As we wrap up our Dental Series, we are excited to introduce an amazing guest! The past few episodes have provided a considerable amount of useful information for purchasing and operating a dental business. In episode #54 of the Cultivating Business Growth, we welcome George Bozonelos, an expert in the field of dental practice sales and director of practice sales at Joseph Rossi & Associates. George is a wealth of knowledge and during our time with him, he shares informative tips for those of you who plan on selling a dental practice at some point, even if it’s not in the near future.
What we cover in this episode:
- 01:47 – Introduction to George Bozonelos
- 05:36 – The value of dental practices
- 06:41 – Methods to value a practice
- 09:55 – Are practices worth 70% of collections?
- 12:48 – Length of time to sell a practice
- 14:40 – COVID-19 impacts
- 17:27 – Making your practice more valuable
- 26:03 – What happens to my staff when I sell?
- 32:14 – Hiring an advisory team
- 42:35 – Should I sell my dental practice?
Introduction to George Bozonelos
Before we let George take the driver’s seat, we want to take a quick minute to share a bit about his background, education, and what brought him to his current role. His insight is top notch and his credentials speak for themself.
George Bozonelos earned an MBA from Loyola University and moved on to start his career at a media marketing firm, leading large teams. He then started his own marketing and advising firm where his clients were Fortune 500 companies. Later in his career, he worked as a director of sales and marketing at a Germany specialty tool manufacturer. During this time, his wife finished dental school and residency in pediatric dentistry, and was working as an associate in the dental industry. She made the decision to start her own dental practice and, in 2015, with the help of George’s extensive business experience, they began the journey of starting her practice from scratch. After about a year of hard work, and “a lot of fun,” George says, his wife’s dental practice opened up in Frankfurt, Illinois. A short year later, they expanded and hired two additional talented doctors, and they are still growing.
While he was assisting with her practice, many of his wife’s friends were seeking advice from George on opening their own practices and running their businesses. George enjoyed the business side of dentistry so much that he decided to work full-time professionally in this line of business, which is what led to his current role. Today, George is the Director of Practice Sales at Joseph Rossi & Associates. Joseph Rossi & Associates is a healthcare advisory firm that specializes in providing real estate and practice transition services to healthcare professionals, including dentists, physicians, and veterinarians. They are well-known in the Chicago dental community as ninety percent of their clients are dentists. As the director of practice sales, George is committed to helping doctors at all stages of their careers. He advises doctors on their long-term strategy of transitioning their practice to new ownership, and also advises doctors on their growth strategies through acquisitions and startups. He understands and appreciates the unique challenges doctors face as they start up, grow, and eventually transition their practices.
The value of dental practices
We were ready with a laundry list of questions for George and he graciously covered all of them, starting with the value of dental practices.
When thinking about the monetary value of a business, many times business owners have high expectations. When we asked George about practice values, he shared, “There is a saying. The value of something is the price at which it would change hands between a willing buying and a willing seller. That’s the value.” People don’t like to hear that, we are able to expand on that with technical information by sharing that the market is truly what dictates the price. Providing a practice valuation gives guidance and understanding. Then, we calculate the estimated earnings using a few different calculation methods, and determine the fair market price given the current market conditions.
Methods to value a practice
There are a couple of different methods to value a practice. One method is to gather and analyze data from the practice, including the three previous years’ tax returns, profit and loss statements, and practice reports. Another method George refers to is to figure out the profitability of the practice, or earnings before interest, taxes, depreciation, and amortization (EBITDA). This is followed by calculating the profitability for a solo doctor owner and for a hypothetical investor. This is important because there are very different types of buyers, and they look at the purchase quite differently. So, it’s very common for practice owners to run expenses through the practices like auto leases, travel, cell phone, family on the payroll, other items. According to George, their CPA will typically guide them through that, “…but it is our job to find those and make the adjustments. We call those addbacks because we go through and add those back into the profit.” And another method involves figuring out the weighted average over three years, using three different approaches, averaging those, and getting a final appraised value. These methods are all very simplified in this explanation and there are many more technical calculations behind it, but these cover finding the value very high-level.
Practice price subjectivity
Even though it is possible to calculate a value, there’s a bit of subjectivity to the practice price. There are certain things that can influence the practice price despite what is on paper. For instance, a desirable practice location, a good payer mix, and/or a good mix of procedures performed in the practice. George gave a personal example in which he recently had a desirable practice that was for sale and they got six offers in just a few weeks. On the other hand, they had another practice that was actually twice as profitable, but it was so unique that the buyer pool for that practice was very thin. Because of the unique aspect of the practice, that will impact the length of time needed to find a buyer and it could influence the price because the market is so thin. The valuation is only part of the process. It’s good practice to obtain expert advice on the market when determining a value for your practice.
Are practices worth 70% of collections?
At PJS & Co. CPAs, we’ve heard there is a rule of thumb that dental practices are worth 70 percent of collections, so we asked George about this and he said this is something he hears quite often as well.
The 70 percent of collections rule of thumb is the simplest but least scientific way to value a practice. It is true that some practices do end up being worth that amount, but far more importantly is the analysis and methods used to determine that number. George illustrated this further by using an example of two practices. Each practice collects one million dollars. After all expenses and paying the doctors and staff, the profit to the owner (practice A) is $250,000 and profit to the other owner (practice B) is $50,000. Most people wouldn’t pay the same amount for these two practices.
There are times when a full valuation is done and the amount ends up being 70 percent of collections, but that number can’t be relied upon. “That’s not a method. That’s just the answer, and that’s not good enough for a bank,” declares George. Some banks do have a hard 70 percent or 75 percent limit, so that might be the extent of what you can get, unless you’re selling to a corporate type of group that can pay far more than the typical buyer.
Buyers should be looking at the profitability of the practice so they can determine if they are able to afford to cover any debt and be fully aware of the financial health. This process is complicated. The process of selling your practice is multi-faceted and involves a bit of negotiation and persuasion, so try not to rely on just straight percentages.
Length of time to sell a practice
We asked George to educate us on the typical amount of time it takes to sell a dental practice, from beginning to end. He started by reminding us, “It’s important to have patience during this process. It can take anywhere from three months to a year, sometimes longer if it’s a specialty practice, but I’d say it takes on average six months.” George goes onto explain that if he received an offer on a practice today, it takes about two months just to sort out the legal paperwork that goes into the transaction which cannot be avoided. It takes time and depends on the motivation of the parties. If a seller is highly motivated, the transaction can move quickly. The key is finding the right buyer and then persuading that buyer to make an offer.
George talks about a practice on the market right now. The only price to purchase is taking over the lease. Essentially the practice is free, but they do not have any takers yet because they have to make sure that it’s a fit for the right person, they’re ready to build it up, and that they want to be in that area. He goes on to explain that it is not as fluid as the housing market, where someone’s going to buy it if you lower the price enough, so it can take time. In summary, George explains “The record I’ve seen is 30 days. I’ve had a few that were 60 or 90 days, and some have taken multiple years.”
Dental practices were closed for several months due to COVID-19 and we asked George what impacts he’s seen this have on practice sales. He shared his insights, telling us that when practices were shut down, there was no cash flow because banks were unwilling to lend on any transactions, so it completely froze the market up for a brief period of time. However, the government stepped in and offered loans and grants. All the while, they were still able to continue showing practices and negotiating deals, but had to wait until they actually opened and could show the banks that there’s some revenue coming in so they feel comfortable moving forward.
George continued, “Right now, the dental practice transitions market is very strong. We’ve had numerous doctors contact us to let us know that Covid-19 had finally pushed them over the edge to sell their practices.” Many new practices came to market over the summer, and buyers were also equally motivated, if not more. COVID-19 changed the employment situation, working hours, and maybe even compensation for many, so there were a number of doctors who were inclined to become owners. He also shared, “On the buyer’s side, they thought they were going to get a COVID-19 discount, but that really has not been the case, in our experience, because the practices have bounced back pretty strong.” At PJS & Co. CPAs we’re seeing clients have some of the best months in the past 6-12 months. Patients need their dental services and there is month’s worth of catching up to do.
August 2020 was Joseph Rossi & Associates’ busiest transaction month ever and George wrapped up this topic by stating, “The prices have been unaffected, assuming that they’ve recovered. As long as they (dental practices) recovered financially, COVID-19 has had no influence on the purchase price.”
Making your practice more valuable
There may be dental practice owners who are currently considering selling their business in the near future and we wanted to get George’s thoughts on what those owners can do to make their practice more valuable. So, we asked if there are changes or improvements practice owners should consider to increase their value. His recommendations are as follows:
Figure out how to increase profit.
The largest influencer on the price is the profitability of the practice. To most buyers, that’s what matters. Most young doctors these days are graduating with hundreds of thousands of dollars in dental school debt. They might be working somewhere, making good money, but with the high debt payments along with additional debt incurred from the practice purchase they’re very sensitive to the financial performance of the practice.
- Analyze expenses and keep them under control. If you can do that for two to three years ahead of a sale, that helps because everyone looks at three years of tax returns. Depending on your specialty, ideally your supplies expense should be under 10 percent of collections and your staff wages should be around twenty to twenty-five percent, at the most.
- Work with an advisor to monitor trends. According to George, “The area where I see the biggest impact to the profitability of the practice is staff wages.” Over the years, it’s common to give many raises and lose sight on productivity. If you lose focus, the practice revenues might stay flat or even decline while your wages and other expenses are going up and up and your profit’s getting squeezed. Because this happens slowly over a long period of time, most people don’t realize it’s happening. George clarifies he does not suggest firing anyone or decreasing anyone’s compensation, but he does recommend working with an advisor to carefully monitor those trends and prevent them from getting out of control. Monitoring industry benchmarks can give you a sense of whether or not your expenses are in line. Buyers will want to see that your expenses align with the industry norms.
- Keep the practice up-to-date. Just like curb appeal helps sell houses, the same psychological rules apply for dental practices. The look could make it more appealing and desirable for folks to come in and consider buying the practice. By virtue of having a higher quantity of people interested, you’re likely to get more offers and hopefully get more of a bidding type situation and a more competitive price.
- Determine if it’s best to bring on an associate. To some practice owners, it may seem appealing to hire an associate so you can train them and over time, sell the practice to them. George believes owners should hire associates if it makes sense for them and also thinks they should find a buyer, if it makes sense for them. George notes an important distinction, “When you combine the two, it really is a very complex situation that requires a lot of analysis and planning. I’ve seen some doctors romanticize the idea of hiring an associate and then expecting five to 10 years down the road the associate will automatically become the buy of the practice, and all will work out perfectly. For one reason or another, this may or may not come to fruition.” He then goes onto highlight some best practices, “If you’re planning on hiring an associate who you intend will eventually buy the practice, I would try to have everything in writing ahead of time like their compensation, the appraisal methodology, and the timing of exactly when the sale would occur. That way, expectations are clear, everybody knows where they stand, and there are no surprises.” In George’s experience, you’re better off hiring associates for the purpose of doing dentistry, and then when you’re ready to sell, go through the normal practice transition process. If you want to approach your associate at that time and it works out, great. If not, it’s not the end of the world and you can move on and find someone else. The bottom line is think carefully, plan, seek advice, and openly communicate.
What happens to my staff if I sell?
A sensitive topic for both the buyer and seller of a dental practice is the staff. It’s common for buyers to be nervous about staff because many times they’ve never met the staff and they are unsure how the staff will respond to new ownership and all of the associated changes. Sellers can be nervous too because they want their dedicated staff to be cared for even when they are no longer the practice owner. There’s a bit of a finesse and you’ve got to make sure you manage the situation well. George shares, “I’ve seen with most practice sales, the staff remains the same for at least six to 12 months. Keeping things the same for some time is in the best interest of the buyer because when buying a practice you’re buying the goodwill of the practice; the cash flow and the stability.” Could it work out if you decide to completely change things when you buy a practice? Sure. But, George’s advice is plain and simple, “Just leave it the way it is for a bit and make thoughtful changes.”
Telling your staff
Buyers don’t necessarily get the opportunity to meet the staff of the practice prior to putting in their offer or finalizing the sale. This part of the process is a bit strange because it requires buyers to have a bit of faith because they don’t know the staff that will soon be the staff of their dental practice.
From a seller’s standpoint, George doesn’t recommend telling your team until the sale of the practice is almost finalized. The reason for this is most people don’t like uncertainty and change. If you share with your staff that you are putting your practice up for sale, they may fear their job is in jeopardy or their role will change. This may drive them to start looking for new work because of the uncertainty of their future. Staff turnover can scare off potential buyers and put the sellers at risk of losing sale opportunities. Communication has to be carefully managed. You shouldn’t do any of this abruptly. Once the majority of the paperwork is signed, you can then announce the sale to your team and invite the buyer to meet your staff. This gives the buyer the opportunity to provide some assurances to the staff that their role, and their plans for the future of the practice are aligned. Then, everyone can focus on establishing their relationships and building on that.
If the entire process is handled appropriately, much of the staff will stay through the sale of the practice and the new owner can decide how to integrate everyone. George has seen most people stay on for some period of time. It’s helpful to keep people on staff for the transition because the staff know the patients and the operation.
There are a few changes that are common and should be expected, like turnover and system changes. Sometimes staff members don’t jive with the new owners or they are accustomed to doing things a certain way and are unwilling to adapt to new changes. In these cases, they will either leave or you’ll support them as you encourage them to find another opportunity elsewhere. You can then find someone who can do what you need them to do. In becoming a business owner, the buyer of a practice also becomes a manager, which means managing staff and emotions. Some conversations will be tough, but do what’s best for the practice and for the long-term success of the business.
Hiring an advisory team
Attorneys and accountants
When buying or selling a dental practice, experts familiar with this process recommend hiring an advisory team that includes an attorney and an accountant. It’s not mandatory, but historically the process of buying/selling a business goes smoother when you have an advisory team of some sort. “My favorite practice transitions are those where the buyer and seller have hired a good advisory team and we all work together to get a deal done,” George shared. A recent transaction took place where the seller didn’t have an attorney and that process was “a little messy.” The deal ended up going through, but it wasn’t as smooth as it could have been. When there isn’t an attorney representing the buyer and/or seller, other advisors aren’t allowed to provide legal advice. In these cases, advisors can only deliver the contract and advise clients to read it. The clients then have to decide what to do with that information. Attorneys are extremely helpful when working with contracts and negotiating, but they need direction.
Having an accountant is also beneficial for many reasons, including the fact that they can advise you on tax implications of the sale. Clients need to understand what can happen after they have a windfall of income, or if they are working for a new owner and want to know how their tax situation is going to change. In your new situation, all deductions you were applying before when you were a business owner may not apply anymore as a W-2 employee or 1099.
George enjoys working on transactions that have an advisory team with a good CPA, consultant, and banker. They can help clients analyze the financials of the practice they’re considering buying. For most buyers, this is their first time owning a business. It’s not easy to understand a business tax return, what all the numbers mean, profit and loss statements, practice reports, etc. It is much better when there is a third party who can independently review the information and give their unbiased advice to the buyers. An advisory team can help buyers and sellers avoid pitfalls they don’t know about. We discuss the importance of an advisory team in numerous episodes of our Cultivating Business Growth Podcast, including episode #51: What Dental School Didn’t Teach You and episode #52: Accounting for Your Dental Practice. We understand hiring a team can be an expense, but if you don’t have a team of advisors helping you make good business decisions, it may end up costing you much more in the long run. Plus, we want you to spend your time doing actual dental work, not doing legal and accounting work! No one needs to be wasting time or money. Strategically spending your money on an advisory team also gives you peace of mind. Who doesn’t want that?
Who needs an attorney?
George told us he’s never done a transaction in which the buyer did not have an attorney. He has, however, seen sellers get away without having an attorney. When we asked his thoughts on the seller not having an attorney, he commented, “You can certainly sell anything on your own. It’s just not as easy.” He equated some aspects of selling a business without an attorney to selling your car or house. For instance, it’s hard to tell who are the serious buyers from those who are just wasting your time. On the other side, selling a dental practice is different from selling an object like a house or car since it’s a business which is an ever-changing, living, organism.
The entire buying/selling process has to be completely confidential. Your patients, staff, and competitors shouldn’t know you are selling. Keeping this news confidential is difficult when you may be the person taking calls, responding to emails, and attempting to vet potential buyers. It’s not hard for people to make the connection that you are the one selling your business if you are answering calls and using your own email address to communicate. George said, “if you are interested in maintaining the confidentiality of your identity and financial information and if your time is extremely valuable to you, then I just recommend hiring someone to represent you by bringing in only credible, vetted buyers and just helping shepard the deal through.”
Should I sell my dental practice?
In George’s role and with all of his experience in this field, he’s often asked by practice owners whether or not they should consider selling their dental practice now or later. Often, his answer is, “It depends on your priorities.” Always start exploring the idea of selling before you’re cutting back your schedule, changing your lifestyle, or doing anything that dramatically reduces revenue of the practice because fixed costs remain the same or increase due to raises and increased rent cost, but your revenue will be decreased. Profits get squeezed over time and the changes you make impact the value of the practice. There are ways to get the most money for your business by cashing out when the practice is at its peak. For example, you can structure a deal so you can stay on with the new owner, work for them for a few years, and potentially reduce your schedule over time. All the while, you’re able to work, earn a living, but are no longer responsible for all aspects of the practice. This gives you the opportunity to maximize earnings, phase out at your leisure, and make the most of living the lifestyle you want.
We are extremely thankful for our time talking with George Bozonelos, the Director of Practice Sales at Joseph Rossi & Associates. He has a wealth of knowledge and was so kind to speak with us today about buying and selling dental practices. We learned about how to determine the value of your dental practice, what methods are used to calculate that value, and even ways to increase the value of your business if you are considering selling in the future. We gained insight on how long dental practices take to sell and how the COVID-19 pandemic has impacted buying and selling over the past few months. We also talked about how to best work with your staff as you are selling your practice and when the right time is to announce the sale. As we neared the end of our time, George shared with us his thoughts and advice on hiring an advisory team to assist with the buying and selling process, and lastly he made sure everyone understood if selling their practice is being contemplated, lots of planning is needed.
Looking for CEU?
We are excited to share an opportunity for you to earn one CEU credit. View the on-demand webcast on Dental Economics, called 3 Ways to Lead a Profitable Practice While Working Fewer Hours. You can find this through the Dental Economics website or visiting www.pjscpas.com/dental-CPA. This course is free and available immediately. Don’t forget to register!