24 May Should a Recent Graduate Purchase A Large Practice?
A few years ago a recent graduate had an opportunity to purchase a relatively large practice (over $800,000 annual gross collections) in the exact area in which the young doctor wished to live and practice. This practice represented a “once in a lifetime” opportunity that would place the new graduate years ahead of his classmates, in both practice size and personal income. The selling dentist was relatively young as well but had decided that dentistry was no longer his long-term goal. The seller wanted to change careers and had told the new graduate that he would continue to practice, as the new graduates’ associate, two days a week for a few years while building up his new non-dental business!
The recent graduate came to PARAGON for a complimentary consultation and had the following questions and concerns.
This seller really does a lot of production, what would happen if I couldn’t handle that much production?
First, the seller will teach you how to produce at the level that is required for this practice. Since the seller is financing a large portion of the purchase price (quite common when a recent graduate acquires a practice), the seller actually has a vested interest in seeing to it that you will do well so you are financially able to payoff his seller note. Second, the seller will continue to practice as your associate for a while so you will only be expected to do a fraction of the total doctor production for the first few years. As your speed increases, you will assume more and more of the doctor production. The seller remaining with you will allow you time to develop the speed and technique to produce quality dentistry at the same high level as the seller does now.
What would happen if the seller were to die before he could teach me how to handle the production requirements of the practice?
You can take out a life insurance policy on the seller for the full purchase price, and continue to carry that insurance until you feel confident that you can handle the practice production and are comfortable that the practice will maintain its income even without the seller in the practice. If the seller were to die, the proceeds of the insurance policy would pay-off your practice debt in full.
What if the seller decides to leave the practice early or were to suffer an injury and become disabled before I am ready to assume a greater production load?
As far as leaving the practice too early, I seriously doubt the seller will jeopardize his position as a lender (for the balance of the purchase price) by leaving the practice before he feels you are ready to handle the production. But even so, consider the following:
A seller leaving the practice prematurely is easy to handle. You could simply build a requirement into the Asset Purchase Agreement (an APA is the contract between a seller and a buyer in a practice sale transaction) that the seller will not leave early without sufficient written notice. Financial penalties could even be imposed on the seller. This generally does not become a concern because most of PARAGON’s purchasers experience much higher incomes than we project and therefore are able to pay off their acquisition debt much sooner than projected. However, if the seller becomes disabled, or is allowed to leave the practice earlier than intended, you still have a few workable solutions.
The most probable solution is to hire an associate to replace the seller’s production. You will typically be paying an associate a lower percentage of collected production than you were paying the seller, so your profit margin will actually increase. You will also have the option to personally do more of the more financially productive dentistry the seller had been doing while moving more of the less expensive production from your schedule to the associate’s schedule.
If an associate is not a viable solution (unless the practice is in the middle of nowhere, an associate is virtually always a viable option), you could reduce your overhead and allow for a drop in practice production to a lower level that is more comfortable for you. This is obviously not the best option but it is a workable solution in extreme situations. For example, a large general practice base overhead typically averages around 50%. The note payments (seller and bank financing) to buy the practice usually adds another 15%. In the absolute worse case scenario of a loss of 50% of the practice production, your solution would be to reduce your staff (no longer need all of the staff with such a dramatic drop in production) so your base overhead will still be in the 50% range. But with a 50% drop in practice collections, the note payments will equate to 30% to the overhead (because the collections are 50% less). Even with this huge production damage (50% production loss) to the practice, you will still be taking home approximately 20% of practice collections. I assure you there are thousands of dentists out there that feel like they are doing everything right (with no major hiccups in their practice) and are very happy to take home 20%. Even if the practice production never increases back to the same levels again, in time your personal income will still increase significantly. Once your note payments are paid off your net income will jump from 20% up to 50%.
How will I know how to run a practice that is as large as this practice?
A practice this size must have a well-trained staff and, to some degree, the practice already runs itself. I assure you that the current owner does not spend his time administrating the practice hour by hour. Probably at least 95% of his time is spent on clinical production and no more than 5% on administrative duties. This practice is a proven production machine already. The staff is obviously a good one or the practice would not be producing at the level is now.
How do I know the patients will stay after the seller is gone?
A patient’s best and most logical referral source to their next doctor is their former doctor. A patient trusts their current doctor and will hold their current doctor’s opinion in very high regard. Frankly, unless you make a concentrated effort to drive the patients away, there is no reason for them to select another doctor when the seller has personally asked each patient to give you a chance to be their new doctor.
With so much dental school debt, is it even possible for me to obtain financing for the purchase such a large practice?
Yes it is, as long as the practice acquisition is structured correctly. The PARAGON PreSale Program was designed with this exact situation in mind. In the Pre-Sale, a seller sells his or her practice now and remains with the practice as an associate and mentor to the purchaser for a pre-determined period of time. It is also quite common for a seller in a Pre-Sale transaction to seller-finance a large portion of the purchase price. After all, the seller is still in the practice producing dentistry and knows, with his or her help, the buyer will be able to keep the practice going at its current production levels. In fact, in most cases, the practice will grow even larger with two doctors doing production. The key is to structure the sale so the buyer is initially only required to produce at a level that is comfortable for a young, inexperienced dentist. The buyer will assume more and more production from the seller as time passes. Lenders love the PARAGON Pre-Sale and feel more comfortable taking a more aggressive lending position with a young, inexperienced dentist knowing the seller is still actively involved in the practice and also has a vested interest in the buyer’s success (due to the seller financing).
NOTE: This new graduate purchased the practice and in just three years he had one fulltime associate and the practice had increased in size by more than 65%. The seller stayed for only two years! Because the young doctor had such a positive track record, he was easily able to refinance his debt at a much lower interest rate and pay the seller loan off in full after a year and half.