The Fine Art of Negotiation
Every situation is different, but the commonality is that you should try to really understand what’s most important to the seller. Is it holding on to accounts receivable? Is it a shorter transition period?
Once you really “get” the seller, you’re in a position to structure a win-win. And that phrasing is important—you’re not trying to “win” to the detriment of the seller. You want to negotiate a sale that leaves you both happy.
Bottom line: if you’ve found a great practice, it’s going to be a cash machine for you over the next several decades. You don’t need to play hardball on every detail.
What Needs to Be Negotiated?
Every deal is different, so some of the following items may or may not apply to your acquisition. That said, here are 3 topics of negotiation that tend to come up when buying a practice.
- Purchase price (this is the big one)
- Terms of sale (also very important)
- Accounts receivable (don’t get too hung up on this)
Negotiating the Purchase Price
You’ve done extensive research on the practice to assign value to it. You’ve done qualitative and quantitative analysis of the practice’s financials, patient base, location, and a bunch of other factors. You feel confident in the value you’ve arrived at.
If that value is higher than the seller’s asking price, keep your mouth shut and gratefully accept the asking price. No negotiation needed.
If your value is lower than the asking price, you’ve got a negotiation on your hands.
The best you can do is take the seller through how you arrived at your value, showing them supporting data for each point you make.
If the seller doesn’t want to budge and the difference isn’t too significant, you don’t want to lose the deal over it. Don’t lose sight of the forest for the trees. And if you can concede a bit on the purchase price with a stubborn seller, you may get them to concede on some other points of negotiation.
If the asking price is way outside of the realm of reality, the seller may be under the influence of a broker who is feeding them unrealistic expectations. The broker may try to minimize the higher purchase price by pointing out that it’s “only” a small difference in your monthly payment.
When it comes to negotiating with a stubborn broker, you can flip the broker’s logic on its head.
The broker: This practice is so good that paying $50,000 is really nothing to your monthly cash flow. $50,000 on a 10-year loan at 4% is only $506 per month. Are you really going to let $506 get in the way of your perfect practice?
You: Well, that extra $50,000 you want for your client is likely going into a retirement fund. So if it’s going to sit in a 50/50 stock/bond portfolio and fund their retirement, it’s going to earn about 5% over the next 30 years. That’s only $268 a month in retirement spending before taxes. You’ve got an ideal buyer here with full bank approval and a team ready to close on this practice as soon as possible. Are you really going to let $268 a month get in the way of the perfect buyer buying this practice?
Negotiating the Terms of Sale
In order of significance, the sale’s terms come right after the purchase price. Maybe even alongside it.
Here are the terms involved in most practice transitions:
- Deal structure: this involves issues such as seller financing, payout schedule, earn-outs, and more. There are so many ways to structure a deal, and all of them are negotiable.
- Assets included in the sale, such as equipment, inventory, and patient records. Sometimes, real estate is included (though we always recommend structuring the real estate as a separate transaction). Often, there isn’t a lot of negotiation to be done on assets: the assets of the business are the assets of the business.
- Contingencies are conditions that must be met before the sale can be finalized. Common contingencies include the buyer’s right to conduct due diligence on the practice, the buyer’s ability to secure financing, and the seller’s ability to obtain a lease assignment or purchase the real estate associated with the practice. The duration and terms of these contingencies can be up for negotiation.
- Non-compete clause: a provision in the sales agreement that prevents the seller from practicing dentistry within a certain geographic area for a certain period of time after the sale. If the seller is retiring anyway, this is a moot point (though it doesn’t hurt to include it).
- Transition period: a time period during which the seller and buyer work together to ensure a smooth transition of ownership. This may include the seller training the buyer on the practice’s procedures and systems and introducing the buyer to the practice’s patients and staff. The duration of the transition period can be negotiated.
Negotiating Accounts Receivable
Any time you’re able to acquire accounts receivable at a discount, it’s a no-brainer. We call it “buying money with less money.”
If the seller wants to keep AR, it’s usually not worth fighting over. Give the seller this concession, and hopefully get a concession in return that’s more important to you.
Don’t Be THAT Buyer
At least 80% of what you’re buying in a dental transition is relationships. You’re buying relationships with patients, staff, referral partners, and the seller. Negotiate well and those relationships will have a great, solid foundation. Negotiate poorly and you’ll destroy those relationships and wonder what happened.
Most buyers understand this and negotiate accordingly. The negotiations in these cases tend to be very amicable. Buyers’ and sellers’ teams work hard to understand how best to meet the needs of all parties. Communication is open and frequent, and both parties usually give a little bit to ensure the deal gets done.
A few buyers, however, believe that aggressive negotiations are the only way they’ll get “a good deal” on a practice. They mistakenly believe that the seller is out to take advantage of them. This type of buyer has read too many cynical dental Facebook group posts about dentists being suckers and is determined that no one is going to pull anything over on them.
This sort of buyer comes out with guns ablaze. It doesn’t work.
Don’t be the buyer who feels entitled through every step of the deal. Don’t be the buyer who alienates every party involved with overly aggressive negotiations. Don’t be the buyer who expects instant responses from everyone else but gets back to others in their own time frame.
Don’t be THAT buyer.
How low should you offer when negotiating buying a dental practice?
It all depends on the specifics and whether you think the seller’s asking price is reasonable or way off. You could offer 10-20% below the asking price to start, but avoid excessively lowballing. Make your offer attractive based on careful valuation, and explain your rationale to the seller.
Who pays broker fees when buying a dental practice?
If there’s a broker in the picture, the seller usually pays the broker’s fee, but this is negotiable. Fees range from 3-10% of the sale price.
What is included in a dental practice purchase agreement?
A dental practice purchase agreement typically includes provisions for the following: assets purchased, representations and warranties, non-compete, transition period, and liability.
What is a reasonable transition period when buying a dental practice?
Typically 30-90 days. Negotiate adequate time for the seller to train you on systems, introduce you to patients, etc.