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COVID-19 brings additional considerations when selling your practice

Posted Apr 22nd, 2020 in the wire, thought leadership, 2020

Nate Tchaplia, Chief Development Officer at dentalcorp

While no one can predict the long-term social and economic impact of the COVID-19 pandemic, we have already seen significant job losses and economic turmoil. Dentistry, like most industries, has not been spared.

Amidst these challenges, many practice owners are asking themselves if it is still a good time to sell. The answer to that question has—and always will be—based on personal circumstances and needs, many of which have changed drastically by this crisis. If selling today is an answer worth exploring, it’s important to ask the right questions.

The first question you should always ask is how your personal and professional growth ambitions align with the group or purchaser you are considering selling to or partnering with. Beyond that, this pandemic has raised unique considerations that should be taken into account today and well after things return to normal (whatever normal may look like). That is, can you successfully sell your practice, and if so, what will that look like?  

While dentistry has historically been recession-resilient, it will not be immune to the catastrophic effects this pandemic is wreaking on global economies. In this economic environment, banks, particularly Canadian banks, are increasingly risk-averse and are approaching their lending activity with a much higher level of caution and scrutiny. In the dental world, this means buyers are finding it more difficult to secure purchase financing. If you are in discussions with a purchaser, it is vital to understand what they are doing to ensure they have the financial means to close the transaction. Before spending any time, money or effort on selling in the middle of or after a crisis, it is useful to know the financial wherewithal, sophistication and track record of the potential buyer.

I encourage practice owners and advisors alike to consider the below factors before engaging in a discussion about selling a practice.
1.  Compensation if a buyer can’t or won’t close

Obtain a sizeable deposit with a signed Letter of Intent (LOI). Taking this step at the outset will provide owners with compensation for the time, effort and expenses incurred during the sale process. By insisting on a deposit, practice owners can force a purchaser to demonstrate their financial strength and commitment to completing the transaction.

2.  No financing conditions

If a purchaser is unable to secure capital from its lenders or investors, financing conditions provide purchasers with an easy exit to walk away from the transaction. Sellers will have no certainty that a closing can take place until conditions have been waived. The absence of a financing condition provides peace of mind that the buyer has the funds to fulfill their commitments.

3.  Flexibility with deal structure and liquidity opportunities

It is crucial to understand whether the seller’s preferred structure can be accommodated and what restrictions, if any, the buyer has. If a seller is required to retain an interest in their practice, it is worth knowing the parameters of the retained interest and how and when it can be sold. How is the value of the retained interest calculated in the future? Is there a guarantee that it can be sold, and if so, at what value and under what timeline? If you are required to find your own buyer, what is the marketability of the retained interest and do you have a right to choose the buyer?

Similarly, if the seller receives shares as part of the deal, it is important to understand what those shares represent in actual value. What has the historical performance been? Have there been opportunities to sell? If so, how many and did all shareholders get to participate?

Finally, selling your practice should be more than a paycheque. It should be a personal and professional transition to be proud of and benefit from. During crisis, an individual or organization’s leadership is pushed to the forefront and seeing how they respond tells you a lot about their culture, strengths and, most importantly, values. Before starting a discussion about selling your practice, it is essential to understand the leadership style and capabilities of the buyer and the support they offer in a time of crisis. How has the potential buyer delivered value to their dentists and practice(s)? How are they ensuring that their staff are financially supported? Are they providing resources to support the mental health of their staff? Are they going above and beyond to ensure their teams are supported with up to date resources? How are they sharing their knowledge and expertise with the industry?

So, what is the key takeaway here?  Times have certainly changed, and if it looks too good to be true, it probably is. The above considerations can help practice owners in understanding a potential buyer’s leadership and character, as well as their financial strength.

As originally published in Oral Health.

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