Are you considering selling your medical or dental practice? There can be countless reasons for selling, from retirement and burnout to relocation or the desire for a new venture. Regardless of your rationale behind wanting to sell, there are a few important considerations before you click “list” on your practice.
In this article, we’ll cover what to think about when selling your medical or dental practice. However, each sale is unique and depends heavily on your geographic location, patient base, and size, making it important to reach out to an expert who can help you navigate the process.
Determining Your Practice’s Value
There are different strategies for valuing a medical or dental practice, from using your asset value to future revenue. Many of these valuation metrics take into consideration the same factors, which commonly include:
- Tangible Assets – The value of your medical equipment, office furnishings, existing technology, or real assets, like an office building, are often included in the calculation.
- Intangible Assets – Your patient base, brand reputation, patient loyalty, referral structure, staff expertise, and existing contracts are intangible assets that influence the sale price.
- Financial Performance – The annual earnings, cash flow, revenue streams, and profitability of your practice are major factors that impact the sale price.
- Location – The location of your practice and size also factor into the sale price.
Each of these factors can influence the sale price. For example, an asset-based valuation will take the total value of your tangible and intangible assets to determine a sale price, while a market/income approach will compare the location and financial performance of your practice to similar practices in the area. Oftentimes, a blend of all of these factors is used to determine a practice’s value.
EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a key component in determining your practice’s value. This is a metric that is used for private party sales as well as private equity deals. Is your practice investment grade? Knowing how to increase your EBITDA before you plan on listing your practice for sale, and what multiple of EBITDA the market is paying for your type of practice, is crucial to know ahead of time.
Preparing for a Sale
Keeping the above criteria in mind, it’s important to start preparing for a sale well before your practice hits listing platforms. Buyers will request financial and operational records regardless of which valuation method is used. This makes it important to have up-to-date accounting records and detailed operational documents going back a few years.
It is also important that you try to time your practice listing when business is doing well. This means optimizing your revenue and decreasing your expenses as much as you can to increase your bottom line. This helps you now financially, but also increases the value of your practice. This is why preparing for a sale now is crucial, even if you don’t plan on finalizing a deal for a few years.
Tax Implications of Selling Your Medical or Dental Practice
The goal when selling your medical or dental practice is to make a profit, which can draw in tax implications. Business sales are generally treated as asset sales, which means paying at long-term capital gains rates, which can be subject to favorable tax rates. However, certain items, like depreciation recapture and interest income, can be taxed at ordinary rates. Timing the sale and choosing a favorable sale structure can help you minimize your tax burden.
Let’s say that you are able to sell your business for $1,000,000. Typically, this is broken down into 20% towards the equipment, inventory, etc. and then 80% towards goodwill. If all of your equipment is older and has been fully depreciated, then the 20% proceeds for your equipment, inventory, etc. will be taxed at your ordinary tax rates. For example, let’s assume this is in the 32% tax bracket. The tax on this would be $64,000. The remaining 80% proceeds for the goodwill would likely be taxed at the 20% tax bracket; $160,000 in tax. This sums up to a total tax bill of $224,000.
If you are able to structure the deal as 10% towards equipment, inventory, etc. and then 90% towards goodwill, then your combined tax bill comes to $212,000.
Another potential option is structuring an installment sale. If you are able to split the sale proceeds across two years using the installment sale method, then you could be in the 15% capital gains tax bracket vs. 20% if you received the proceeds all in one year. Strategically, this could alter when you have to pay the taxes on your practice sale as well, keeping the money in your hands longer.
Legal Considerations of Selling Your Medical or Dental Practice
Just like there are tax considerations when selling your medical or dental practice, there are also legal considerations. For one, existing contracts need to be reviewed for cancellation policies upon sale. The same goes for any type of lease agreement, employment contract, or non-compete clause.
Regulatory and compliance considerations also come into play. Patient data needs to be securely transmitted to the buyer, professional and facility licenses need to be properly transferred, and insurance must be updated to ensure continuity of care. Since selling your medical or dental practice can have complex legal layers, an attorney is non-negotiable throughout the process.
Post-Sale Transitioning
Even after the sale closes, you still have the task of post-sale transitioning. In many cases, you were the face of the brand, which is why buyers will generally require you to stay on board for a period of time (6 months to 3 years) after the sale to help with the transition process. During this time, you will help staff and patients transition to the new ownership.
Other Considerations
There’s no one-size-fits-all approach when it comes to selling your medical or dental practice. Here are some additional considerations to keep in mind:
- Assemble Your Team – Working with a broker, attorney, and accountant is essential to maximizing your sale price and minimizing tax and legal challenges. Assemble your team right away.
- Start Preparing Now – Planning and timing your sale can take years of backend work. Start preparing your finances and operations now. We’ve published numerous blogs to help our clients improve their practice’s competitiveness and operations, including:
- Remain Flexible – The right time to sell your medical or dental practice isn’t always the timeline you had in mind. Remaining flexible can help you secure a beneficial deal.
Summary
Selling your medical and dental practice might be on your radar as you near retirement or just need a new change of pace. However, selling your medical and dental practice isn’t always as easy as listing your business online. Instead, there are different milestones and boxes you need to check to maximize your sale price. If you have questions about selling your medical or dental practice, please contact us.