Maximizing Your Practice's Value: The Year-End Strategy

For Smile Source dentists considering a future transition, the end of the year isn't just about holidays; it's a critical time to optimize your practice's financial health and prepare for a higher valuation. Buyers place immense value on clean, predictable financials. Here's a look at the essential steps for boosting your practice value and ensuring transaction readiness.

The Year-End Valuation Hike: Boost Your EBITDA

A practice's valuation is most often based on a multiple of its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). By taking strategic steps before your financial audit, you can significantly increase this key metric.

Reduce Non-Essential Expenses

Now is the time to scrutinize your overhead. Look for perks that a buyer wouldn't inherit, such as non-essential subscriptions, excess travel, or unused professional services. By cutting these non-essential expenses, you immediately increase the EBITDA on your books, which directly translates to a higher valuation multiple.

Confirm Hygiene Recall Systems

Consistent, predictable revenue is golden to a buyer. A high patient retention rate, anchored by a robust hygiene recall system, is a major selling point. Before year-end, confirm that your recall system is operating at peak efficiency:

• Review past-due lists and implement a focused outreach campaign.
• Ensure all patients have their next appointment booked before leaving the office.
  
  

Tax Strategy for Sellers: Capital Gains vs. Ordinary Income

How the final price is allocated among the practice's assets has significant tax implications for the selling dentist. This negotiation point is one of the most critical aspects of the entire sale.

Goodwill vs. Equipment

The sales price is typically divided into two major categories for tax purposes:

• Goodwill: This is the intangible value of your practice—the patient base, reputation, and brand. The gain from the sale of goodwill is generally taxed at the lower Capital Gains rate.
• Equipment & Tangible Assets: This includes your dental equipment, furniture, and fixtures. The gain on these assets, particularly any amount related to past depreciation recapture, is typically taxed at the higher Ordinary Income rate.

The Seller's Advantage

Sellers seek to allocate as much of the sale price as possible to Goodwill to take advantage of the more favorable capital gains tax rate. Negotiating a high goodwill allocation is a key strategy for maximizing the seller’s after-tax proceeds from the sale. A specialized advisor can help you balance your goals with the buyer's financial needs.

Due Diligence & Readiness

The due diligence phase can derail a sale if documents are messy or incomplete. Getting organized before year-end saves time, eliminates uncertainty for the buyer, and reinforces your practice’s value.

Digitize and Organize Key Documents

Gather and digitize all critical administrative paperwork, including current office and equipment leases, employment agreements with compensation structures and benefits plans, and contracts with labs, suppliers, and key service providers.

Clean Financial Reports

Work with your CPA to ensure your financial statements are clean, reconciled, and clearly represent the practice's operating performance (EBITDA) for the past three years. A clean, transparent financial package instills buyer confidence and accelerates the closing process.

Industry Expertise: JW Advisory for Smile Source Members

A successful dental transition is complex, requiring expertise in finance, taxation, and the dental industry. Smile Source members benefit from partners like JW Advisory, who specialize in end-to-end practice transition experiences. JW Advisory’s practice transition services help sellers maximize their sale price and peace of mind by guiding them through every step of the process to find the best financial and cultural fit.