The Ugly Truth About Buying and Selling Dental Practices
This article isn’t going to make some dental practice brokers happy. But the story needs to be told so that the consumer has better information.
- Some, but not all, banks offer undisclosed “incentives” to brokers to steer clients to them. This incentive is typically around 1% of the loan amount. $1MM loan = $10,000 check to the broker. Therefore, brokers have little incentive to encourage Buyers to shop banks for loans, which Buyers should. Nor do brokers disclose that they receive this “incentive.” It just arrives in a white envelope and goes into their bank account. PracticeCFO does not accept these incentives or passes them on in full to clients. Buyers – ask your banker to disclose if they offer incentives to referring Brokers.
- A broker is highly incented to pitch an inflated practice value to get Sellers to sign a Listing Agreement because a Listing Agreement provides for exclusivity for an extended period, typically a year, with a ‘tail’ exclusivity period thereafter. Then the broker has all year to let the price sink back to earth as Buyers and Banks keep saying ‘no’…and the Seller is stuck with that broker. Unlike PracticeCFO, most brokers don’t have a certified valuator on staff and will give an “Opinion of Value.” Guess what…anyone can have an Opinion…doesn’t mean it’s analytically rooted.
- Some brokers won’t tell Sellers about all interested Buyers. In California, sales of businesses, including dental practices, are governed by the Bureau of Real Estate (BRE). Therefore, a licensed Broker / Agent must be involved. Under BRE rules, all Buyer offers must be presented by the Broker or her Agent to the Seller. However, many brokers will skillfully ignore a Buyer who has representation for two reasons: 1) that Buyer is better informed and has representation who can save them tens of thousands of dollars (thereby reducing the broker’s commission) and 2) it’s easy to push around a Buyer who doesn’t have representation. Making a purchase of hundreds of thousands of dollars without representation is like representing yourself without a lawyer at a serious trial. Sellers also suffer because they aren’t getting as many offers as they should.
- Brokers can be confrontational, aggressive, and unpleasant. If you’re a Buyer and want to know what it’s like to deal with some Brokers, go spend an hour at your local used car dealer. Here are some of our favorites tactics from brokers:
- “I have three other Buyers lined up ready to pay this price.” Sometimes this is true, but many times it is not. If a practice has been on the market 6 months, your advisor tells you it’s overpriced, and banks won’t lend the full asking price, chances are Buyers aren’t chomping at the bit. The broker is creating a false sense of scarcity.
- “That’s an unreasonable request.” This is usually a tactic to quash a logical request or question by a Buyer using condescension. More often that not, the question or request is completely reasonable, but the broker intimidates the Buyer by playing against their lack of experience.
- “That Buyer’s representative kills deals.” Sellers’ brokers prefer an uninformed, unrepresented Buyer. So, they’ll use a statement like this to keep a Buyer undefended. But the truth is that a Buyer’s advocate gets deals done all the time and deals that are fair to both Buyer and Seller.
- Lack of communication, condescension, or even insulting communications. These are all tools in some brokers’ kits.
- Most brokers don’t estimate the Seller’s tax bill or retirement plan impact of selling a practice. “You’ll make $800,000 from the sale of your practice!” Well, that’s only part of the story. Then the fine print: subtract out commission, federal tax, and state tax which will be due next April 15. Most brokers don’t advise Sellers that they should put some of the sales proceeds away for taxes, nor how much. Nor do they tell Sellers how investment vehicles like a Defined Benefit Pension program can save them tens of thousands of dollars in taxes. Most brokers also have no idea of the Seller’s full financial picture and whether they’re financially ready for retirement – that’s someone else’s job.
- A Seller’s broker has zero stake in the success of a Buyer. They get a sales commission and are on to the next deal. Therefore, they don’t analyze a Buyer’s future cash flows after loan payments and the Buyer is on her own. A Buyer is on her own unless she has representation.
If you’re interested how practices can be bought and sold ethically, collaboratively, and profitably, contact us. PracticeCFO Transitions, Inc. is a licensed California brokerage.
– Greg Maravilla, MBA, CPA, CFP®, PracticeCFO