can, before you go to list your practice, work out with your landlord so that there's a. An assignability so you can assign it to a buyer, that lease. So the buyer basically assumes the existing lease. So there's assignability. Number one. And most leases do. I haven't come across many leases that don't have assignability. Would you agree?

Unless they're over 20 years old, older leases, there was a long period where there was this profit interest where if you assign your lease you have to give all of the profit associated with the sale of the business. But.

Well, those were the dark days. The landlords trying to get their hands in the cookie jar and getting some of the sale price.

Yeah. But now landlords are pretty open to having reasonable terms for assignment. The buyer still has to be credit worthy. But we've gotten a lot of traction on assignability.

Yep. So that's number one. And number two, making sure there's ideally 10 years left on the lease, which could include Options. So if you've got five years remaining on your current term and then you have a single option to renew for five years and the options are assignable as well. Which generally the options are assignable as well. Right, Matt?

So you need to make sure that's written in there by default. Most landlords try and say that the options are personal to the current tenant. So when you're negotiating your lease, you want to make sure that it says that the option is transferable to an assignee.

Okay. If you can work out with the landlord the lease such that when it's assign sign the buyer inherits in that lease 10 years, then that shouldn't slow up the process. What slows it up is when there's not enough term on the lease for the buyer to qualify for the loan. Most banks require 10 years. A couple banks are okay at lower. Think bank of America. Currently, as of 2024 will allow a five year at a minimum. But most banks want more than that. Would you agree that's the main holdup with leases is the fact that they don't have a lo enough term on them for the buyer to get the loan?

Yeah. Oh, absolutely. I mean, the biggest holdup is lack of response from landlords. True, but it compounds the situation when you're asking them for something.

Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales. In such a fragmented market, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com practice orbit is modernizing how dental practices are bought and sold. It's a platform technology. Y' all know them. Zillow, Airbnb, Uber, and OpenTable, just to name a few. These technologies do two things. First, they help match buyers and sellers by centralizing the marketplace. Second, once the match between buyer and seller is made, these technologies help them navigate the sale to a successful close. Here are a few of the features inside a Practice Orbit users can determine a reasonable sale price for practice in just minutes. All they need is the most recent business tax return. Practice owners can use the directory to find important service providers like practice brokers, attorneys, accountants and bankers. Practice owners and their brokers can invite those service providers into the platform. So all parties are coordinating the sale together. Practice owners will have a beautiful digital listing of their practice, like a home on Redfin. And importantly, the listing will be anonymous. And personal information like your address, name and pictures are only Released after an NDA is signed and approved by you or your broker. Practice buyers can create saved searches to be auto notified when new listings come on the platform that fit their desired specialty and location. And hey, dental practice brokers, you can list all your practices on the site for free. By doing so, you'll get access to Practice Orbit's large pool of buyers, all of whom have created profiles and saved searches to be auto notified when new listings come for sale. You can use the platform to introduce your listings to a targeted set of buyers. Additionally, and optionally, you can use the platform tools such as a built in NDA, a customizable LOI, and a workflow flow tool to navigate the sale from LOI to closing. In fact, you can manage all your listings on the system, from listing the practice to NDA to LOI, and finally to closing the deal. Create your free account today at www.practiceorbit.com.

And keep in mind that if you're the seller that the lease is your problem.

Don't push that off on the buyer to say, jump in there and start negotiating. Do what you can to facilitate what the buyer needs, because without that. So when you first talk with the landlord, if you've got three years left on your term and you're the seller, you should start with the landlord by saying, I'd like to sell my practice. I'm going to be assigning the lease to a buyer and I'll help facilitate that. And there's only three years left, so we're going to need to have you give another option, a five or eight year option or something along those lines, and preempt the landlord to be okay with that. So when the buyer and the buyer's attorney speaks with the landlord, it's not the first time the landlord's ever heard of it and the landlord understands. And you as the current tenant and seller have the leverage with the landlord for them to be friendly on the buyer side when their attorney reaches out or the buyer reaches out. The landlord's never met this person before and they don't have any obligation to help that person out. So the more you can facilitate that as the seller, the quicker the transaction is going to go and the higher the likelihood of success of the transaction.

Yeah, because remember, the buyer has no leverage to negotiate a new lease. They don't have any because the seller is already on the hook. The landlord is already getting paid and they're getting paid for the foreseeable future from the existing seller. So the buyer has no leverage to negotiate. It's not the time to negotiate a new lease.

And how much of the practice sale do you think of the the lease as an asset? You know, I mean transactions just don't. A bank won't lend on a sale unless the lease is there. So it's a mandatory requirement that as the seller you help facilitate that and get the buyer into a comfortable at least as far as duration goes.

So bottom line, sellers, the lease is your problem. It is your issue to resolve. And if you can engage an attorney who does lease contract law to review that lease fully before you list your practice to understand what the problems may arise are the better you're going to be when it comes to assigning that lease.

Yeah, and this is huge for buyers as well and new dentists or startup. This is the one point I would say even more so than the cost of the rent and what you're responsible for is that if the assignability language is not in there, it's going to kill the value of your practice and you may just need to wind it down.

So I would say getting the lease at the point of non disclosure agreement is probably reasonable to do because no point in hiring and paying attorneys and accountants if the lease clearly isn't going to allow you to move forward or at least getting some something from the seller giving you some reassurance that the lease isn't going to, isn't going to break the deal.

Yeah, absolutely.

Okay. That this has been comprehensive. So if the average takes four months, then it goes plus or minus. It's going to depend on how well you stage the practice. So let's summarize here. To stage your practice as a seller. You get all your documents, get your financial statements right telling a story, sift out your personal, take nice pictures, get from the banks what they would lend on the practice, engage your team and go through your lease agreement. That's everything at the starting point, right Matt?

Yeah. And the one thing I would add to that is communication. You said engage your team, but communicate with your team the deadline that you're working towards and get their feedback on whether that's obtainable.

Yep. Great. And now what have we done in if all of that is staged well and your practice is a desirable practice and location always helps there. Of course, if all of that is lined up, I think that the practice could sell within two to three months without that being lined up. It's probably going to go from four to eight months.

And are you talking about after letter of intent or from the date of listing to closing date of listing?

To closing.

Yeah.

If you have everything lined up and you've done all of those things we've discussed and it's a desirable practice, meaning as soon as you list it, you're going to have five to 10 qualified buyers. I would think that within two to three months you're going to be able to close on that practice. If you don't have that in place, or maybe the price is too high or it's not as desirable of a practice by size and operatories and location, it could take four to eight months. I've seen it take longer.

Yeah, I absolutely agree with that.

Okay, let's jump in and just conclude here with how Practice Orbit can help solve this problem. So when we started designing Practice Orbit and drafting this out, this what would become a software coupled with professionals like you and me to help buyers and sellers, we knew that these problems existed. And so what we did is we designed it to solve them and do so by creating, I was, I always call it by TurboTaxing the process. Because TurboTax takes this complicated process where historically people had to pay somebody every time to something simple that a lot of people can file their own tax return because it really just step by step holds their hand. So Practice Orbit helps buyers and sellers holds their hands. But there are aspects of it that are just a bit complicated that technology is not going to solve. And even if you throw an AI, it's not going to solve it. There's too many nuances in dental practice sales. That's why we believe that human involvement is valuable at some level. And the more nuanced and complicated, the more you should probably go for a full service brokered model like our 4 to 6% model.

Yeah. And going back to the early days of Practice Orbit, there's what delays transactions is the party's lack of knowledge, you know, or lack of planning. So the Practice Orbit platform takes away that variable and through the checklists and through the document uploads, it streamlines everything that can be streamlined and then tease up everything that needs a professional to come in. Like you were talking about the full brokerage. You know, it's not going to draft, it's not going to draft the purchase and sale agreement. You're going to take that to your attorney, but it's going to tee it up to where once you get to that stage, all the information is there for your attorney to jump in and be able to do their job efficiently and quickly. All the information is going to be there to submit to the bank so that the bank can do their job efficiently, but the bank still needs to be involved. It's not doing the bank's job.

And the nice thing is that when you have everything in the system, you invite them in by putting their email, their name and their title, like a banker or an attorney. And they get an automated email coming into the software. And now you've given them access to the documents so you don't have to email it. A lot of these are secure documents, you shouldn't be emailing them anyways. And everything is secure within the system.

Yeah. And what sprouted the idea is before Practice Orbit on our transactions, the bank would email the attorney or the CPA or the client and say, this is what I need. The client or the person that received the email from the bank forwards that to whoever their advisor is that has that information. So that's three steps right there. And say that one person has a busy day and so there's a day delay before they get to the email and can forward it. Then the person who's receiving it who has to provide the documents has a three day delay because they have to go and find them or whatever. Those are all the things that create delays that ultimately can derail or kill the goodwill in a transaction that we're trying in Practice Orbit to break that multiple step for basic things.

Organization technology has an amazing ability to organize processes, data and even reduce costs. And so it's such a win, win, win all around. And this really important for you sellers out there. Even if you're not looking to sell now, and you may sell 10 years down the road, it's always a good idea to know what is the value of your dental practice. Almost like a Zillow or a Zestimate for dental practices. You can create a totally free account in Practice Orbit, you can get your tax return, you can put in some information in about 60 seconds and it will give you a really nice value or price estimate. It's not a formal valuation cause it's not a, it's not a certified licensed valuation expert, but it gives you a really good price estimate based on that information. And it will tell you how much you would take home after an estimated paying off of debt. So you would put in how much debt you have on the practice, estimated taxes and estimated selling expenses. And it's a really valuable data point to be able to make some decisions around your practice. And as you grow your practice from year to year, you can just come in, enter your tax information and see what the value increase was. This is also going to be valuable for estate planning purposes. You've done some estate planning, Matt, you talk about that.

I was just going to jump in and say that when you do your estate plan, having a ballpark valuation of your practice, and this is something you should do every single year, will allow you to set up a strategy for what would happen in the event that you become disabled or pass away. And the key to making that strategy is understanding what the value of your practice is so that you can adequately get insurance in place. You can kind of make the decision so that your family's not burdened with, if you're not able to be working in the practice, that you have a plan that can go right into effect.

Yep. It's also valuable if you want to bring on a partner and sell a portion of your business to a partner. I had a client reach out, or actually not a client, but a dentist here in San Diego reach out recently who's unfortunately going through a divorce and they needed a price estimate there. So there's various reasons to have a price estimate, something you can print up outside of the system. It does of course qualify the language saying it's not a formal valuation, but it can be very helpful from a context standpoint. And lastly, I just want to emphasize too that one of the unique value propositions here for sellers of Practice Orbit is that you can go in there and you can list the practice. There is a non exclusivity agreement right now in the system as we've decided at this point. This could change at some point to had some period of exclusivity. Which means that if you decide to not use Practice Orbit and go with another broker or you find somebody outside of the system, Practice Orbit doesn't provide you a buyer in the system. Then you don't have to use Practice Orbit and you don't have to pay anything. With Practice Orbit. You pay Practice Orbit if either A, you want to use it to find a buyer and close on a transaction, or B, you have a buyer but you feel like you need a resource to navigate the sale in an organized way. Those are the two reasons to use practice orbit. And again there's the 2% self directed option where you have sort of an administrator helping you through the process. And then there's the fully brokered option which is where you get a deep professional advice helping you throughout the entire process.

Yeah, and I hate to be the disclaimer guy or the legal.

You're an attorney, you're here that.

But one thing to note is that while the non exclusive that we currently have in Practice Orbit is great. So you could list your practice and we would only get paid in the event that we find you a buyer or produce it or if you already have a buyer and you agree to the for sale by owner side. But if you go out and talk with and list it with another broker, which we're completely open to, make sure that you don't sign a exclusivity with them while keeping it listed on the Practice Orbit site. You want to make sure that you're not signing up for something that will impact your ability or get you in trouble with having multiple listings.

Yep. Most of the time the broker is going to require you remove that off of Practice Orbit. The other option this did happen recently is they found a local broker. This was outside of California where I had. We have less density in users. Fewer in other words, fewer buyers. And so they went with a local broker. But they agreed that if Practice Orbit furnished the buyer that they would. The broker would give some of their commission over to Practice Orbit for providing the buyer. So there have been a couple scenarios where Practice Orbit worked in conjunction with an outside broker.

And we absolutely love working with outside brokers. If they're up for working with us. Especially in the scenario where the outside brokers having a hard time finding a buyer, they can tap into our pool of associates and buyers that we have that are looking and make that connection.

So yep, the value to the broker is that they could use our pool of buyers, number one. And you literally can go in there as a broker and search for buyers that fit the criteria of that practice. And then you can. There's a way to then contact them. They're anonymous, but to contact them if they're interested. Number two is the brokers can use the software as well to navigate the sale and use all of the tools. They are welcome to do that. We are an open platform for them. A lot of brokers are a little bit on the older side. Not all, but a lot of them are on the older side. And so technology is a change of their ways and so we'll see how it develops. But Practice Orbit does have a full, all inclusive solution for those looking to sell their practice.

Yeah. So I think it's about time we wrap this up and kind of. Do you have any final summaries or.

That's it. I think this has been productive, Matt. We will continue to have more episodes on the practice sales process for both buyers and sellers. This one was great on the timeline of a dental practice sale. Thanks for joining Matt.

Yeah, thanks for having me. We.