Most, if not all dentists start their careers with optimistic expectations of doing well financially only to find out in the real world practicing dentistry may not deliver the financial and/or emotional rewards they were seeking. They then feel a strong need to increase their income and to gain more control over their professional lives. You may have experienced this frustration already. If you have not yet, you can surely avoid it through proper planning and the implementation of the key concepts addressed in this booklet.
You will learn about several essential issues to be addressed before you begin the process of acquiring a practice. You will learn how to make the process a profitable experience, and perhaps more importantly, you will learn how to avoid mistakes that can turn the acquisition of a professional practice into an emotional and financial disaster. We trust you will find this presentation educational and beneficial as you strive to achieve personal and professional goals.
1. How will I know when it is the right time for me to purchase a practice?
The right time to buy varies with your needs and goals. If you have a strong need for substantial income and/or direct control over your professional career, then purchasing a practice may be your best options.
Purchasing a practice can produce $250,000 to $500,000 more in net earnings to the doctor during the first ten years of ownership when compared to starting a new practice and building it over the same time period. Unless dentists plan carefully and do start-ups only in high-growth areas, they may find themselves years behind their collogues who opted to purchased a practice.
Perhaps the best indicator as to what time is the right time, however, is how you feel about your situation. If you are uncomfortable with your current circumstances or are not sure what is best for you, seek professional guidance. Find someone who will help you determine the course of action that best meets your needs and goals.
Our experience suggests most doctors who do not have a plan early on for owning and operating a practice may be jeopardizing thousands of dollars in lost income. Far too many doctors wait too long waiting for the perfect opportunity. Remember, while taking a pro-active approach may present some risks, taking no action may involve even greater risks. By doing something positive, you have a greater chance for success.
2. What are my options?
The first option is to do nothing. For some of you, this may be precisely the right thing to do, but only in the short term. Over the long term, every dentist in America will face the dilemma of what to do with their professional career. The question is whether you want to take a pro-active role to maximize the positive potential a practice transition affords, or a reactive role to minimize the negative impact of change.
To give you an idea of the financial costs associated with waiting too long, we ran an analysis of two dentists starting their careers at the same time. Dr. A bought his practice using a deferred buy-out arrangement in which he worked for two years as an associate for the seller prior to buying the practice outright. Upon selling, the seller “worked back” as an associate for Dr. A over the next two years before retiring. Dr. B worked as an associate for a couple of years, then decided to start up a practice of his own.
Who made the right decision? Dr. A averages a take home pay of $120,000 per year while working three and a one-half days per week with five weeks vacation per year. Dr. B averages about $70,000 per year over the same time period, works five days a week and struggles to get in a week of vacation each year. Both doctors had the same educational background; both completed the same number of fillings and crowns.
When the time arrives for you to seriously consider a practice transition, you should know there are two basic ways to buy a practice: you can buy all of it, or you can buy a portion of it. The variations of those two basic structures are numerous. But first, you should decide what type of practice you want and whether or not you want to work and/or associate with another doctor over any extended period of time.
So what are some of the more common transition variations used? Another common variation besides the deferred buy-out mentioned above is the sale/walk-away, i.e, an outright purchase of a practice with the seller walking away at closing. If done correctly, this scenario can be very smooth and patient retention can be as high as 90% or better. A third, very popular arrangement is the pre-sale (or work-back) transition in which the practice is purchased outright from day one and the seller “works back” part-time as an associate for the buyer. This allows the seller to phase out of the practice at a comfortable pace while maintaining the integrity of the patient base and staff. If you decide to buy, the seller doesn’t have to walk away necessarily. You simply need to structure the right kind of relationship with the seller. If properly structured, pre-sale arrangements can be an excellent mechanism for lowering your risk while maintaining a good level of income. As with any long-term relationship, working with the right partner will require more effort than having them simply walk away, but the quality of life and financial rewards associated can be well worth it.
For example, a buyer who has a strong need for control might consider buying 100% of a practice. This arrangement is typically easier and far less complicated than only buying a portion and usually is the preferred method of transition for dentists acquiring a practice. If you need (or choose) to share clinical, managerial, and overhead responsibilities, you may want to consider buying part of a practice now and the rest later, when the seller is closer to retirement. This method has proved best for middle-aged “selling” dentists who are still experiencing excellent growth and who could use another set of committed hands in the practice. Becoming an equity partner is much more preferable to the revolving door of associateships we see so frequently.
Each method, i.e., buying a portion or buying all of a practice, offers certain advantages and disadvantages. Carefully consider both the opportunities and risks associated with each approach before entering into any legally binding agreement. New relationships can be very rewarding if built properly; they can be devastating if they are not.
We discuss additional transition options and structures later in this booklet (see question 6).
3. Where should I look for practice opportunities?
Simply stated, look in areas where you and your spouse want to live. However, where attractive practice opportunities are found and where you decide to live may not be one in the same. In most cases, there are fewer practice opportunities in the more desirable areas (newer suburbs, for example), and if such opportunities do become available, they usually sell quickly and for a higher than average price.
As a general rule, the best opportunities are in the older parts of town and/or in rural areas. Nevertheless, these opportunities are frequently overlooked because of certain characteristics such as older equipment, an older facility, and the office location. However, these practices tend to have older patients who need a lot of dentistry, and when they are transitioned to a younger doctor with a lot of energy, the revenue frequently increases. As such, purchasers may choose to live in the more desirable areas but commute 10 to 40 minutes to the office, giving them the best of both worlds, a good practice and a pleasant living environment.
4. What should I look for in a practice opportunity?
First and foremost, when a practice opportunity presents itself, you should ask yourself, “Is this practice opportunity complementary to my goals and needs?” Goals and needs such as: “Does this practice opportunity address all my financial obligations? And is the philosophy similar enough to allow me to do the type of dentistry I want to do?” Establishing guidelines about your needs and goals will make it much easier to identify opportunities that are right for you.
When it comes to gathering the information required to make an educated decision, many doctors feel perplexed and overwhelmed. Obviously, a practice should not be purchased without first sufficiently studying the data. Nevertheless, enthusiasm frequently overrides objectivity, and many dentists decide to close a purchase prior to conducting the proper due diligence.
A good indicator of the future success of a practice, i.e., it potential is its track record. That is, a practice that has demonstrated stable income over an extended period of time is likely to continue to do so. A productive history of active patients and referrals indicates satisfied consumers who are happy with the quality of care they have or are receiving. An extremely positive attribute is a good active patient base coupled with a healthy flow of new patients. Add to this a cooperative seller, good staff, and a profitable bottom line, and you have the ingredients for a successful practice.
Consequently, it is imperative that you, as the purchaser, regardless of the opportunity, conduct a patient chart audit. To accomplish this, pull every tenth chart and review the following:
- Frequency of patient visits
- Type(s) of insurance
- Distance patients live from practice
- Amount of restoration done in the past and amount left to be done in the future
- Type of dentistry previously completed
Review these five areas and rate each patient (chart) on a scale of one to five (five being the best). For example, if the patient comes in every year for hygiene, has some restorative work done, has good insurance, and lives within a five-mile radius of the practice, then he or she is probably a five. However, if the patient visits infrequently and has poor insurance coverage, he or she might be rated around a one or a two.
If after you review 100 charts the composite score is less than 200, you may need to re-evaluate the intangible value of the practice. A healthy practice should have 250 to 350+ active patients (patients of record seen in the past 18-24 months) and 30 or more new patients for every $100,000.00 of gross, annual revenue. The number of active good patients and number of new patients is critical to the degree of success achievable in the practice.
As a buyer of a dental practice, you are purchasing a future stream of income. The most important part of the income stream is what remains after paying all necessary overhead expenses and debt related to the purchase of the practice. This is referred to as the pretax, economic earnings or pretax profits. This figure should be around 25% (or more) of gross collected revenue. If you are unable make a reasonable income (at least 25% of your gross production after overhead expenses and debt service in the first year), then either an adjustment should be made to the purchase price and/or terms or you should continue looking for another opportunity.
In addition to reviewing the patient profile of a practice, there are several other items you should investigate such as the reasons the seller has for selling, the seller’s philosophy in treating patients, the price and terms, the location, the current status of the local economy, profit and loss statements for the last three years, the condition of the equipment, the staff profile, a fee schedule, the type and prevalence of insurance plans, the terms of the office lease, and the level of OSHA compliance in the office. These are several of the numerous criteria for evaluating an opportunity.
As you can see, it can be a costly mistake to undertake researching a practice opportunity alone. Seek professional help in this area. It may be the best decision you make in planning your career and will ensure that you “do it right the first time.”
5. Why not be an associate for a while to see if we get along and to see if he or she is the right partner?
If we have learned anything over the many years of transitioning practices, it is the odds of an associateship breaking up and becoming a disappointment for all concerned are about 70%. We call these arrangements ambiguity-ships, because of the ill-defined parameters that govern them as well as the lack of any equity investment on the buyer’s part. In fact, the only reason to be an associate without an equity investment is if, and only if, both you and the host doctor have short-term goals and needs (meaning 12 to 24 months or less). If you work as an associate without a well-defined agreement or an equity investment, plan on a future separation.
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 an equity investment or a well-defined agreement, the greater the likelihood that it will end in disappointment. Keep in mind that a commitment to ownership is a much different kind of commitment, and brings with it an entirely new mind-set. We see countless associates work for a few years without any problems, all while expecting to buy out or buy into the practice only to discover the seller has no real intention of selling. Many of these situations have ended tragically, costing the associate years of lost equity and income. Do not put your future at risk! If you start things off on the wrong foot, it is unlikely that anyone can resurrect what may otherwise have been your best opportunity for an excellent transaction.
6. 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 yourself appropriate questions, like: “Am I meeting my real needs, and what information do I need to educate myself about all viable options?” The second step is to ask yourself how you really feel. Questions such as: “Does my decision show I am being honest with myself? What would I decide if I wasn’t afraid? What would I do if money or other concerns were not an issue?”
There are basically five types of buy-out arrangements. Depending on your goals, the structure can be set up complementary to both parties.
The first option is called a deferred buy-out. This method is used when the practice production is not big enough initially to accommodate a straight buy-out and fully support two dentists. Therefore, the new practitioner works as an associate for one to two years while building the practice production such that when he or she starts the buy-out, there is sufficient production to service the debt on the practice acquisition, make a good living, and still allow the seller to work back as an independent contractor associate for the next few years. This is accomplished by having both parties commit early on in writing to the price, terms, and conditions that will govern the practice sale and by having the buyer to put down some earnest money to insure that commitment.
As for scheduling, many times there is simply not enough room for two doctors to work at the same time in the same facility. So we suggest they straddle their schedules, having one doctor work from 7 a.m. to 1 p.m. and the other from 12 p.m. to 6 p.m., for instance. Often doctors produce more income on a six-hour day than on an eight-hour day. Using the office in a more efficient manner allows both parties to leverage their practice activities, lower their overhead, and generate more net income. This is due to the fact that some of the fixed expenses stay the same, and as the production increases, the overhead percentage decreases.
The second option is called a merger pre-sale. Under this scenario, the buyer has an existing patient base but is looking to increase his or her net income without suffering an increase in workload. So one of the parties moves his/her practice to the other party’s facility. The objective is for one doctor to sale the practice and work for the other doctor as an independent contractor for the duration of his or 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 may end up taking home more pay and overcoming solo-economic dependency. This type of transition is very economically sound, but the difficulty lies in finding the right candidates within a five-mile radius of one another. Therefore, mergers usually require long-term planning and can take up to five years to consummate.
The third option is to purchase a practice outright and have the seller work back part-time for the purchaser. (We briefly discussed this option in the answer to question two of this booklet.) The seller’s schedule is subordinated to the purchaser’s schedule after the sale, and the seller is usually paid 30 percent of his or her respective gross collected production. The buyer may purchase 100 percent of the practice by making a down payment of 20 to 40 percent of the purchase price and having the seller carry back a promissory note for the balance over a seven to ten-year period. The seller works part-time for the buyer as an independent contractor for a period of time ranging from a few months to several years. With this type of option the seller’s income is usually cut in half; however, he/she has the monthly income from the buyer’s promissory note to help offset the reduction in income. This allows the buyer to have the seller’s help in building up the practice as well as maintaining the seller’s goodwill over a longer period of time.
The fourth option is to buy 50 percent undivided interest in a practice. This is only advisable, however, if the seller’s time horizon for retirement is beyond seven years. If that is the case, consider buying part of the practice now and the rest later, when the seller is closer to retirement. A new business entity is established with each doctor owning 50 percent interest in the partnership (in some states a limited liability company is set up, which is taxed like a partnership, but can limit certain potential liabilities that may arise). Each doctor receives two types of income from the partnership. The first is referred to as provider compensation, which is usually 30 to 35 percent of the doctor’s respective, individual gross collected production. The second is in the form of distributable profits, or profits remaining after all overhead expenses are paid. These profits are generally split 50/50 between the partners. This structure rewards each doctor for his/her own production as well as for being a part of a co-building, synergistic relationship. Many doctors cite sharing in the success of their partner and overcoming solo-economic dependency as the two greatest advantages of a partnership arrangement.
The fifth and final option is a deferred buy-in. The new partner works as an associate for one to two years for the host doctor. This two-year period allows the practice to grow sufficient enough to allow the new practitioner to buy 50 percent of the practice and service the debt payments on the purchase. Once the buy-in is accomplished, there is a partnership or an operating agreement that governs the relationship. Both parties may choose to have a six-month courtship period before committing to a future buy-in. After the six-month courtship period, the associate pays the seller an amount of non-refundable earnest money which commits both parties to complete the buy-in at some designated time in the future (usually one to two years).
Beware of compromising the deal. Compromising is the art of getting both sides to agree to a resolution that neither side likes. Compromising is many times a defensive strategy: It does not play to the party’s strengths, it seeks to minimize vulnerability to weaknesses. Instead settle only for a win-win arrangement in which both sides feel comfortable and content with the outcome.
7. What do I really know about buying a practice? Are my expectations realistic?
Every dentist who has decided to buy a practice has certain preconceived ideas about what the process entails. Sometimes those ideas match reality; sometimes, 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 or even hundreds of thousands of dollars. Here are just some of the things you can realistically expect as the process unfolds.
- Expect the process to take time: 4-8 months for locating general practices in major metro areas, and up to 24-36 months in smaller rural communities.
- Expect to either pay cash or make a sizeable down payment for the most desirable practices.
- Expect to deal with a sincere but sometimes uninformed seller looking for the highest price, with unreasonable terms. Unless you have someone carefully review each opportunity in advance, expect to spend time and money finding the right practice.
- Unless you take the proper steps up front, expect to have every representation you make to the seller scrutinized, questioned, and negotiated.
- If you’re not sure how to utilize your lawyer and accountant in this specialized process of practice transition, expect to pay for their education without the guarantee of a completed transaction.
And, just when you think you have everything in order, expect the seller and his advisors to change their minds at the last minute about this or that or the possibility of him/her choosing not selling the practice at all.
As you can see, a successful transition is not the absence of problems, but the ability to deal with them. Having a qualified professional at your side can truly enhance your ability to deal with the unexpected.
8. What is a practice really worth, and who is most qualified to appraise it?
A practice is worth exactly what someone will pay for it in the marketplace. This may sound like a cliché, but it is a fact.
Currently, buyers of general practices are paying prices that range from 50 to 75 percent of the most recent 12 months collections. (This range excludes duress sales for death, disability, or health reasons. Studies show these sales average closer to 30 to 60 percent of the prior year’s gross.) Specialty practices typically sell for less. Circumstances surrounding each sale vary widely, from estate sales to partnership buy-ins. In general, healthy and active practices with fee-for-service patients and a strong new patient flow sell for more. Sometimes older practices, i.e., practice with older equipment, older patients, and outdated decor, bring less even though they often represent the best value for the money.
You may already realize that the value of a practice is really in the mind of the buyer rather than in the mind of the seller. Getting a seller to understand and appreciate this concept may not be easy. Perhaps the best way to illustrate this is by illustration: Suppose you are a physician. Assume you are looking to buy a medical practice consisting of the same revenues, overhead, and location as your neighbor, the dentist. What is your practice worth? You will find medical practices with identical revenues will sell for far less than their dental practice counterparts. Why? Young physicians beginning their careers simply do not experience the same level of competition for patients that young dentists experience. Without a specific need to plug into 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 is much more intense competition for patients and therefore more value in practices with established patient bases. This is why the intangible assets of goodwill, patient records, and restrictive covenants are so important to you as a buyer and why up to 80% of the value of a practice may consist of these intangibles. The process of establishing and substantiating the true value of a practice is crucial to your success. The wrong approach can lead to unfortunate results.
As mentioned, the intangible value of a practice may range from 60 to 80% of the total value. There is substantial value in goodwill, loyalty, trust, established relationships, perceptions, and covenants. Unfortunately, there is no simple formula for objectively evaluating these essential aspects of a practice, and yet these are the major items you, as a purchaser, need to buy. You can find newer, better, and less expensive equipment and furnishings just about anywhere. You may also be able to find a better facility or location, and a staff with better abilities. What you will have difficulty finding are the intangible relationships of goodwill and trust that a seller has spent many years developing with his or her patients. Out of those relationships of goodwill and trust come the financial rewards that you seek. That is why you will pay a considerable amount of money to access the revenue stream developed by the seller. And, despite the concerns of many buyers, the value of these intangibles will not diminish or leave the practice when the seller does because almost all patients are willing to transfer their trust to the buyer after having received a strong endorsement from the seller.
What you ultimately pay for a practice is entirely dependent on what you believe, how you feel, and in whom you trust. Be sure to pay attention to your gut feelings about the proposed transaction. If you feel good about the seller and the practice, and trust that the appraiser has been objective and can actually facilitate a fair transition, there is a high probability that you will want to pay the appraised value.
The person most qualified to appraise a practice is someone who has demonstrated the ability to transition practices and meet the needs and expectations of the parties involved. Remember, the appraisal is not worth the paper it is written on if the appraiser can not back it up with a track record of successful outcomes for other purchasers. All too often unrealistic, ego-inflated appraisals and poorly structured transactions have created heartache instead of creating success.
The moral of the story: know with whom you are dealing. Ask lots of questions, and check references from both buyers and sellers.
9. How will I know I have the right seller or partner?
You may not know for sure until long after you have signed the contract. Fortunately, there will be many signs along the way to help give you and idea. Keep in mind you will be asking the seller to take on some contractual commitments, but before those major commitments are made, there will be plenty of smaller ones. The acid test in determining how the doctor will handle major commitments is how he/she handles the smaller ones. The right seller will be enthusiastic and cooperative and will agree to a fair market price with reasonable terms.
The transition of a professional practice is a very revealing process. As you move along the path of commitment, you will learn new things about the seller and, more importantly, about yourself. In our experience, somewhere along the way and usually prior to closing, the questionable ones reveal themselves in one way or another.
Some things to look for in selecting the right seller or partner: Someone who demonstrates a high degree of integrity and moral character in their dealings with everyone. (Dave Barry said, “Someone who is nice to you but rude to the waiter is not a nice person.” In other words, notice how he/she interacts with and treats his/her staff, spouse, and other family members.) Someone with a track record of making and keeping commitments. Someone with goals that are complementary to yours. Someone with a willingness to cooperate and accept sound advice. Someone possessing these characteristics is likely to be a very good candidate.
10. How can I pay the least amount of money for a practice, and at the same time be fair to the seller?
Begin by considering what you feel is fair to you. Ask yourself, “Can I buy this practice with these price and terms and still make a good living?” For the practice value to be meaningful to you, it must address the fundamental issue of feasibility and income potential. In other words, can you take home a reasonable income before taxes (say 25 to 30% of your gross production) and still pay all overhead expenses including debt service on the practice sale? Obviously, the challenge is to offer the seller fair compensation for the intangible and tangible assets of the practice, yet economically substantiate that value from a cash flow perspective.
Unfortunately, many buyers inadvertently offend the seller by offering to purchase the practice for a sum well under what the seller is asking. To avoid making this mistake, be sure you can substantiate a reason or reasons for offering less than the asking price. In other words, conduct your due-diligence research on the practice (as described under question 4) and present your findings in logical and reasonable way which will show the seller exactly why you feel the practice should sell for less. If you cannot substantiate a reason for offering less, then offering less then the asking price may be risky-even foolhardy. Keep in mind that paying five, ten or even fifteen thousand dollars more than you “feel” you should now will make very little impact in your financial success over the long term, but offering less just so you can say you “got a deal” may negatively influence your relationship with the seller and have serious negative repercussions later. Please understand, we are not suggesting you pay more for the practice than what it is worth, but that you not allow your perceptions of its value be skewed by an intense desire to “get a deal.”
11. I have little cash and a lot of school debt. How will I have the financial resources to purchase a practice?
Since most buyers have few financial resources, they usually borrow the down payment from a bank and then have the seller carry back a promissory note for the remaining amount. This amount can vary from 20 to 80% of the purchase price and is usually financed at a fixed rate determined by the market over a five to ten year period. If the seller feels confident the buyer will be a success, he/she will likely be more flexible in carrying back a promissory note with reasonable terms on the practice purchase. Furthermore, having the seller carry back financing helps give the buyer some insurance and assurance that the practice is and will remain a viable, successful entity. Moreover, the seller maintains a vested interest in the buyer’s success.
Many purchasers search to find a bank that believes enough in them and the practice potential to lend the money to get started. That is never easy, but with the right banking connections and proper presentation, it is possible.
Fortunately, this type of bank and seller financing combination has been used for long enough to confidently say the odds of the purchaser failing to service the debt are extremely small. On average, less than 0.05% of dental practice purchasers default on their practice acquisition debt each year.
12. What if the patients stop coming to the practice after the seller is gone?
One of the greatest myths surrounding practice transitions is that 20 to 50% of the patients will not stay with the practice after the sale. Truth is, with a well-managed transition the attrition rate is actually less than 8%. Several independent studies from various regions of the country confirm this figure. We know of cases where the patient loss has been over 30%, but those transitions were poorly handled by the doctors and staff, and are, fortunately, rare.
The very best way to keep patients in the practice is to have the seller give you a strong endorsement to the patients via a personal letter. The staff is will also play an important role by recommending you to the patients and creating a sense of continuity in the practice. Most patients agree to see the “new” dentist with little reservation. Then it is up to you to win them over during their visit.
13. Is there anything I can do to help ensure my success with a practice transition?
- First, educate yourself on the process. Take some courses on practice transitions and practice management. Work closely with someone you trust and who understands your expectations, but more importantly, who is competent in this specialized area. There are many so-called professionals, but being a self-proclaimed expert and having the ability to get the job done right are two different things. You will want to seek professional advice from someone who specializes in managing dental practice transitions. This person should educate and advise you in dealing with the myriad situations you will face as an owner or partner in a practice; things such as effective leadership and management, hiring and firing, patient retention and case presentation, regulatory compliance, financial monitoring, clear communications, and so on. Most importantly, a transition specialist can anticipate problems in advance and help you avoid costly mistakes and detours.
- Second, don’t get hung up on the age of the dental equipment. Even though this is factored into a valuation process, you are buying a business that produces an income flow, and those tangible assets are required to produce that income. Besides, when the practice becomes more profitable, you will be able to afford to buy new equipment.
- Third, don’t negotiate directly with the seller; you risk damaging the very thing you are buying, the seller’s goodwill, trust, and cooperation. If you try to negotiate a deal, the seller may resent your requests. Even if you conclude the transaction, the seller may try to get even later on if he/she feels slighted or used.
- Fourth, show respect to the seller by being on time and by not being judgmental on the way the practice looks and how it is run. The seller may not be managing the practice the way you would, but that doesn’t mean it can not be molded to be more in line with your expectations.
- Fifth, build trust with the seller. Building trust before talking about business in earnest will tremendously increase your chances of obtaining favorable terms and a cooperative seller, without compromising either party’s interests.
- Sixth, when possible, meet with the staff members before the transaction is completed. Many times, they provide valuable insights on how the business is really doing. They will also be an important catalyst to a successful transition.
14. Can the seller walk away from my practice, or do I need him to remain on for a transition period?
Except in the case of most specialty practices, it is usually not necessary for a seller to remain with a practice for a transition period. If handled properly, patient retention will likely be high whether the seller stays on or leaves immediately. Personal introductions of the purchaser by the seller are not necessary, and sometimes are counterproductive. The seller remaining with the practice after the sale should be viewed as a possible option available to you and the seller, not as a prerequisite for your success. However, the loss of good staff can be detrimental to a positive change. Patients who hesitate to accept the new doctor generally take the risk of coming back if they can identify with the original staff members. Initially, the fewer the changes, the greater the likelihood of patient retention.
15. How long will it take to find a practice and close a transaction?
This largely depends on your desired location as well as your financial resources and other requirements. The best locations are in high demand and are difficult to locate. As a general rule, it requires a time period of a year or so to locate such a practice opportunity. However, some of the best opportunities are located in the older parts of town or in rural areas. They may not be the ideal practices you were looking for, but with the proper planning and practice management, they can very well become the ideal practice.
Once you have located a committed seller and all the terms have been agreed upon, it usually takes six to eight weeks to close the transaction. If no bank financing is involved, the process may take only three to four weeks.
16. How do I best handle the staff?
Always tell the staff the truth. Make sure you understand what the seller has conveyed to the staff. Be sure to emphasize their individual job security and the need for their continuing support. It is important to understand and address their needs and goals. By doing so, a high degree of trust can be established which will pay big dividends not only financially but emotionally as well.
Initially, the establishment of good rapport and a good working relationship with staff will have a great impact on patient acceptance of the new doctor. Why? Patients will typically ask the staff (before they ask the seller) what they think of the new doctor. Even a glowing letter of recommendation from the seller does not necessarily indicate that the staff has an equal amount of enthusiasm for the new doctor. It is imperative that the staff feel the buyer is good with people and has competent skills. This confidence allows the staff to make recommendations about his abilities without qualification.
We suggest you spend some quality time with the staff. Initially this means spending some one-on-one time to understand each staff member’s personal needs and goals as well as learning how he/she feel about the strengths and weaknesses of the practice. Also, ask them for suggestions on how to change or improve the practice.
When a doctor is truly interested in the staff’s point of view, staff members are more likely to accept change without feeling threatened. They are then more likely to loosen their hold on tradition and consider new ideas. With this type of environment, more energy can be directed toward the desired results versus toward protecting self-worth and self-interest. By seeking to understand the staff, the doctor gains respect and trust in his relationship with them.
In an effort to clearly define expectations and desired results, doctors and staff should institute a regular meeting schedule. Initially, staff meetings with a specific, pre-assigned agenda should be held weekly. Effective staff meetings should consist of the following:
- Objective: The purpose or intended result of the meetings.
- Attendance: Who should come and what each person should contribute.
- Guidelines: What is the best way to accomplish desired results? What resources are available to achieve those goals?
- Accountability: Assignments to who (person receiving the assignment); of what (nature of the assignment) and when (due date of the assignment).
- Follow-up: Review the progress by scheduling subsequent meetings and following the same format.
This type of accountability system, where each individual has the responsibility to carry out assigned tasks, enables the staff to work more interdependently, thus freeing the doctor’s time to do what he does best: treat patients.
In addition to weekly meetings, daily 10-15 minute huddles to review the day’s schedule help to achieve the short-term and long-term goals which have been established in the weekly staff meetings. More importantly, these daily meetings will provide you an excellent opportunity to learn about the patients scheduled to be seen that day from the staff. The general background information you can glean about each patient during these meetings will assist you in making a good impression with the patient and beginning to build a strong relationship of trust with him/her.
If the transition structure involves some “overlap” with the selling dentist, the new doctor should see all of the new patients as well as most of the existing ones. Unless the patient expresses concerns about the new doctor, the staff schedules him/her with the new doctor. If the staff detects any hesitation or concern by the patient, they should empathize with the patient and mimic the content of his/her concerns. Then the staff should go on to say, “I know how you feel, Mrs. X. Other patients have felt the same way, but we have found when they have met with Dr. New, they have had a very pleasant experience. I know he would appreciate the opportunity of meeting you.” OR “If I were in your shoes I might feel the same way, but I can assure you that once I saw how he treated patients, I felt very good about the new doctor’s level of professionalism and competence. Mrs. X, we really want to earn the opportunity to continue giving you [and your family] the service you expect and desire. [Especially for being such a loyal patient.]” Then the staff member should go ahead with scheduling a time for the patient. If the patient is still reluctant, the staff could schedule them with the seller (assuming he is still available.)
It’s important to know that since the buyer is assuming the overhead responsibility as well as the debt payments, his schedule should be booked first. The seller’s schedule is subordinate to the purchaser’s schedule.
17. What about taxes? How do I lower my tax liability from a practice acquisition? From day-to-day operations?
It is possible to minimize taxes on the purchase of a professional practice. This is a complex and tedious part of developing the appropriate structure for a proposed transaction. Unfortunately, some professionals are not aware of some of the more sophisticated and highly effective alternatives that are at your disposal to minimize the tax impact. Proper planning in this area can easily save many thousands of dollars being sent on a one-way trip to Washington. You should be aware that when you purchase a practice as an asset sale (as opposed to a stock sale) you can generally deduct or amortize the entire purchase price over a 7 to 15-year period. However, be sure to get advice early in the process.
Once the practice is bought, the type of business entity under which you choose to do business will have a direct and significant impact on your ability to save taxes. There are advantages and disadvantages to each entity. Again, consulting a profession with knowledge, background, and experience in this area is very important and will save you money.
18. What if the seller wants me to buy the building too?
The inclusion of real estate with a practice sale can complicate matters. We suggest you purchase the practice initially, then lease the building under a long-term agreement (i.e. a 3 to 5 year term) with the option to buy at any time. This allows you time to get get your feet on the ground and increase your cash flow before taking on the additional debt associated with the acquisition of the building.
19. Should I employ a professional to assist me in the sale?
Some dentists believe that they will save money by buying a practice without professional guidance. For that to be true, the doctor must make some dangerous assumptions. He must first assume that he can actually determine and objectively substantiate a fair value for a practice. Then he must convince the seller he was truly objective and sincere in his analysis. Next, he must assume he has all the necessary banking connections to finance the purchase. He must assume he has the knowledge and expertise to work through all the complex legal, financial, tax, and staff related issues surrounding the sale. Finally, he will surely spend many hours trying to put all the pieces of the puzzle together. If you do hire a consultant or work with a broker, you may want to first ask them the following questions:
- How many practice transitions and/or sales have you been involved with?
- How many years have you been in the business?
- How many sales ended up in litigation/arbitration or in professional divorce?
- How many of your purchasers have defaulted on their promissory notes to sellers and/or banks?
- What do you charge for an appraisal?
- What do you feel are your strong points in providing transition/brokerage services?
- Is your appraisal contingent on signing a listing agreement?
- How do you know you are accurate with your appraisal?
- Do you feel there is a conflict between appraising a practice and then listing it for a percentage of the sales price?
- What type of post-sale/post-transition follow-up do you provide?
- 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, practice dentistry, etc.)? How will I know that these other activities do not conflict with the quality of service I’ll receive?
- What systems do you have in place to help both parties better understand their compatibility concerning goals, needs, and personalities?
- What do you include in your appraisal?
- What resources do you use to keep up with the latest changes in business and tax laws?
- How long does it take you to transition/sell a practice?
- How are you compensated?
- What services do you offer for the fees charged?
- Do you have any literature that will help me better understand the transition process and how I can better prepare myself for it?
- Can you furnish a list of the five most recent buyers and sellers you worked with?
20. If I choose to use the help of a professional, who should I call first: my lawyer, my accountant, my financial planner, my supply salesman, or a broker? What kind of professional guidance will I need?
The real question here is: Whom can you trust with one of the most important transactions of your life? That is the quintessential question, and rest assured the seller will be asking himself the very same thing. And what if his advisor tells him something different from what your advisor tells you? The ideal advisor, therefore, would be someone who could be trusted by both sides to be competent, fair, and objective. With that trust, the respective parties could proceed forward in confidence toward their mutual objectives, knowing that everything would work out. Such an advisor would be in tune with the needs and expectations of both parties and would be in a position to know how the demands of one party might impact upon the needs of the other. He or she could then act as an intermediary for minimizing conflict and resolving concerns.
Of course, the ideal advisor should specialize in dental practice transitions. Your advisor should be competent in financial as well as legal matters and capable of coaching and interacting with the lawyers and accountants who likely will be involved. An advisor who works in this capacity to the fullest extent will help you better utilize the services of your attorney and/or accountant, and ultimately will help ensure the transaction really happens. He or she should have direct experience in structuring successful transactions similar to the kind of transaction you hope to have.
This advisor should be performance-oriented, deriving compensation from the results of the process. Ideally, this advisor will have resources available to assist you in realizing the potential of the practice, thereby assuring the seller that his practice and patients will be properly cared for and that you will have the greatest chance for success.
21. How much will it cost me to hire a professional transition consultant?
The real costs of selling a practice are incurred by those few dentists who insist on going it alone. How strange it seems to us when, in order to save a few thousand in fees, dentists end up losing thousands in what could have been a very successful practice transition.
A true professional will add value as the process unfolds. His or her expertise in practice appraisals will ensure fair-market valuations. His or her credibility as a transition specialist will give comfort to both sides and assist each in making some difficult commitments, without succumbing to the temptation of structuring a deal that is too one-sided. His or her focus on the big picture will help keep envy and greed from corrupting a good transaction. And finally, his or her broad knowledge of legal, tax, and financial issues will save both doctors untold thousands they would otherwise spend having their respective advisors research, explore, and revisit the critical issues.
Depending on the type of transition, most professional consultants will charge a fee between $2,500 and $7,500, which may or may not include any post-sale support. Either way, you need to check on the background of the professional and on the types of services offered.
22. How do I negotiate a win-win transaction?
We suggest the following four-part system for developing a win-win transaction with another doctor.
- First, seek to understand before being understood, that is, understand and define the other parties expectations. This will lead to a developed climate of mutual trust and empowerment for both parties to act upon.
- Second, plan activities that allow a positive relationship to develop.
- Third, cultivate a sense of mutual trust by opening questions about your goals and needs.
- And fourth, allow the relationship to fully develop before discussing business in earnest, thereby enabling both parties to discuss issues without being defensive.
- If each party becomes sensitive to the needs of the other, and if they can clearly see that their individual goals and objectives are intertwined, then the resulting synergy will allow the doctors to achieve a far greater degree of success.
23. What questions should I address to the seller?
In addition to the obvious questions surrounding the production and collection figures, overhead percentage, active patient count, and overall profitability of the practice, you should consider asking most or all of the following:
- Which service/social organizations do you belong to in the community?
- How would you describe this community demographically?
- What kind of people live in this community?
- Do many of your patients work at one or two particular companies? That is, are there major employers who contribute a significant amount of patients to your practice?
- Do you involve yourself in any PPO or capitation programs? If so, with whom and how much do you have?
- If you rent the building, what is your relationship with the landlord? Do you find him/her cooperative or is that relationship strained?
- Have you ever had an associate or associates? How has it worked out? What do you see as the positive and negative parts of this relationship? How long ago did you have an associate?
- Have you ever done any type of external/internal marketing and if so what kind?
- Do you see any value to changing the hours of the practice? If so, why?
- Where are most of your new patients coming from and how many do you get a month?
- What type of procedures do you primarily perform in your practice? What type of procedures could be done in your practice which you are currently referring out?
- What advice would you give concerning ways of generating additional income for the practice?
- Do you see any ways of decreasing the overhead of the practice?
- How would you rate the competition from other dentists in the area?
- How would you rate your staff?
- Do you delegate many of your responsibilities to your staff?
- Would you describe the staff situation as stable or unstable?
- Is the practice amalgam free?
- How do you treatment plan your patients?
- How does your recall program work?
What issues need to be addressed before I make a offer to purchase?
If a prospective purchaser has conducted due diligence in researching the practice, including a verification of the seller’s data and a careful review of the appraisal, etc., he or she will likely be ready to make a offer on the practice. However, this offer should be made either contingent upon or after the completion of the following items: a thorough chart audit, approval of adequate financing, procurement of the appropriate state license, and negotiating an acceptable office-lease agreement with the landlord. In addition, you should agree with and feel comfortable about the terms and conditions of the proposed purchase agreement.
Many times the seller’s current staff can shed some light on how the practice has been and is presently operating. Take time to “interview” the staff and ask the following questions: what do you like best about this practice? Which area’s do you feel the practice could improve in? What attributes do you feel the doctor should posses or exhibit in order to precipitate effective practice operations? What things should I know to help make this a smooth transition? Please tell me about the patient profile, i.e., type(s) of insurance most frequently dealt with, the type of recall system being employed, how scheduling is done, and what new patient flow is like, etc.
Should I put down some earnest money with my offer to purchase?
Unfortunately there is no definite answer to this question. Since most offers contain certain contingencies similar to those previously mentioned, there is very little guarantee that either party will be able to “force” the other to follow through with an offer to purchase or a letter of intent. In most case, either party will be able to back out of the deal without penalty if he/she finds one or more of the contingent items unacceptable. However, earnest money seems to create a greater mental commitment by both parties to go forward in good faith and complete the transaction. Oftentimes the seller will require some form of financial commitment from the purchaser before taking his/her practice off the market. Some offer-to-purchase agreements furnished by brokers and/or attorneys may contain language which makes it very difficult for the purchaser to get his/her money back if the transaction is not completed. We suggest purchasers draft and send a letter of intent, without the inclusion of any earnest money, but a strong moral commitment to close the transaction if all is found satisfactory.
26. Items you should review when conducting a due diligence research on a practice opportunity.
- Have you personally reviewed 50 to 100 patient charts?
- If so, did you look for:
- Complete, thorough, readable treatment notes by the doctor and/or RDH.
- Recommended but uncompleted dentistry clearly noted and tracked.
- Dentistry performed by the selling doctor that matches the type of dentistry you do or intend to do.
- Overly aggressive or very conservative approach to treatment completed.
- Patterns of patient treatment acceptance evident (high or low)
- Have you examined the computer hardware and software?
- Will there be a software transfer fee?
- Is there a computer maintenance agreement in effect? For how long?
- Were you able to review a computer report of the following?
- Number of patients grouped by ages.
- Percent (and number) of active patients as well as percent and number of patients who have been in for restorative and hygiene treatment in the past 12 months/the past 18 months.
- Percent (and number) of patients consistently receiving hygiene treatment in the past 12 and 18 months.
- How far are operative appointments booked in advance?
- How far are hygiene appointments booked in advance?
- Have you reviewed an accounts receivable report? Is there a sizable amount outstanding over 90 days?
- Do you know how flexible or how strict the practice is about extending payment terms to patients?
- Have you examined written records of patient financial agreements?
- What is the average monthly payment amount allowed for patients with outstanding balances? ($25 per month vs. $200 per month)
- Are over-the-counter collections consistently done (for insurance co-pays, etc.)
- Have you reviewed the selling doctor’s fee schedule, and does it match with the fees you intend to charge?
- Does the practice have two or more fee schedules due to the restrictions of a managed care plan? If so, how well are the different schedules managed by the front desk staff?
- When did the selling doctor last increase his/her fees and by how much?
- Has the selling doctor informed his/her staff of the practice sell?
- Have you interviewed all or some of the staff that will be staying on?
- Do you have a transition plan for what you will do about salary increases, paid vacations, working days/hours, sick time policy, etc.
- Is the staff currently taking an active role in marketing the dental practice? How? Do they do this willingly?
- Have you observed the practice in full operation for at least one full day?
- Do the staff and Doctor seem to have a good rapport with one another? With patients? Do patients seem to trust Doctor and staff?
- How does the practice communicate with its patients (newsletter, birthday or holiday cards, etc.) Does this match with your intentions?
27. What items or checklist should I address before closing a transaction?
- Have a qualified consultant/appraiser or accountant review the appraisal. Review practice polices and procedures. Complete financial statements and a household budget and meet with a banker.
- Preview a list of all assets included and excluded in the practice sale. Both parties walk through the office and discuss these items before closing.
- Have your attorney review the contracts to cover debt obligations.
- Have your accountant review purchase price allocations and any sales tax implications. Accountant files IRS form 8594 after the sale is completed (this is usually filled out when you file your tax returns).
- Both parties assist in writing a letter of introduction to patients. Send out letters after closing.
- Hold a staff meeting to build rapport and discuss how to handle the transition and how best to address staff and patient concerns.
- Review communication dialogue between doctors, staff members, and patients.
- Secure malpractice insurance and notify D.E.A. about the practice address.
- Possible printed material needed:
- a) Appointment Cards
- b) Letterhead and Envelopes
- c) Professional Business Cards
- d) Referral Thank-You Cards
- e) Billing Envelopes
- f) Rx Forms
- g) Recall Cards
- h) Office Signs
- i) Rubber Stamp with Name and Address
- Call insurance agent for life, disability, and casualty insurance.
- Establish the entity under which you are going to do business (i.e. professional corporation, limited liability company, sole proprietor, etc.)
- Apply for Tax I.D. or EIN number for your new business entity (your accountant can do this).
- Change name and account with the phone company.
- Inform any answering and/or pager services.
- Check with the City/County for applicable business license.
- Set up bank accounts and credit card/financing arrangements and establish a line of credit.
- Seller makes keys for the buyer.
- When the buy-in occurs, call the other utility companies to change billing name (i.e., sewer, water, electricity, gas, garbage, etc.) to the new entity or owner.
- Have the landlord, if applicable, sign the lease assignment agreement.
- Inform staff and help reassure their job security, because the buyer or partner really needs their help. Seller supplies a list of employee benefits and any accrued vacation. If accrued benefits and/or accrued vacation is owing, this needs to be reconciled on the closing date.
- Have a copy of all accounts receivable on the date of closing.
- Try not to make too many changes in office policies in the first six months (despite this suggestion, you may need change the way financial arrangements are made with patients in order to meet your cash flow demands).
- Meet regularly with the seller (if he/she is staying on) to understand and define each other’s expectations. Identify and verify personal and practice goals. Review options to achieve those goals.
- Initially hold staff meetings weekly, then bimonthly. Conduct daily 10-15 minute morning huddles to go over the day’s schedule.
- Spend time with patients to help understand their expectations. Ask the patient after their appointment: Is there anything we can do to make your visit more pleasant? Call the patient after their appointment to see how they are doing.
- Conduct one-on-one interviews with staff members to understand their needs and concerns.
28. If I don’t think I am quite ready to buy, what should I be doing now to prepare for a practice transition?
Maintain a good credit rating, save money, enhance your clinical skills, continue with your educational courses, plan for the type of practice you are looking for, and continue to learn and study more about the practice transition process, leadership skills, and practice management systems and procedures.
We hope the information contained in this booklet was helpful to you. There are far too many specific and complex issues surrounding a successful practice transition than can possibly be addressed in a format of this nature. If you have any further questions, or would like additional information regarding our services, please call us (303) 795-8800 or (435) 654-1717.
PO Box 1357 Midway, UT 84049
2305 E. Arapahoe Rd., Ste. 220 Littleton, CO 80122
(801) 298-4242 (435) 654-1717 (303) 795-8800