At some point in your career you will feel the need for change. You may have a need to overcome solo-economic dependency, improve staff relations, or find some relief from the stress of managing a private practice.
In this article, we address the initial and essential questions our clients often ask when they are considering a transition of their dental practice. We recommend that you read this in your early planning stages for a future transition, consider it an introduction to the issues and a starting point for more detailed discussions throughout the process of preparing for and eventually transitioning your practice. Through proper planning you will find you can preserve and enhance the value of your practice. Perhaps more importantly, you will learn how to avoid making some critical mistakes that can turn the sale of your professional practice into an emotional and financial disaster. We trust you will find this booklet presentation educational and that the information it contains will assist you in charting a course that will lead to achieving personal and professional goals. We have also prepared a “Seller’s Dental Practice Transition Guide” detailing and explaining the steps of the actual transition process (i.e. buyer visits, letter of intent, lenders, lease/real estate, staff, accounts receivable, working back, etc.) which we provide to our clients once the practice is under contract, or sooner at their request.
Through proper planning you will find you can preserve and enhance the value of your practice. Perhaps more importantly, you will learn how to avoid making some critical mistakes that can turn the sale of your professional practice into an emotional and financial disaster. We trust you will find this booklet presentation educational and that the information it contains will assist you in charting a course that will lead to achieving personal and professional goals.
1. How will I know when it is the “right time” for me to sell my practice?
The following ten items are the most common reasons doctors give for considering a transition:
1. The need to overcome the pressures of solo-economic dependency.
2. To improve the bottom line.
3. More time to pursue other interests (i.e., family, recreation, career change, etc.)
4. Change of scenery and/or a new challenge.
5. Limited or no future in current position.
6. Health concerns.
7. Reduce stress associated with clinical, management and administrative responsibilities.
8. Alleviate frustration from insurance companies and government pressure.
If you are motivated by one or more of these factors to make a change, maybe now is the time to consider some type of transition. The exact timing will be right when you can answer yes to each of the following questions: Can I financially afford to make a change? Can the practice financially support a transition? Can the facility accommodate another doctor if I decide to stay on after the sale? Can I give up part or all of my control? And does it feel right?
Perhaps the best indicator is how you feel inside. Decide whether you are an “increaser” or a “decreaser.” If you can’t wait to get back to the office on Monday morning, if you still enjoy managing and motivating your staff, or if you are constantly looking for ways to grow and improve your practice and see more patients, then you are considered an increaser. On the other hand, if you have seriously entertained thoughts of cutting back the time you spend in the practice, if you experience a lot of stress and fatigue, or if you are bored with the practice and just marking time, you are probably a decreaser. (Read an article on this topic at www.ctc-associates.com)
As an increaser the primary reason for considering a sale of any portion of your practice would be to bring on another equally committed doctor to help manage the growth. If you are a decreaser, you may want to investigate the possibility of a transition in the near future. Your primary motive will likely be to enhance your quality of life by making the most out of your remaining time in dentistry.
As we discuss in greater detail later in this article, if you decide to sell, you don’t necessarily have to quit. You just need to know how to structure the right kind of relationship with another doctor. Most dentists equate selling their practice with retirement, or a loss of control and status, and/or a reduction in income, and therefore often wait too long to begin the process. Across the country, we see more and more dentists selling their practices up to five years before retiring from dentistry. If properly structured, these sale/work-back arrangements have been a very successful way to transition a practice. This type of transition allows a practitioner to sell the practice to a third party. That third party could be another established practitioner, a new dentist with no patient base, or possibly an independent business entity. Depending on your needs and goals, these practice transitions can allow you to “cash in” on your practice equity and still work for many years to come. Remember, selling your practice does not always mean giving up practicing. But what you do give up is the administrative and managerial hassles of running the practice.
One of the primary benefits of a practice transition is to allow you to overcome what is referred to as solo-economic dependency. This phenomena refers to the negative cash flow that takes place while you–as a solo practitioner–are away from the practice. Extra time away from the practice can help you discover or expand other viable avocations and/or vocations in your life or spend more quality time with family and friends.
In summary, our experience suggests that any doctor with a time line for retirement of five years or less who does not have a plan underway for the transition of his/her practice could be jeopardizing one of his/her most valuable assets. Far too many doctors wait too long and receive too little for their practices. This is a highly individual and complex issue worthy of very careful planning and consideration. A thorough and realistic evaluation of your specific situation and your transition options can be invaluable for arriving at the best decision.
2. How will demographic trends over the next ten years affect my practice value and marketability?
Dental practices sell because established practitioners have what young dentists need–access to patients and the cash flow that patients represent. These doctor-patient relationships and the associated cash flow are commonly referred to as “goodwill” which comprises 60 to 80 percent of the value of any dental practice.
Over the past decade, the number of U.S. dental schools has decreased by 10 percent and the number of annual admissions to each school has declined by almost 30 percent. The most immediate impact of this decline has been to lessen marketplace competition, thereby allowing more young doctors to start from scratch and survive. Despite seeing a market increase in the success of scratch start-ups, a practice purchase usually remains the best option for a dentist starting out.
A combination of the aforementioned decline in dental school graduates with a recent increase in the number of dentist retirees is having an effect on practice values. Simply put, nationwide there are more practices for sale and fewer buyers for them. However, practice values vary on location and practices located in rural areas tend to have a more difficult time in receiving full value as compared to practices in larger cities. Consequently, if you have plans to sell in the next several years, it will be well worth the time and effort to begin the planning process of transitioning your practice now, or as soon as you feel you are financially and psychologically ready to do so.
3. What are my transition options?
The most common and most popular transition options are the “sale/work-back” options. These options allow you, as the seller, to work-back for the buyer after the sale of your practice is complete. There are essentially three types of sell/work-back arrangements. Depending on the type of practice you have, the structure can be set up to be very complementary to both parties.
The first option is a deferred sale/work-back. This option is recommended in situations where practice production is not sufficient enough to accommodate an immediate sale of the practice. Therefore, a deferred sale has the new buyer work as an associate for one to two years while building the practice production. Then, when he or she acquires the practice, there is sufficient production for him or her to service the debt on the practice acquisition, make a good living and still allow you to work-back as an independent contractor for a period of one to three years (or in some cases longer). This transition structure requires both parties to commit in writing to the price, terms and conditions that will govern the eventual buy-out. The buyer is usually required to put down earnest money in a good faith gesture to complete the sale at the end of the deferred period.
For the “increaser” we described earlier, a variation of this first option is a deferred buy-in. Rather than selling the entire practice after a deferred period, you instead sell a one-half interest in your practice and form a partnership with the buyer. A deferred buy-in is only for those doctors interested in working for another seven to ten years or more while continuing to grow and improve the practice. You must also have a desire to operate in a full and equal partnership arrangement which means sharing both control and profits.
As a side note, many doctors are concerned that their office is not large enough to accommodate two doctors working at the same time. We suggest straddling the doctors’ schedules. For example, one doctor works from 7:00 a.m. to 1:00 p.m. while the other doctor works from 12:00 p.m. to 6:00 p.m. Studies show most doctors produce more income during a six-hour clinical day than an eight-hour day. Using the office in a more efficient manner allows both par¬ties to leverage their practice activities, lower the overhead percentage, and net more income since many fixed expenses stay the same while production increases.
The second sale/work-back option is called a merger pre-sale. Under this scenario, the buyer already has a patient base but is looking to increase his or her net income without necessarily increasing the work load. One of the parties moves his/her practice to the other party’s facility. The objective is for one doctor to sell the practice and work for the other doctor as an independent contractor for the duration of his/her career. The buying doctor benefits by receiving additional income from the seller’s production in exchange for purchasing and managing the seller’s practice. If structured properly, both parties end up with more take-home pay, and it helps both candidates overcome solo-economic dependency. This type of transition is very lucrative financially; however, the difficulty lies in finding the right candidates within a five mile radius of one another. Therefore, pre-sale merger transitions are rare, require extensive planning, and may take up to five years to consummate.
The third sale/work-back structure involves selling your practice on the onset and working back for the buyer, thus removing the initial deferred or junior associate period. Under this scenario, the seller’s practice income usually drops more than half, and there is the possibility the seller may be required to exit the practice sooner than anticipated if the buyer’s schedule gets thin. However, the seller may want to carry back a note on the practice thus having the monthly income from the buyer’s promissory note to partially offset the decrease in practice income. This type of transition works best for a seller who wants more time off and has the resources to take a cut in pay.
Another option is to sell to a dental management services organization (“DMSO”). These organizations may pay top dollar for your practice and will allow you to continue working in the practice as an employee. They assume ownership, administration, management and marketing responsibilities for the practice, allowing you to focus on the clinical aspects as well as giving you more time away and freedom from the practice. They often bring in management and marketing systems that can help bring in more patients and streamline the efficiency of the office. In many cases the company will allow you to participate in its operation and profits through stock ownership. However, this type of arrangement only works for certain types of doctors. Caution should be advised, since some DMSOs may over promise and under deliver.
If you decide to look into a pre-sale type transition, you need to plan ahead. It could be a costly mistake if you wait too long before you plan a transition. To give you some idea of the financial costs associated with waiting too long, we ran an analysis of two dentists the same age with identical practices. Dr. A sold his practice at age 55 and continued to work as the associate for the next seven years, then retired. Dr. B waited until age 65 to sell and then retire. Our analysis assumed that both doctors A & B sold their practices for the same $200,000. From the proceeds of the sale alone, Dr. A lives on over $50,000 per year for 15 years and still has $272,000 in the bank. Dr. B receives a modest down payment and just under $24,000 per year for 10 years. Then Dr. B’s money runs out. With proper planning, Dr. A was able to pull his practice equity out and have it start working for him ten years before he retired from the practice. Both did the same number of fillings and crowns. Both took home the same incomes during their career. But the key was that Dr. A planned ahead and structured the type of transition that was complementary to his needs and goals.
As mentioned earlier, variations of the sale/work-back arrangements are the most popular transition types. Some of the advantages to the sale/work-back arrangement are:
- Freedom from administrative and management responsibilities.
- Reduction in clinical responsibilities.
- Increased time off from the practice.
- Possible increase in take-home pay.
- More efficient management systems.
- Increased patient flow.
- Professional interaction.
Nevertheless, as with anything, there are also disadvantages to the sale/work-back arrangements in general. They include: relinquished control of the practice; loss of autonomy; staff polarization; changes in operating procedures and personnel as directed by the new owner; potential conflicts with the other doctor; and possible declines in personal income.
Selling 100 percent of a practice and walking away is far less complicated than selling part of the practice and is, subsequently, the preferred transition method for most dentists planning to retire sometime within the next five years. However, each method offers certain advantages and disadvantages, as listed in the preceding paragraph. Careful consideration of both the opportunities and risks associated with each approach should be made before entering into any binding legal agreement. These new relationships can be very rewarding if put together properly. They can be devastating if they are not.
4. Why not bring in an associate for a while to see if we get along and if he or she is the right candidate for my practice?
If we have learned anything over many years of transitioning practices, it is that the odds of a typical associateship breaking up and becoming a disappointment for all concerned are over fifty percent. We call these arrangements “ambiguity-ships”, because of the ill-defined parameters that govern the relationship and the lack of any up-front equity investment. In fact, the only reason to bring an associate into your practice without first establishing a well defined agreement and requiring an equity investment is if, and only if, both you and the associate have short-term goals and needs (meaning six to twelve months or less). If you hire an associate without requiring an equity investment within the first six to twelve months and without having a well-defined agreement in place, plan on him or her eventually leaving.
Contrary to conventional wisdom, you do not have to “live together” for a year or two to see if he or she is the ideal candidate. In fact, the longer the relationship goes without the requirement of an equity investment and without the terms of a well-defined agreement in force, the greater the likelihood it will end in disappointment. Keep in mind a commitment to ownership is a much different kind of commitment and brings with it an entirely new mind-set and focus for all concerned. Unfortunately, we see far too many sellers who have well-paid associates in their practices for years without any problem, all the time expecting to someday sell the practice to the associate and ride off into the sunset. Some of these situations have ended in disappointment and professional divorce. Some have ended tragically, costing the seller thousands of dollars and years of his/her retirement. Do not put your practice at risk! If an associate cannot or will not make a commitment to ownership, how can you be sure they will when you need them to?
If you have an associate in your practice now, and if you think you would like to commit this associate to an ownership role, please seek professional help before doing anything. We have found the initial approach to the associate is critical in creating the proper environment for a long-term commitment. If you get things off on the wrong foot, it is unlikely anyone can resurrect what may otherwise have been your best opportunity for an excellent transaction.
If you are not planning to cease your clinical activity for at least another ten years, you may consider selling part of the practice now and the rest later, when you are closer to retirement. This method has proven best for middle-aged dentists who are still experiencing growth and who could use another set of committed hands in the practice. Bringing in an equity partner is preferable to having several short-term, revolving associateships.
5. How can I know what is best for me?
The first step is to do exactly what you are doing now. Educate yourself about the process and the possibilities. Ask the right questions. Questions such as: “Am I meeting my real needs? And, what information do I need to inform myself of all viable options?”
The second step is to ask yourself about how you really feel inside, “Does my decision show I am honest with myself? What would I decide if I wasn’t afraid or apprehensive about change? Do I really want to have another doctor in my practice at this time?”
Finally, talk with someone you can trust to understand your needs and help you chart a course to meet those needs. Seek answers and advice from someone who really knows the transition process.
6. What do I really know about selling a practice? Are my expectations realistic?
Every dentist who has decided to sell his practice has certain preconceived ideas about what the process entails. Sometimes those ideas match reality. Often they do not. It would be virtually impossible to list all of the misconceptions that dentists bring to the process, some of which cost them tens of thousands of dollars.
Here are just a few of the things you can realistically expect as the process unfolds.
- Expect the process to take time. Six to twelve months for general practices in major metro areas. Up to 24-36 months in smaller rural communities.
- Your most interested buyers will have little money, if any at all, and will need financing.
- If you want all cash, you may expect to discount your price somewhat depending on your location.
- Unless you take the proper steps up front, expect to have every disclosure, every number, every minute detail of the transaction, and every representation you make scrutinized, questioned, and negotiated.
- If you are not sure how to utilize your lawyer and accountant in this specialized process, expect to pay for their education regardless of whether the transaction is completed or not.
- And just when you think you have everything in order, expect your purchaser and his advisors to change their minds at the last minute.
A successful transition is not the absence of problems, but having the ability to solve them in a manner that is timely and satisfactory to both parties. Having a qualified professional at your side can surely enhance your ability to deal with the unexpected.
7. What is my practice really worth, and who is most qualified to appraise it?
At present, practices are selling for amounts in the range of 45 percent to 68 percent of the practices most recent annual collections total. (This range excludes duress sales for death, disability or health reasons. These sales may average 30 percent to 50 percent of the prior year’s gross collections figure.) Specialty practices, however, typically sell for less. Circumstances surrounding each sale vary widely, from estate sales to partnership buy-ins. In general, healthy, thriving practices with a majority fee-for-service patients and strong new patient flow sell for more. The difficulty in realizing the full market value of an older practice lies in convincing a prospective purchaser’s of the latent value of the practice.
It is important to understand that the true value of any practice rests in the mind of the buyer–not in the mind of the seller. A practice is really only worth what a buyer is willing to pay for it. Perhaps the best way to illustrate this is to consider the market for medical practices. Presume that you are a physician looking to sell your medical practice. It consists of the same revenues, overhead, and location as the dentist next door. What is your practice worth? Ask your M.D. counterparts if any of their colleagues have sold their practices, and if they have, ask them how much they sold them for. You will find medical practices with identical revenues sell for less than their dental practice twins. Why? The value is in the mind of the buyer. Young physicians beginning their careers simply do not experience the same levels of competition for patients as young dentists experience. Without the need to “plug-in” to someone else’s patient flow, most young physicians can start their own practices or join a large group practice. In the dental field, however, there exists a more intense competition for patients. Therefore, established practices represent a significant value for young dentists who need immediate access to patients. Remember; when there are no buyers, there is no market value.
Now that you understand how the buyer’s needs affect practice value, you can see why the process of establishing and substantiating a market value for your practice is so crucial. The wrong approach can lead to unfortunate results such as losing credibility with buyer candidates, delaying the sale of the practice, and possibly bankrupting the eventual purchaser.
Intangible assets, i.e., goodwill, loyalty, trust, relationships, perceptions, and restrictive covenants, represent between 60 and 80 percent of the value of your practice. Consequently, there is no simple formula to objectively evaluate the intangible aspects of your practice. Oddly enough, these are the most essential things a buyer needs to buy. A buyer can find newer, better and less expensive equipment and furnishings just about anywhere. He or she may also be able to find a better facility or location and a staff with better abilities. What he or she will have difficulty finding are the intangible relationships known as goodwill as well as the trust you have spent many years developing with your patients and staff. Out of those relationships come the financial rewards the buyer seeks. This is why the buyer needs you. This is the primary reason why the buyer will pay you a considerable amount of money for your existing practice.
How much an individual will pay for a practice is entirely dependent on what they believe, how they feel, and in whom they trust. If the buyer feels good about you and the staff, trusts that the appraiser has been objective and fair, and believes that he or she can actually make things work, then he or she is likely to pay the full appraised value.
The person most qualified to appraise your practice is one who has actually demonstrated the ability to market and sell practices in your market at or near their appraised values. Beware those who make more money from practice appraisals than they do from actually closing transactions. The appraisal is not worth the paper it is written on if the appraiser is not able to present you with prospective purchasers ready to pay the appraised value. All too often unrealistic, ego-inflated appraisals have caused legitimate purchasers to pass on excellent practice opportunities. Many times these same sellers eventually sell the practice for an amount much less than their original “asking price.”
The moral of this story is to know who you are dealing with. Ask lots of questions and check references (from both buyers and sellers) who have actually closed their practice sales through a particular firm. Some firms are very open about these references; some even publish the names of the doctors and the transactions they have been involved with.
8. How will I know I have the right purchaser?
Ultimately, the decision of choosing the right buyer is solely yours. However, it may be useful for you to be aware of some of the things we look for in a high caliber purchaser. We look for individuals who demonstrate integrity and moral character both in their dealings with us and with our clients. We look at their track record for making and keeping commitments. We review and compare their goals and philosophy with those of the seller to determine their compatibility. We consider their credit rating and financial resources. And finally, we look at clinical experience and their willingness to continue their learning process beyond school, in other words, their level of humility or “teachability”. If these things are in order, you probably have a pretty good candidate.
But you may not know for sure until long after the sale is complete. Fortunately, there will be signs along the way. You will be asking the purchaser to make a tremendous commitment in purchasing the practice, but preceding this large and important commitment will be plenty of smaller ones. A reasonable indication as to how well the doctor will deal with “follow-through” during the sale is found in how he or she handles the smaller commitments leading up to it. The right purchaser will exhibit honesty and integrity by consistently following through with these smaller promises.
In addition, the “right” buyer will also be fair-minded and cooperative throughout the process. He or she will share a philosophy similar to yours as it relates to patient care, clinical procedures, staff relations, and so forth. He or she will have good work ethics, strong morals, and values that mirror your own.
The transition of a professional practice is a very revealing process. As you move toward the completion of the sale, you will learn new things about the prospective buyer and, quite possibly, about yourself. In our experience, somewhere along the way, usually prior to closing, questionable candidates will reveal themselves through their actions and their attitudes.
9. How can I get the most money for my practice, and at the same time be fair to the purchaser?
It is no mystery a well-managed practice with an excellent staff and high patient loyalty is worth much to a purchaser. If you do not already know how your practice measures up, then find out. There are several key indicators which will provide a penetrating insight into your overall staff efficiency and practice performance. If you discover problem areas, get them fixed before you put the practice on the market. Better to address and correct the problem up front rather than try to explain it away later.
Maximizing the proceeds from a sale while considering what is fair to the buyer is an intricate process. As part of this process, you should ask yourself this question: “If this were me, would I purchase this practice under these terms?” For the practice value to be meaningful, it must address the fundamental issues of income feasibility and investment integrity for the buyer. That is, can the purchaser service the debt on the practice acquisition and still take home 25 to 30 percent of the gross collected production. Obviously, the challenge is to convey to the buyer a sense of appreciation for the value of the intangible and tangible assets in order to substantiate the asking price. This is not an easy task. So whatever you do, get professional guidance from someone who really knows how to get the job done and who has the track record to prove it. Chances are you have only one practice to sell. Do it right the first time. You may not get a second chance.
We suggest the following three-part system in developing a win-win transaction:
- Seek to understand before being understood. Truly understanding the other party’s needs and expectations leads to developing a climate of mutual trust and respect for both parties to act upon.
- Plan activities which allow a positive relationship to develop.
- Allow the relationship to fully develop before discussing business in earnest, thus enabling both parties to discuss sensitive issues without being defensive.
If both parties become sensitive to the needs of the other, and if they can clearly see that their individual goals and objectives are intertwined, then the synergy that results will allow the doctors to achieve a far greater degree of success.
10. Should I attempt to get all cash, or should I finance a portion of the sale?
Several years ago, finding a buyer capable of completing an all cash transaction was a substantial obstacle; however, in recent years all cash funding for practice acquisitions has become a more common occurrence.
Receiving all cash for a practice may sound enticing, but in reality it has two fundamental drawbacks. In many instances, requiring all cash for your practice may mean taking a discount on the purchase price. Most buyers perceive the risk of an all cash deal as higher because you have now absolved yourself of any vested interest in the success of the practice. By carrying back a note for a portion of the purchase price, you are demonstrating your faith in the practice to produce and perform. Consequently, this lowers the perceived risk in the mind of the buyer. The second drawback is taxes. The receipt of a large lump sum amount in any single tax year can often bump a taxpayer up into a higher tax bracket and precipitate unnecessary tax obligations. You should consult with your tax professional before making a firm decision on whether to ask for all cash or not.
11. How will the purchaser finance the acquisition?
Most of the likely purchasers of your practice have a negative net worth. That is, they owe more than they own. They typically have little or no money with substantial school debt and limited access to the kind of money it takes to either acquire or make a down payment on a practice. Their only hope is to find either A) a lending institution or B) a selling dentist (you) who believes enough in their potential to loan them the money needed to get started or C) a combination of both, i.e., a down payment financed through a lending institution and the remainder of the purchase price financed by the seller. Although financing is difficult for a new dental school graduate, with the right banking connections and proper presentation, obtaining full financing from an outside source is possible.
12. What if I am asked to subordinate my seller note to the bank?
Sellers who choose to finance a portion of the purchase price for their practices will almost always be required to subordinate their security position to the bank or institution lending the down payment to the buyer. The purchaser will not likely have the down payment sitting in his checking account and will need to borrow it. A bank willing to make the purchaser a loan for the down payment will require a first lien on the practice assets (as well as any and all other assets of the purchaser). The seller will be asked to subordinate his note to that of the bank. This puts the seller in a second lien position, a prospect that many sellers are not completely comfortable with.
Fortunately, our experience with this type of seller financing has proven to be very successful and we can confidently say the odds of the purchaser failing to pay are extremely small. In fact, an examination of our practice transactions during the past fifteen years reveals a purchaser loan default rate of less than one percent. The risk you take by being in a second lien position to a bank is relatively small when you consider that a bank has very little interest in or ability for operating a foreclosed dental practice. Their only sure recourse in the event of default is to seize tangible practice assets and sell them at a fraction of their value in the secondary market. As a selling dentist, your options for recourse are more diverse and include the possibility of taking over the practice entirely until another purchaser is located. A well-written security agreement can reinforce your position and allow you to reap the benefit of maximizing your net after-tax proceeds by taking back a subordinated note for some portion of the sales price.
13. What if my patients stop coming to the practice after I am gone?
One of the great myths surrounding practice transitions is that 20-50 percent of the patients will leave the practice after the sale. In reality, a well-managed transition will result in an attrition rate less than 10 percent. We have heard of cases where patient loss was over 30 percent, but those transitions were either A) handled by the doctors themselves or by attorneys, brokers, and other professionals who lacked experience in dental sales, were ill-informed, or poorly prepared, or B) purchased by a doctor with poor patient relations, lackluster management skills, or a clinical philosophy wholly unlike the selling doctor. Fortunately these types of situations are the exception rather than the rule.
The very best way to keep patients from leaving the practice is to sincerely and strongly endorse the purchaser. This is accomplished through several different mediums including a letter sent directly to the patients and specific dialogues with patients used by the staff and doctor. Most, if not all, patients will give the purchaser a chance to win them over during their initial visit. If handled properly, patient retention will remain very high.
14. Is there anything I can do to help ensure the purchaser’s success?
Yes. Once the practice is sold, do your best to let go. Regardless of whether you have sold half the practice or all of it, whether you are staying on or moving on, try to let go emotionally and managerially. This may be the hardest part of the process for many sellers, but the transition will be much better for both parties when you give the new doctor room to make his own contribution and run his practice his way. This may mean going along with some new process or procedure he would like to implement. Keep an open mind and always support the purchaser publicly, i.e., in front of staff and patients. More than likely, patients will call you at home to express their concerns over the changes taking place. When they do, be sure to remain firm in your support for the purchaser. The more commitment the patients sense from you toward the purchaser, the more committed they will be to the new doctor.
Underpinning any successful transition arrangement is a mutual and abiding trust between the parties. It is this mutual commitment to the relationship and the success of the other party that is truly the foundation of a long-lasting and profitable relationship. Through effective communication and a sincere concern for the well-being of the other individual, differences can be solved quickly, thus maintaining a good relationship and ensuring a desirable outcome for everyone involved.
If necessary, encourage the purchaser to seek professional advice from someone who specializes in managing dental practice transitions post-sale. This person will educate and advise an inexperienced purchaser on dealing with the myriad of issues which he or she will face as an owner or partner in the practice. Things like staff leadership and management, patient retention and case presentation, regulatory compliance, financial monitoring, communication, and so on. Most importantly, a transition management specialist can anticipate problems in advance and help the purchaser avoid costly mistakes and detours.
15. Can I simply walk away from my practice, or do I need to remain on for a transition period?
With the exception of most dental specialists, it is not necessary for a dentist to remain with his practice for a long transitional period. In fact, many times the transition process is made smoother and simpler when the seller simply walks away. If handled properly, patient retention will likely be high whether the seller stays on or leaves immediately (see question 13). Personally introducing the purchaser to patients may seem like the right thing to do, but it is not necessary and can often be counterproductive. Again, your decision to remain with the practice after the sale should be viewed more as a convenient option available to you and not a prerequisite for the purchaser’s success.
16. How long will it take to find a purchaser and close a transaction?
Generally, the smaller the town, the longer it takes to sell, sometimes up to 36 months in rural or less desirable areas. If you are a specialist living just about anywhere (metro or rural) you can expect at least 18-24 months, assuming a buyer can be found. For general dentists in the major metro areas, expect six to twelve months to complete a transaction.
Once a qualified and interested purchaser has been found and all terms have been agreed upon, it usually takes six to eight weeks for both parties to negotiate and agree upon all of the terms of the sale and to close the transaction. This time line includes meeting all of the bank’s demands for financing including insurance (life, disability and contents and liability) and office lease assumptions. If no bank financing is involved, the process may only take three to four weeks. You might be interested to know that the most time-intensive portion of the transition process is usually the legal review of the buy-sell agreement and other necessary documents. Consequently, you will likely save a significant amount of time and money by working with a professional who is skilled in transitioning practices and can guide your attorney through the essential issues involved.
17. What should I say to my staff, and when should I say it?
Always tell the staff the truth. We have found the sooner you tell your staff about the possibility of a transition, the better. This does not mean, however, that you must tell them about every aspect of the transition. For example, if an appraisal is being made on the practice, the doctor should inform his staff that he is considering bringing someone else into the practice and has hired a professional firm to conduct an analysis and make recommendations. As the process unfolds, the doctor can disclose further aspects of the game plan. When it is time to inform the staff, be sure to emphasize their individual job security and the need for their continuing support.
18. What about taxes? Is it possible to minimize or defer the tax liability associated with the sale?
Yes, it is possible to both minimize and defer taxes due after the sale of a professional practice. There are a myriad of different strategies used, each corresponding to the particular needs of the client and specifics associated with the sale. These strategies range from certain allocations of the purchase price to 1031 tax deferred exchanges to qualified defined benefit plans and non-qualified deferred compensation plans.
This is a complex and important part of developing the appropriate transition structure. Proper planning in this area can easily save many thousands of dollars from being sent on a one-way trip to Washington. Be sure to get advice from someone who specializes in this area early on in the process. It can really pay big dividends in terms of net proceeds and eventual retirement income. Contact our office for a copy of the article “Transitions and Taxes”.
19. I own my own building. What do I do with it?
Including real estate in the sale of your practice can significantly complicate matters. We have seen situations where the seller has insisted the purchaser acquire both the practice and the real estate. In these situations, the mandatory inclusion of real estate has turned away otherwise interested buyers, even when a discount was offered as an inducement. Aside from the additional documentation, financing, and fees associated with selling real estate, the time required to find a purchaser and complete a joint sell (practice and building) is extended. While it is possible to sell both to a single purchaser, you should know that historically, when real estate and professional practices are combined in a single transaction, the values of both are compromised.
Although no two situations are alike, to maximize the return on each asset, we recommend a dentist who owns his building sell the practice initially and lease the building to the purchaser under a long-term agreement with an option and inducement to buy. This allows the purchaser time to build cash flow and equity in the practice before taking on the additional debt associated with buying the building.
20. Should I employ a professional to assist me in the sale?
Naturally any response we offer to this issue could be construed as partial. That being said, the only real benefit we have seen a doctor gain by undertaking the sale of his practice on his own is the avoidance of a professional’s fee. On the other hand, with the belief that they will save money by selling their practice without professional guidance, the doctor must also make certain assumptions and assume specific risks.
He must first be confident that he can accurately determine and objectively substantiate a value for his practice; a value that is very near market value or what a professional appraiser would place on it. Next, he must assume he can get a purchaser to believe his determination of value is objective, unbiased and fair. Then he assumes he will be able to establish the necessary banking connections to finance the purchaser’s acquisition, or else he assumes he will be able to self-finance the sale in a way that mitigates his risk yet is fair to the buyer. He must also possess the knowledge, ability and expertise to work through the complex legal, financial, and tax issues surrounding the sale. A poorly structured transaction may cost far more in taxes than one would pay to a consultant.
If the dentist uses an attorney or accountant to assist him, he must presume they know something about dental practice transitions, and that they will help rather than hinder the process. Moreover, the doctor risks spending hundreds, even thousands of dollars in legal and accounting fees without actually completing the transition. Finally, he will surely spend many, many hours putting all of the pieces of the puzzle together, learning step by step as he goes.
Of course it may be possible for a dentist to facilitate the sale of his own practice with great success; however, should you decide not to use a qualified, experienced transition consulting firm to assist you, then at least be aware of the risks you take by doing it on your own. These risks include, but are not limited to:
- The risk of wasting countless hours with a buyer candidate who thinks he/she can wait you out for a lower price.
- The risk of not being able to agree on the price or terms of the sale with the purchaser because neither of you can speak objectively or with authority to the issues.
- The risk of being caught in adversarial negotiations due to an unreasonable purchaser or an overzealous advisor for either party.
- The risk of locating the perfect buyer, only to later lose him/her because they are offended by something your attorney has said, requested or by the manner in which negotiations were undertaken.
- The risk of not realizing the full fair market value of your practice and selling it for less than it is worth.
- The risk of selling the practice above market value and bankrupting the buyer by effectively stripping his/her ability to meet his cash flow demands due to a stifling debt service.
- The risk of becoming weary of the process and negotiating away large sums of money just to get it over with.
- The risk that the purchaser will be unable to secure the requisite financing.
- The risk of drafting or having your attorney draft documents that do not properly address key issues, allow for certain provisions, and clearly define the essential obligations of both parties.
- The risk of leaving your practice in the hands of a successor who fails to manage the practice properly and alienates staff and patients.
- The risk of not properly securing your position as a lender should you choose to self-finance a portion or all of the purchase price.
- The risk that the anticipated sale will not happen during your lifetime or that your unforeseen, early death will leave your spouse with the unpleasant responsibility of selling your practice.
All of the above risks are taken from true accounts.
When all is said and done, the few thousand dollars saved by doing it alone may or may not offset the associated risks.
21. Then who should I call? My lawyer, my accountant, my financial planner, my supply salesman, or a broker? What kind of professional guidance will I need?
Ask yourself, “Who can I trust with one of the most important business transactions of my life?” That is the quintessential question. Rest assured the purchaser will be asking himself the very same thing: “Who can I trust?” And what if his advisor tells him something different than your advisor tells you?
The ideal advisor is someone who can be trusted by both sides, someone who is knowledgeable, competent, fair, and objective. A mutual trust in such an advisor allows the respective parties to proceed with confidence toward a common objective, knowing that both of their interests are being properly addressed. Such an advisor is in tune with the needs and expectations of both parties, and is in a position to know how the demands of one party may impact the needs of the other. Such an advisor acts as an intermediary, a facilitator, a negotiator to minimize conflict, resolve concerns, and reach a solution that is “win-win” for both parties.
Of course, the ideal advisor is one who specializes in dental practice transitions; not one who works for a living doing something else. Too many dentists entrust their most valuable asset to someone who may sell dental supplies for a living and dental practices on the side. Ideally the qualified advisor is competent in business, financial and legal matters, and is capable of properly assimilating input from each party’s lawyer and accountant. He has specific experience structuring transactions similar to the kind of transaction you are contemplating. An advisor with these skills, working in this capacity will save you hundreds or thousands of dollars in legal and accounting fees, and will ultimately help ensure the success of the transaction.
The right advisor is also performance oriented, deriving his compensation from the results of the process, not by the hours spent on it. Consultants who insist on being paid by the hour cast doubt on their own ability to get the job finished. Moreover, they may run up a sizable bill without really accomplishing anything. Remember, you are not paid for your practice until the transaction is closed. A good advisor has resources available to assist the purchaser with financing and with realizing the financial potential of the practice, thereby ensuring the purchaser the greatest chance of success while assuring the seller, his staff and his patients that they will be properly cared for.
22. If I do hire a professional to guide me, how much will it cost me to sell the practice?
A true professional will add value to the process as it unfolds. His or her expertise in practice appraisals will ensure a genuinely fair market value. His or her credibility as a transition specialist will reassure the purchaser and assist him or her in making significant commitments without succumbing to the temptation to dicker over price and terms. An outside professional’s focus on the big picture will help keep envy and greed from corrupting a good transaction.
Some professionals charge a percentage of the purchase price as a commission; others prefer to charge a flat fee regardless of sales price, depending on the type of transition. Some consultants may include additional services. Either way, thoroughly check the background of the professional, including services, fees, and references, before you decide to use him or her. Issue #25 of this booklet addresses many important questions to ask and things to consider before hiring a professional consultant or advisor.
23. If I don’t think I am quite ready to sell, what should I be doing now to prepare myself and my practice for a transition?
Four things (none of these are easy, but each will make your practice more valuable and/or marketable):
- Pay off any outstanding debt or do not incur any additional practice-related debt. Your practice value consists primarily in your cash flow and relationship with patients, not your equipment. Resist the temptation to go out and purchase a lot of new equipment with the false expectation that it will enhance your practice value dollar for dollar.
- Objectively evaluate your staff situation. You may want to conduct a staff performance analysis to see what can be done to make the practice run more effectively. A truly excellent staff will make the practice much more valuable and attractive to a young purchaser. If your spouse works in the practice, he or she should phase out (or be ready to phase out) once the new purchaser acquires the practice.
- Take positive yet conservative steps to increase practice collections and improve new patient flow. Generally speaking, practices with greater collections from fee-for-service patients will sell for more; however, canceling your participation in PPO type insurance programs shortly before a sale will result in greater risk of patient attrition and, subsequently, a lower perceived value by the buyer. Practices with a healthy new patient flow and high patient retention represent greater value to purchasers.
- Consider if the practice facility needs a face-lift. This may include items such as painting the walls, re-carpeting, re-upholstering dental chairs. For only a few thousand dollars, such improvements will pay dividends in marketability when it comes time to sell.
24. What should I tell my spouse to do if I should die before the practice is sold?
There are essentially two critical things your spouse should be aware of:
First, time is of the essence! The more time elapsed between the owner’s death and the sale, the less the practice is worth and the less the estate will receive. Only a few short weeks after the doctor’s passing, the practice value will have diminished by tens or even hundreds of thousands of dollars! (This is true even if other dentists are covering the schedule.) All too often a grieving family will not act soon enough and will unwittingly squander away much of the practice value.
Second, in most cases, the only people who can successfully complete an estate sale in a timely manner are those who specialize in dental practice transitions. Write down the name and phone number of someone you trust to handle the sale and give it to your spouse today. If you cannot decide now on a transition consultant/broker or other professional now, write down the name and number of a colleague you trust to make that decision for your spouse if and when the time comes. (You will notice we have taken the liberty of answering each of the following questions as they pertain to us and our services.)
25. Which questions should I ask before hiring a practice broker/transition consultant? (We have taken the liberty of answering each of the following questions as they pertain to us and our services.)
How many practice transitions and/or sales have you been involved with?
CTC Associates Answer: Over 1500
How many years in the business?
CTC Associates Answer: Founded in 1988, we have 26 years in practice transitions. Each individual broker/team member has additional experience and training in various aspects of business and finance consulting.
How many sales ended up in litigation/arbitration or in professional divorce?
CTC Associates Answer: Three arbitration and fourteen separations of associate buy-in type transactions with no arbitration or litigation.
How many purchasers have defaulted on their promissory notes to sellers and/or banks?
CTC Associates Answer: Five to the bank and three to the seller.
What is the charge for an appraisal?
CTC Associates Answer: We produce appraisals for a variety of circumstances. A practice to be listed, marketed and sold to an outside buyer requires a greater degree of detail than a internal appraisal for the owner and/or partner to assess the growth or changing value of their practice. Appraisal fees may vary if there are multiple offices or multiple dentists. We also utilize different fees for the different markets in which we work, based on our knowledge and experience in those markets. Contact the broker for the state your practice is located in for more information. Typically, the appraisal fee is credited towards the total transition fee at closing.
What do you feel are your strong points in providing transition/brokerage services?
CTC Associates Answer: Integrity; competence with over 26 years of business and finance experience; follow up after the transaction; provide detailed “to-do lists” for buyer and seller; conduct staff meetings on how to best handle the transition; and have an attorney and accountant on retainer for updating and researching changes in legal and tax law.
Is your appraisal contingent on signing a listing agreement?
CTC Associates Answer: No.
How do you know you are accurate with your appraisal?
CTC Associates Answer: We are thorough in our analysis and use time tested appraisal formulas; we also track the results of previous transitions.
Do you feel there is a conflict between appraising a practice and then listing it for sale?
CTC Associates Answer: There can be. Some brokers will inflate the appraised value to persuade the seller to sign the listing agreement. A biased appraisal makes it much more difficult in convincing a purchaser that the sales price is fair and equitable.
What type of post-sale/post-transition follow-up do you do, both with the buyer and seller?
CTC Associates Answer: We follow up with both the buyer and the seller after Closing. We also provide training for the buyer in marketing and leadership/teambuilding.
Is this your main occupation or do you have other activities to help subsidize your consulting business (i.e. sell insurance, securities, real estate, equipment/supplies, or practice dentistry, management)?
CTC Associates Answer: Each broker/team member is devoted full-time to facilitating successful transitions.
How will I know that these other activities do not conflict with the quality of service I’ll receive?
CTC Associates Answer: Our only activities are facilitating, consulting and coaching dental practices and dental transitions. Our compensation is derived solely from practice transition services.
How do I know I have the right candidate (seller/purchaser)? What systems do you have to help both parties better understand their compatibility concerning goals, needs and personalities?
CTC Associates Answer: Depending on the type of transition, we may have the doctors fill out a personal needs analysis and/or a personality profile. This tells us more about their goals and their work style. We look to see if goals are complimentary with both parties. We encourage “pre-courtship” activities (i.e. checking references, out of the office activities, spouses meet together, etc.) This helps establish a better understanding of each party’s needs and goals. We look at how they follow through with their commitments through the consulting process.
Do you have “pre-qualifying” guidelines with regard to whether or not you will work with certain clients?
CTC Associates Answer: Yes, we review their background, objectives, financial statements, income needs, and leadership style.
What do you include in your appraisal?
CTC Associates Answer: Our standard appraisal includes a detailed practice prospectus that covers how the practice operates, an appraisal report that analyzes financial information, proformas to analyze a potential buyer’s cash flow after the transition, demographic data on the area around the practice, and practice photos.
Does your appraisal cover enough information for one to complete a due diligence to the practice?
CTC Associates Answer: Yes, with the exception of a chart audit, which must be performed by the buyer in person before closing; the buyer should also review the seller’s tax returns.
What resources do you have to keep up on the latest changes in business and tax laws?
CTC Associates Answer: We have an attorney and accountant on retainer and also subscribe to publications on legal, tax and practice management issues.
How long does it take to transition/sell a practice?
CTC Associates Answer: This depends on various factors, like location, size of practice, terms, type of transition and market demand. In most cases, 3 to 6 months in desirable areas and up to 12 to 24 months in rural areas.
How are you compensated?
CTC Associates Answer: We utilize different fee structures for the different markets in which we work, based on our knowledge and experience in those markets. Contact the broker for the state your practice is located in for more information.
What services do you offer for the fees charged?
CTC Associates Answer: Locate a buyer or seller; Locate financing; Determine the financial structure of the transaction; Draft contracts for attorney’s review; Oversee the closing; Conduct a staff meeting on how to have a smooth transition and on how to transition the patient base; Show ways to increase new patient flow; Instruct on how to conduct effective staff meetings; Provide practice management guidelines for a successful practice; Address any ongoing concerns during the first year of transition.
Please tell me how your form of doing business is best for me and the transition of the practice.
CTC Associates Answer: We add integrity, clarity and perspective to the process. A practice transition consultant directs a win-win transition and helps minimize the need to compromise the goals of both parties. 97% of past clients were satisfied with our services.
Do you have any literature that will help me better understand the transition process and how I can better prepare myself for it?
CTC Associates Answer: Yes, we have detailed information and checklists for sellers, for buyers, and for staff which address all the relevant issues of the transition process. Please call or email us for more information.
How well does the buyer do after the transaction is completed?
CTC Associates Answer: We offer post-transition management and marketing services to the buyer for the first 12 months after the sale to help ensure the success of the transition. By tracking the results of the sale, we find that more than 90% of our buyers either meet or exceed the previous year gross production in the first year.
Can you furnish a list of the five most recent sales and/or transitions of buyers and sellers?
CTC Associates Answer: Testimonials from past clients are used in a variety of our marketing materials and under “Success Stories” on our website. We would be pleased to provide additional references upon request.