You will learn about several essential issues you should address 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 your personal and professional goals.
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 more control over your professional career, then purchasing a practice may be your best option. Perhaps the best indicator, 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, we recommend you seek professional guidance – the kind that will help you determine the course of action that best meets your needs and goals.
Over the years, our experience has suggested that most doctors who do not have a plan under way for owning and operating their practice may be jeopardizing thousands of dollars in lost income. Far too many doctors wait too long and receive too little waiting for the right opportunity. Remember, while taking positive action may present some risks, taking no action may involve even greater risks. By doing something positive, you have a greater chance for success.
What are my options?
When the time arrives for you to seriously consider a practice transition, you should know that 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 another doctor involved in the practice.
So what are some of the more common variations used? First is a deferred buy-out transition where the buyer works as an associate for a year or two before purchasing the practice. The second option is an outright purchase of a practice with the seller walking away. If done correctly, the transition can be very smooth with a patient retention of more than 90%. A third arrangement is a pre-sale (or work-back) transition in which you would buy 100% of the practice day one and have the seller “work back” part-time for you as an associate. This allows you to phase into a practice at a comfortable pace while maintaining the integrity of the patient base and staff. If you decide to buy, the seller does not necessarily have to walk away. You simply need to structure the right kind of relationship with the seller. If properly structured, any of the aforementioned arrangements can be an excellent mechanism for acquiring a practice. As with any long-term relationship, working with the right partner will require more effort than having him or her simply walk away, but the quality of life and financial rewards associated could 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 buying only a portion and usually is the preferred method of transition for dentists acquiring a practice. If you need 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 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 agreements. New relationships can be very rewarding if built properly; they can be devastating if they are not.
Where should I look for practice opportunities?
Simply stated, look in areas where you and your family want to live. However, the place where good practice opportunities may be and the place where you decide to live may not be the same. In most cases, there are fewer practice opportunities in the more desirable areas (usually newer suburbs), and when these opportunities do become available, they usually sell quickly, with a higher than average price tag.
As a general rule, the good opportunities are in the older parts of town and/or in a rural setting. But these are many times overlooked because of older equipment, an older facility, and the office location. These practices usually have older patients who need a lot of dentistry. When they are transitioned to a younger doctor with a lot of energy, the revenue frequently increases. Some doctors 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.
What qualities 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 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 those 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 studying sufficient data. Nevertheless, enthusiasm frequently overrides objectivity, and many dentists decide to close a purchase prior to conducting the proper due diligence.
A very good indicator of a potentially successful practice is a practice with a good track record. That is, a practice that has demonstrated stable income over an extended period of time. 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 sign is when records indicate an 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.
Therefore, it is particularly important that you, as the purchaser, regardless of the practice, conduct a patient chart audit. To do this, we suggest you 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 potentially 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 150 to 200 plus active patients per $100,000 annual revenue. Active patients are usually defined as patients of record seen in the past 24 months. Also, having 50 or more new patients for every $100,000.00 of annual revenue is also a good sign. The number of active good patients and number of new patients is critical to the degree of success you will enjoy in your practice transition.
Essentially, 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 what we refer to as the pretax economic earnings, or pretax profit. This figure should be around 25% of gross collected revenue. If you are unable to make a reasonable income of at least 25% of your gross production, after overhead expenses and debt service in the first year, then maybe the purchase may need to be adjusted.
In addition to reviewing the patient profile of a practice, there are several other items you should investigate, such as: reasons the seller has for selling, the seller’s philosophy in treating patients, price and terms, location, current status of the local economy, profit and loss statements for the last three years, status of equipment, staff profile, fee schedule, type and frequency of insurance plans, terms of the office lease, and level of OSHA compliance. These are only a few of the numerous criteria for evaluating an opportunity.
As you can see, it may be a very 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.”
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 that the odds of an associateship breaking up and becoming a disappointment for all concerned is about 70%. We call these arrangements ambiguity-ships, because of the ill-defined parameters that govern these relationships, as well as the lack of an equity investment. In fact, the only reason to be an associate without an equity investment is if, and only if, both you and the host have short-term goals and needs (meaning 12 to 6 months or less). If you work as an associate without a well-defined agreement and 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 and 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 and focus for all concerned. We have seen countless associates work a few years without any problems, all the while expecting that someday they would buy the practice and have some control over their future. Many, if not all, of these situations have ended poorly, 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.
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, and what would I do if I deserved better?” 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 ten years. This is accomplished by having both parties commit in writing on day one to the price, terms, and conditions that will govern the practice sale and for the buyer to put down some earnest money. 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 the schedule, having one doctor work from 7 a.m. to 1 p.m. and the other from 12 p.m. to 6 p.m. We have found that doctors produce more income on a six-hour day than on an eight-hour day. As the Italian philosopher Pareto once said, “Eighty percent of your results come from twenty percent of your activities.” Using the office in a more efficient manner allows both parties to leverage their practice activities, to lower the overhead, and consequently generate more net income. This is die to the fact that some of the fixed expenses stay the same, and as the production increases, the overhead decreases.
The second option is called a merger pre-sale. The buyer has an existing patient base but is looking to increase his or her net income without suffering an increase in the workload. In this transaction, one of the parties moves their 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 parties 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. The seller’s schedule is then subordinated to the purchaser’s schedule, 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 ten years. With this type of option the seller’s income is usually cut in half. However, he or she has the monthly income from the buyer’s promissory note to help offset the reduction. 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. In these cases, the seller schedule is subordinate to the purchaser’s schedule, thus assuring the purchaser a better position to address overhead expenses.
The fourth option is to buy 50 percent undivided interest in a practice; however, this is only advisable if the seller’s time horizon for retirement is beyond ten years. If that is the case, consider buying part of the practice now and the rest later, when the seller is closer to retirement after a 1-2 year associate period.
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.
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; 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 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: 6-12 months for locating general practices in major metro areas, and up to 34-36 months in smaller rural communities.
- Expect the most desirable practices to have a large price tag.
- 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, expect to waste time and money finding the right practice.
- Unless you take the proper steps up front, expect to have every representation you make 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 result 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. And expect the possibility of him 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.
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 46 to 70 percent of the most recent 12 months collections. (This range excludes duress sales for death, disability, or health reasons. Studies show this type of sale averages near 30 to 60 percent of the prior year’s gross.) Specialists 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 strong new patient flow bring higher valuations. Sometimes older practices and practices in rural areas bring less, even though for the purchaser, they often represent the best opportunities for growth.
Perhaps you may already know 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 to suppose that you are a physician. Let us assume that you wish 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 that 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 that 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 established practices for young buyers needing access to patients. That is why the intangible assets of goodwill, patient records, and restrictive covenants are so important to you as a buyer. 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.
Usually, the intangible value of a practice is about 60 to 80% of the total value, meaning that it is composed of such things as goodwill, loyalty, trust, relationships, perceptions, and covenants. There is no simple formula to objectively evaluate these essential aspects of what you have to buy. And yet these are the major items you as a purchaser need to buy. Typically 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.
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/consultant 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 has demonstrated the ability to transition practices and meets the needs and expectations of the purchaser as well as the seller. Remember, the appraisal isn’t worth the paper it’s written on if the appraiser can’t back it up with other transactions in which purchasers have done well after the ink dried. All too often, unrealistic ego-inflated appraisals and poorly structured transactions have caused much heartache instead of creating what could have been an excellent practice opportunity.
The moral of this story is to know with whom you are dealing. Ask lots of questions, and check references of clients (buyers and sellers) who have actually closed their practice sales through a particular firm.
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. Keep in mind that 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 or she handles the smaller ones. The right seller will be enthusiastic and cooperative. The right seller will agree to a fair market price and reasonable terms.
The transition of a professional practice is a very revealing process. As we move along the path of commitment, everyone will learn new things about one another, and more importantly, about themselves. Our experience is that somewhere along the way, usually prior to closing, the questionable ones reveal themselves.
Ultimately, the decision is yours. However, it may be useful for you to know some of the things we look for in selecting dentists we will work with as clients. We look for people who demonstrate a high degree of integrity and moral character in their dealings with us and our clients. We look at their track record in making and keeping commitments. We determine whether their goals are complementary to those of the other party; we also review their financial needs and resources. And finally, we look at their willingness to cooperate and take sound advice to effectuate a smooth transition. If these things are in order, you probably have a very good candidate.
How can I pay the least amount of money for a practice, and at the same time be fair to the seller?
It is no mystery that a well-managed practice with an excellent staff and high patient satisfaction is worth more to you as a purchaser. There are several key indicators that offer penetrating insight into overall staff efficiency and practice performance. These indicators include: How many active patients are in the practice? What types of practice management systems are in place? Does the other historical financial data support the practice value? These and many other crucial factors need to be reviewed in order to come up with a fair and equitable arrangement.
Maximizing the practice potential from a purchase is an intricate process. This process considers what is fair to the buyer. The appraiser must ask himself, If this were me, could I buy this practice with this 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 tax of 25 to 30% of your gross production and still pay all overhead expenses and debt service on the practice sale? Obviously, the challenge is to covey to the seller a sense of appreciation of these factors and of the fair value of the intangible and tangible assets, and to economically substantiate that value. This is not an easy task. So whatever you do, get professional guidance from someone who really knows how to get the job done right and who has the track record to prove it. You probably will buy only one practice. So do it right the first time; otherwise, it could end up being a very costly experience
I have little cash and a lot of school debt. How will I have the financial resources to purchase a practice?
Most practice acquisitions are financed by lending institutions, depending on the buyer’s financial history and credit rating, and analysis of the cash flow of the practice. More acquisitions are 100% financed today than 10-20 years ago. Some buyers will only borrow the down payment from a bank if the seller is willing and able to 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, these bank and seller financing options have 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.
What if the patients stop coming to the practice after the seller is gone?
On of the greatest myths surrounding practice transitions is that 20 to 50% of the patients will not stay with the practice after the sale. The truth is, in well-managed transitions, the attrition rate could be less than 10%. 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 not very common.
The very best way to keep patients in the practice is for the seller to give you a strong endorsement in a letter sent directly to them, and to have a supportive staff. Most patients will then give you at least one opportunity at winning them over during a patient visit. Our experience on transitioning practices has shown that the average patient attrition is low if the transition is handled properly.
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 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 having the competence to get the job done right is another matter. You’ll want to seek professional advice from someone who specializes in managing dental practice transitions. This person will educate and advise the younger purchaser in dealing with the myriad situations that he or she 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 too 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 may be 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 you. Even if you conclude the transaction, the seller may try to get even later on, and you may lose thousands of dollars.
Fourth, show respect to the seller by being on time and by not being judgmental on the way the practice looks and how it’s run. The seller may not be managing the practice the way you would, but that doesn’t mean it can’t 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 interest.
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.
Can the seller walk away from my practice, or do I need him to remain on for a transition period?
Except for specialists, 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.
How long will it take to find a practice and close a transaction?
This largely depends on the location you desire and what your financial resources and requirements are. The best opportunities, in terms of location, operations, cash flow, etc. are in high demand. Whether or not they are difficult to locate, they may go fast and many buyers look for year or so to locate and secure such a practice opportunity. Keep in mind that some of the best opportunities are located in the older parts of town. They may not be the Cadillac practices you were looking for, but with the proper planning and practice management, they can very well end up being the practice you dream about.
Once a qualified and committed seller has been found and all 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.
How do I best handle the staff?
Before Closing, keep in mind that they are the seller’s staff treat the seller and staff with the utmost respect. After Closing, continue to speak respectfully about the seller, the practice and staff, even if your methods or priorities differ. remember that you don’t buyer trust and rapport, you earn it. 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. From day one, it is important to understand and address their needs and goals. By doing so, a high degree of trust can be established. Such trust can 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 patients’ acceptance of treatment from 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 will have an equal amount of enthusiasm for endorsing the new doctor. It is imperative that the new doctor help the staff feel he’s good with people and has competent skills. This confidence allows the staff to make recommendations about his abilities without qualification.
We suggest that the new doctor spend some quality time with the staff. Initially this means spending some one on one time to understand their personal needs and goals as well as learning how they feel about the practice’s strengths and weaknesses. Also, ask them about ways of changing or improving the practice.
When the doctor is truly interested in the staff’s point of view, staff members will look at ideas, both theirs and the doctor’s, without feeling threatened. They are then more likely to loosen their hold and consider a new attitude that favors the doctor as well as themselves. 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 in the relationship.
To clearly define expectations and desired results, doctors and staff should institute a meeting schedule. Initially, staff meetings with a specific pre-assigned agenda should be held regularly to facilitate and improve communications. Effective staff meetings should include the following:
- Objectives: The purpose or intended results of the meetings.
- Attendance: Who should come and what each person will contribute.
- Guidelines: What is the best way to accomplish desired results? What resources are available to achieve those goals?
- Accountability: Assignments of who (person receiving the assignment); 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 periodic staff 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.
To handle the scheduling of patients, the new doctor usually sees most of the new patients as well as 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 might empathize with the patient by saying: “you feel…” or “you’re saying…” and repeat back their feelings or concerns.” Then the staff could go on to say, “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. [Patient’s name], we really want to earn the opportunity to continue to give you [and your family] the service you expect and desire. [Especially for being such a loyal patient.]” Then the staff schedules a time. If the patient is still reluctant, the staff could schedule them with the seller, if 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.
What about taxes? How do I lower the taxes on a practice acquisition and operation?
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. Some professionals are not aware of some of the more effective alternatives that are at their 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 (an asset sale, not a stock sale) you can generally deduct the whole purchase price over a 15-year period. However, be sure to get advice early in the process, from someone who specializes in this area.
What if the seller wants me to buy the building too?
The inclusion of the real estate with a practice sale can complicate matters. We usually suggest that you purchase the practice and rent the building under a long-term lease (i.e. 3- to 5-year terms), with the option to buy. This allows you time to get comfortable with the practice before taking on the additional debt associated with the acquisition of the building.
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, near to what a professional appraiser would place on it. Then he must assume he can get the seller to actually believe he is truly objective and sincere in his analysis. Next, he must assume that 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 issues surrounding the sale. Finally, he will surely spend hundreds of hours trying to put all the pieces of the puzzle together. If you do hire a consultant or work with brokers, 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?
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: Who 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. Whom can the seller trust? 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 that the transaction really happens. He or she should have direct experience in structuring successful transactions similar to that kind of transaction you wish to have.
This advisor should be performance-oriented, deriving compensation from the results of the process. Ideally, this advisor has 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.
How much will it cost me to hire a professional transition consultant?
The real costs of purchasing 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 either a hourly rate around $300 per hour or a flat rate between $7,500 to $15,000, 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.
How do I negotiate a win-win transaction?
We suggest the following four-part system in developing a win-win transaction with another doctor.
First, seek to understand before being understood, that is, understanding and defining the other’s expectations. Truly understanding the other’s expectations leads to developing a 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.
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?
24. 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 an offer on the practice. However, this offer should be contingent upon and/or after the completion of the following: a thorough chart audit (if not already completed previously), approval of adequate financing, the procurement of the appropriate state license, and the attaining of an acceptable office-lease agreement with the landlord. In addition, the purchaser 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 interesting light on how the practice has been and is presently operating. We recommend that prospective purchasers “interview” the staff and ask the following questions: what do 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.
25. Should I put down some earnest money with my offer to purchase?
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 or amount 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 that the letter of intent contain certain contingencies when earnest money is tendered with the offer, including financing, lease arrangements, licensing, and due diligence. In which case, it is more difficult for the seller to keep the money–or for the purchaser to complete the sale–if one or more of the contingent items are not acceptable to either party.
26. Items you should review when conducting a due diligence research on a practice opportunity.
- Have you personally reviewed 50 to 100 patient charts?
- Did you (or when you eventually do review the charts) look for:
- Complete, thorough, readable treatment notes by Dr. and/or RDH.
- Recommended but undone dentistry clearly noted and tracked.
- Dentistry performed by the selling Dr. 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?
- 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 in the past 12 months and in the past 18 months.
- Percent (and number) consistently receiving hygiene in the past 12 and 18 months.
- How far is the operative booked in advance?
- How far is the hygiene booked in advance?
- Production by procedure and production by provider for the last 12 months.
- Have you reviewed accounts receivable reports? Is there a sizable amount of the accounts receivable over 90 days?
- Do you know how flexible or how tight/strict the practice is about extending payment terms to patients?
- Have you examined written records for patient financial agreements for balances due?
- 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 maintain two or more fee schedules due to managed care plan restrictions? If so, how well is this managed by the front desk staff?
- When did the selling Dr. last increase his/her fees and by how much?
- Has the selling Dr. informed his/her staff of the practice sell?
- Have you interviewed all or some of the staff you may inherit?
- 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 operation?
- Do the patients and staff and Dr. seem to have good rapport? Do patients seem to trust Dr. and staff?
- How does the practice communicate with their patients (newsletter, Thanksgiving 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 all the contracts and office lease.
- 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.
- Credential with all the insurance companies that the seller accepts (get a complete list and apply with every one as early as possible)
- Possible Printed Material Needed:
- Appointment Cards
- Letterhead and Envelopes
- Professional Business Cards
- Referral Thank-You Cards
- Billing Envelopes
- Rx Forms
- Recall Cards
- Office Signs
- Rubber Stamp with Name and Address
- Call insurance agent for life, disability, and casualty insurance.
- Apply for Tax I.D. or EIN number for new entity (see accountant).
- When buy-in occurs, set up the entity that you are going to do business under (i.e. professional corporation, limited liability company, sole proprietor, etc.)
- Seller calls the phone company to inform them of the change.
- Also, inform 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 owed, 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, except you may have to change the way financial arrangements are made with patients.
- Doctors meet regularly to understand and define the other’s expectations.
- Identify and verify personal and practice goals. Review options to achieve those goals. Each meeting should have written notes.
- Initially hold staff meetings weekly, then later 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.