Every business owner hopes to harvest the wealth locked up in the business. Unfortunately, most owners over-value their businesses. This has an enormous impact on the success of the transition into life after business because owners who count on the business for retirement can experience catastrophic disappointment. According to Christopher Snider, in his book Walking to Destiny (2023), 75% of business owners “profoundly regretted” the decision to sell their business 12 months after selling.

Sean Hutchinson (2023), Partner of Strategic Development at Ready for Next, says this is because the owners were ready to transition but were not transition-ready. Hutchinson reminds business owners that the most valuable businesses are transition-ready due to their attention to operational excellence that affects all seven value domains of a business. Hutchinson contends that businesses add or subtract value daily due to their actions toward each value domain. The value domains are:

• Culture
• Risk
• Strategy
• Productivity
• Financial Performance
• Leadership & People
• Sales & Marketing

For business owners, the key to adding value begins with viewing the company from a buyer’s perspective. Snider (2023) calls this approach a business attractiveness score. This quantitative scoring process can allow owners to get their businesses in shape before they feel the urge to sell, thus unlocking the best value for their business and preparing for the transition to the next chapter of their life.

 

The value domains can be grouped to provide four factors for business owners to consider in their transition readiness. These factors are business factors, forecast factors, market factors, and investor considerations.

The Four Key Factors That Buyers Consider and Their Value Components

Business Factors

• Leadership & People: Buyers want to buy a well-managed business. This means having a team of experienced and capable executives who can execute the company’s strategy. This also necessitates carefully crafted succession plans that optimize a continuing history of strong leadership.
• Strategy: Businesses that don’t rely too heavily on key managers can withstand changes in leadership without too much distress. Owners cannot be the top producers or salesmen in strong businesses because potential buyers understand they will lose customers when the transition occurs.
  • Intellectual property: Buyers value businesses with valuable intellectual property (IP). This can include patents, trademarks, copyrights, and trade secrets.
  • Location and Facilities: Inattention to the business’s facilities can diminish value because the new owners must make costly repairs and adjustments.
  • Operations: Processes and systems should be robust, documented, and up to date. A prospective buyer will begin factoring in discounts to the sale price if the business operations are weak.
• Sales & Marketing: A solid customer base is another essential value driver. A large and loyal customer base likely to continue doing business with the company is crucial to a successful transition. The customer base should also be broad, not concentrated on a few large contracts. Buyers also want strong brand awareness to build on the company’s reputation.

Forecast Factors

• Financial performance: Buyers want to see a business with a solid financial performance history. This includes factors such as revenue growth, profitability, and debt levels. Buyers will seek a long history of continuous growth and a solid recurring revenue model.

Market Factors

• Productivity: Buyers are also interested in businesses with potential future growth. This can be assessed by looking at factors such as the size of the market, the competitive landscape, and the company’s products or services and comparing these to the current productivity of the business. Businesses maximizing their market and being competitive now will likely sustain that into the future.
  • Industry trends: Buyers also consider the overall industry trends when evaluating a business. This includes factors such as the industry’s growth rate, the competition level, and the regulatory environment.

Investor Considerations

• Risk: Each company has its own risk inherent to its market. Companies with a proven track record of mitigating risk are favorable investments to buyers. Risk mitigation occurs by following documented compliance measures, developing succession plans, and evaluating buy-sell agreements. Competitive companies are those with low legal susceptibility, appropriate insurance coverage, and strong community support.
• Culture: A company’s culture is its lifeblood. Companies with low morale, poor communication and problem-solving, and ineffective management will likely score poorly in attractiveness to buyers. A strong culture is born from ensuring the right personnel are in the right positions within the company. The culture grows as employees see themselves as part of a team that aims to serve the customer base and grow the business enterprise.

Here are some additional tips for business owners who are thinking about viewing their company from a buyer’s perspective:

• Be realistic about the business’s financial performance and operations when self-evaluating.
• Remember that exit planning is a good business strategy because it focuses on value.
• Get professional help from a Certified Exit Planning Advisor (CEPA) at Whalen CPAs.

Businesses can make themselves more attractive by understanding and improving the factors influencing buyers. Thinking about your business as if you were going to sell it will help you maximize the proceeds when you are ready to sell. Maximizing the profit from the sale of your business can help you transition well into the next great chapter of your life.

 

Resources
Hutchinson, S. (2023, August 22). Value Enhancement Process [Presentation] CEPA: 2023 August, Online.
Snider, C. M. (2023). Walking to destiny (2nd ed.). Think Tank Publishing House.

Exit planning, although often only associated with the end of a career, is actually both a starting and end point. It’s not just the final stage. Exit planning is about preparing and implementing systems throughout the business’s life that protect and grow value so that you can maintain a profitable business today and possess an attractive business to potential buyers. Let’s examine the facts about exiting a business and discuss how exit planning is a good business strategy to implement over the life of a business.

Owner Readiness

According to a recent State of Owner Readiness survey conducted by the Exit Planning Institute (EPI), 99% of business owners agreed that a transition strategy is important for realizing future personal and business goals. However, 94% had no “life-after” plan, 79% had no written exit plan in place, and 49% had done no planning at all! Equally disturbing is that 63% of owners planned to transition within the next ten years. The saddest news is that, according to EPI, over 70% of businesses on the market do not sell. This is even true of family-owned businesses; only 30% transition into the second generation and only 12% into the third.

What is Exit Planning?

Exit planning is a process of operating a business through thoughtful planning, effort, and strategy that is transferable due to its strong structural, human, customer, and social capital. This concept interweaves an owner’s personal, financial, and business goals into a cohesive plan that focuses on creating business value today.

What is Value?

When a business is offered for sale, the price of the business is composed of two different parts: the tangible and the intangible assets. Tangible assets are those things that show up on the business’s balance sheet. Only about 20%-30% of a business’s value comprises tangible assets. The intangible assets make up as much as 80% of the value of the business. These intangible assets include the four capitals (structural, human, customer, and social) that manifest as goodwill, management strength, reputation, operations, and company culture. Inattention to intangible assets prevents businesses from successfully transitioning, which is why attending to these important aspects of business is a must to improve the value of a business.

 

Focusing on Value

It should be noted that value and income are not synonymous. Focusing on income keeps some business owners entrenched in maintaining their current lifestyle with little thought of their next chapter in life. Fortunately, focusing on the intangibles that add value to a business are best practices that should generate more income now while improving future value.

Business value improves through a cycle called value maturity. The Exit Planning Institute has developed a Value Maturity Index™ to help owners and advisors move through a value enhancement process called Value Acceleration Methodology™. This methodology begins by identifying the current value of a business, protecting the value by de-risking actions, and building the value through improving the intangible capitals of the business. Once the business value is in a growth curve, the owner can manage the business and further increase value or choose to harvest the value of the business through a transition event.

As you can see, exit planning is a comprehensive endeavor that requires meticulous preparation and a targeted approach. It’s not a step taken at the last moment; it’s a strategy woven into the fabric of your business. In the dynamic business world, where change is constant and the future uncertain, a well-crafted exit plan shields against unexpected storms. The exit isn’t an end; it’s a new beginning. Learn More.

The business landscape constantly evolves, and businesses must be prepared for anything. That’s why it’s essential to have a strong de-risking strategy in place. De-risking strategies help companies to mitigate their risks and protect their assets.

5 Essential De-Risking Strategies

Here are five essential de-risking strategies that businesses should consider:

1. Succession planning: A well-crafted succession plan ensures the business can thrive without key figures. This involves identifying and grooming internal talent and developing relationships with external candidates.
2. Buy-sell agreements: Buy-sell agreements protect businesses from the financial and operational disruptions that can occur when a partner leaves. These agreements outline the terms and conditions under which a partner’s interest can be bought or sold.
3. The 5 D’s of Exit Planning: The Exit Planning Institute cites the 5 D’s as death, disability, disagreements, distress, and divorce. Any of these can devastate a business. Planning appropriately for how the company will be transitioned when facing one of these challenges helps bring peace of mind when tragedy strikes.
4. Risk mitigation strategies: Risk mitigation strategies help businesses identify and reduce risks. This can involve implementing internal controls, purchasing insurance, and complying with regulations.
5. Financial contingency planning: Financial contingency planning helps businesses to weather unexpected financial challenges. This involves setting aside reserves and planning to reduce costs or raise additional capital.

Other De-Risking Strategies

In addition to the five essential de-risking strategies listed above, businesses can consider several other strategies. These include:

• Cybersecurity preparedness: Businesses must be prepared for cyberattacks and data breaches. This involves investing in cybersecurity measures, training employees, and planning to respond to incidents.
• Intellectual property protection: Businesses relying on intellectual property (IP) must protect their assets. This can involve registering trademarks, copyrights, and patents.
• Diversification of revenue streams: Businesses should diversify their revenue streams to reduce their reliance on any one source of income. This can involve expanding into new markets, launching new products or services, or developing new partnerships.
• Supplier and vendor management: Businesses must carefully manage their suppliers and vendors. This involves assessing their financial stability, operational efficiency, and contingency plans.
• Regulatory compliance: Businesses need to comply with all applicable regulations. This can help to protect them from fines, penalties, and other legal challenges.

De-risking strategies are essential for businesses of all sizes. By implementing these strategies, companies can protect themselves from risks and ensure long-term success. Certified Exit Planning Advisors (CEPAs) can help you de-risk your business. Whalen has two CEPAs on their team who are happy to discuss these strategies with you.

 

Determining a game plan for buying your dental practice is the first step to successfully starting this phase of your career. It may be tempting to locate an office and begin negotiations; however, this approach will likely cause unnecessary stress and unwanted mistakes. The suggestions below can help you make solid business choices and keep you on track for a successful purchase.

1. Find out where you stand financially.

Graduating with significant student loan debt is common among dentists. Statistics show that 83% of dentists used student loans to pay for school and that the average dental graduate owes $293,900 upon graduation (ASDA, 2022). These staggering numbers impact the practitioner’s choice of career path. Before beginning the path to ownership, closely examine your debt package. It may be wise to defer the purchase of a practice until you have a repayment plan that works for your income. If you know and manage your debt early, you will be better positioned to purchase quickly.

2. Locate good advisors early.

Dental graduates often report that they need more business training. Their more experienced colleagues would likely agree. It is a common mistake to presume your dental skills will make you proficient at running a business. Find strong and professional business advisors to help you set up a budget and a business plan. A CPA can help you determine the best type of business entity for your endeavor and help with the budget and business plan. They can also direct you to trusted business professionals to assist with funding and legal issues. Find an advisor who is qualified and willing to help you every step of the way. You want to avoid choosing someone to do your taxes; find a partner to guide you into success.

3. Find a practice broker to help you locate an office.

You may have a setting that you envision for your practice. A practice broker can help you locate sellers in that type of setting. Location is a crucial ingredient to successful operations. Avoid markets that are saturated with dentists already. If you are inexperienced, you will likely have difficulty competing with established practices, assuming they are well-respected. Also, avoid the common problem of eliminating practices for consideration because they only fulfill some items on your wish list. Be willing to look at practices with an open mind and listen to what your broker and financial advisors say about the business.

4. Study the practice financials carefully.

After you locate a practice that suits your requirements, review the last two to three years of the business’s financial statements with your CPA and broker. Evaluating tax returns, patient numbers, production, recall efficacy, and collections over the chosen periods is critical. Your financial advisors can explain how this practice compares to national benchmarks. The seller has an emotional connection with the company that may influence the selling price. Some sellers will negotiate the price, while others may resist changing the asking price. Do not fall in love with the practice until you determine if it is worth purchasing and within your designated budget.

 

5. Make sure you list all items that are part of the purchase price.

Does your purchase price include items other than the equipment, building, or goodwill? Remember that the real estate purchase or lease is separate from the business purchase. You will need an attorney to help protect you in the contracts that are developed.

Some sellers will want to retain the accounts receivable, while others sell them with the practice. Some sellers may have items that need to be excluded, such as supplies or specific equipment or furnishings. Ensure you understand what you own after the sale.

6. Set up a contract that includes not just the particulars of the sale but also discusses how the transition will proceed.

Be sure that your contract with the seller addresses particulars about how long the previous owner will remain after the sale of the practice, who will be responsible for lab bills for finishing work, and hours during which the leaving dentist may access the office to complete remaining cases. If the selling dentist is not going to finish work, such as orthodontic cases, discuss how the case will transfer to you. Be sure to include verbiage outlining restrictive covenants so the owner does not set up a new dental practice within reasonable proximity and make your purchase valueless.

Patients may bond more easily if introduced to the new owner as they come into the office over six months to one year. Finding a seller willing to make the transition successful for you and the patients is prudent. Regardless, be prepared for some patients to leave the practice and for new patients to arrive when they see changes to signage and other indicators of new ownership. Goodwill is impossible to quantitate, although it is part of most dental practice sales.

7. Make sure you have an effective staffing transition plan.

Staff members are heavily involved in what happens at the sale of a practice. Many team members have only worked with the previous owner and may have reservations about a new dentist’s fit for the office. While they cannot thwart the sale, it is essential to help them understand their role in the new owner’s dental practice as soon as appropriate. After the staff is aware of the deal, keep the lines of communication open so they can have their questions about future employment answered and envision how their day-to-day tasks will be affected.

Following these tips will help you make a smooth transition into your new role as a business owner.

 

Laurie A. Morgan M.S., D.D.S., M.Ed

Healthcare and Dental Services Consultant

 

 

As you embark on your professional journey, one important decision awaits you: Should you buy an existing practice or start your own? In this blog, we’ll explore the key factors to consider when making this decision, helping you navigate the path to practice ownership with confidence.

Assessing Your Goals and Vision:

• Define your long-term professional goals and vision for your practice.
• Consider your desired level of autonomy, flexibility, and control over the practice.
• Evaluate your risk tolerance and financial aspirations.

Start-up, if you want to

• Practice in a particular location or serve a targeted market.
• Design the office space and brand.
• Choose your own equipment, systems, and staff.
• Crave the challenge of growing practice in your own style.

Additional considerations before setting up an office:

• Be sure your skill set is sufficient. You will need to be comfortable working solo. Be sure your quality and speed of dental services will be sufficient to be successful.
• Identify your trusted advisors. You must locate a banker, accountant, and attorney prior to beginning the start-up. Business advice early and often can prevent regrets down the road.
• Develop a solid business plan that encompasses all aspects of practice. Banks will require you to have a prospectus that outlines your demographic study of the location and population, your plans for marketing the practice, and your work strategy and abilities.
• Make sure you are ready to spend more time than a normal workday during the early years. It takes a lot of effort to establish policies and procedures, secure compliance in all the different areas of business and practice, train staff, keep up with purchasing, etc. If you have life situations, such as an infirm parent or a new marriage or baby, starting a business can add additional complications to an already full life.
• Evaluate your business every day. Are your plans succeeding? What needs to change? Goals are not enough to ensure a successful venture. Actionable feedback from your advisors will keep you on track to succeed.

Buy, if you want to

• Rely on existing office infrastructure, equipment, and staff.
• Generate revenue more quickly.
• Learn from a seasoned practitioner during the transition.
• Avoid stressors of construction and purchasing.

Additional considerations before purchasing an office:

• Consider the reputation of the office. Is the reputation one that reflects your practice style? If the office has a stellar reputation, it will be easy to build on that foundation. If you purchase a practice with a bad reputation, be sure to let patients know that the office is under new management and market to existing patients and new patients on that basis.
• Make sure you are comfortable with the exit strategy of the current owner. It is important that the current owner commits to transitioning the patients. Owners who linger long at the practice, however, may impede patients from attaching to you.
• Evaluate the financials with trusted advisors. You need to engage an attorney to review contracts, and you need an accountant to help you understand the practice’s financial position. A trusted banker can help you understand your obligations on loans and lines of credit.
• Make a new business plan for goal setting. You cannot rely on how the previous owner conducted business. Plan for marketing, recall, patient communication, and compliance. Making goals and evaluating progress are key ingredients to successful business ownership.
• Be aware that the staff may resist the transition changes. Be prepared for some staff to exit and other staff to stubbornly hold on to the past. Be ready to help navigate the relationship-building process and take the initiative to keep staff members informed about how you plan to assist them during the transition.
• Make sure that the equipment is well maintained and that you have proper evidence of the maintenance schedule. Equipment suppliers and repair services can inspect the equipment before the purchase.

Deciding between buying an existing practice and starting your own is a crucial step in your journey to practice ownership. By carefully considering your goals, evaluating the pros and cons, understanding the financial implications, seeking expert advice, and conducting due diligence, you’ll be well-equipped to make an informed decision that aligns with your aspirations. Remember, each path has its own rewards and challenges, and what matters most is choosing the right path for your unique circumstances.

This blog serves as a starting point for your research, and it’s essential to consult with your Whalen professional, who can provide personalized advice based on your specific circumstances and goals. Best of luck on your journey to practice ownership!