29 Mar SELLER REMAINING AS THE BUYER’S ASSOCIATE… COST or PROFIT?
Production in a dental practice is divided into two categories… doctor production and hygiene production. To properly analyze the financial impact of the seller remaining as your associate, you must determine the percentage of the total doctor production that you will be providing personally. The estimation of such also requires that you be totally honest with yourself.
It should be noted that buyers are often not very objective in this regard and tend to grossly overestimate their speed and ability to produce dentistry. It normally takes many years for a dentist to develop into a major producer. But, for purposes of this article, buyers have been divided into two categories… those who CAN produce 100% of the practice’s doctor production and those who CAN’T yet produce 100% of the doctor production in the practice under consideration.
For the buyer who CAN’T produce 100% of the total doctor production, the seller remaining in the practice as your associate is a major financial advantage. However, to appreciate this advantage you must first understand how the numbers work. It is amazing how many times we have heard a doctor say something like “I can’t possibly pay the seller 40% of his or her collections when my overhead is already 70%… I would be losing money.” We fully understand why some doctors get a bit confused on this issue. After all, most doctors were only trained to provide health care, not to dissect and understand financial statements. That’s precisely why doctors hire accountants. But, such thinking could not possibly be more wrong and unfortunately, we have found that some accountants get confused as well!
Thinking that adding a 40% seller compensation expense to an existing practice overhead of 70% causes the practice overhead to escalate to 110% is ridiculous (regardless of what your accountant may be telling you). Such thinking is a classic case of comparing apples to oranges. Whatever you pay any associate is not a direct add-on to your practice overhead. Your practice overhead is based on TOTAL practice production. An associate’s compensation is based on ONLY the associate’s production. The only way that the 40% you pay an associate adds 40% to your TOTAL practice overhead is IF the associate is responsible for 100% of the practice production… that is 100% of the doctor production as well as 100% of the hygiene production.
The truth is, in many situations, having the seller remain as your associate will actually REDUCE the negative impact of your practice overhead. This is better understood if we examine what happens when any practice brings in an associate. Let’s say that a solo practitioner owns a practice that produces $700,000 per year and the annual overhead (including all debt service) is 70%. That means that the total practice overhead is $490,000 (70% of $700,000). Now let’s suppose that we hire an associate who adds an additional $200,000 of annual production to the practice thus bringing the total practice production up to $900,000. Let’s further assume that the owner pays the associate 40% of the associate’s production, pays all of the associate’s lab bills (generally about 8% of the associate’s production), pays for all of the associate’s supplies (generally about 5% of the associate’s production) and hires a part-time assistant for the associate (total annual payroll cost including payroll taxes of $18,000). The added practice overhead due to the associate compensation is $80,000 (40% of the $200,000 the associate produces) plus $16,000 for additional lab costs (8% of the $200,000 the associate produces) plus $10,000 for additional supply costs (5% of the additional $200,000) plus $18,000 for additional staff costs. Thus, the addition of the associate to this practice added $200,000 in annual revenues and an additional $124,000 to the practice overhead (increasing the practice overhead to $614,000, or $490,000 plus the additional $124,000).
Financially, two exceptionally positive things happened in the scenario above because an associate is added to the practice mix: (i) the total practice overhead is reduced from 70% to 68% ($614,000 divided by $900,000) and this favorable trend will continue as the associate continues to be more productive through the years; and, (ii) the practice owner created a passive income (income that does not require the effort of the owner doctor) source that earned the owner an additional $76,000 in that first year ($200,000 additional practice production produced by the associate less $124,000 additional expenses incurred due to the associate). When you examine the numbers, any practice that is able to achieve additional production because an associate (seller or any other associate) is added to the practice mix, provides the owner of the practice a significant increase in personal income.
So, if you CAN’T produce 100% of the doctor production in the practice, then the seller remaining as your associate is not a cost to you at all. In fact, the seller is making it possible for you to enjoy a major financial advantage. With the seller’s assistance, your practice will maintain a higher production level than it could with you as the only doctor. Without the seller, your total practice production would fall. You would lose 100% of the income the seller would produce for you. And, that income production was only costing you 40% seller compensation plus the production’s expenses (another 13% to 18% of the seller’s production) plus possibly one assistant salary.
PARAGON PreSale opportunities are typically structured for the buyer to realize passive income profits of somewhere between 35% and 45% of every dollar the practice collects from the seller’s production. These substantial profits often provide the buyer with the additional cash inflow necessary to pay the entire debt service on the practice acquisition (third party loans as well as any seller financing). Buyers who understand these numbers stop worrying about the “cost” of the seller remaining with the practice. Those savvy buyers realize how great it would be if the seller stayed with them until the practice acquisition debt is fully paid off. Paying your practice off with passive income derived from the seller’s efforts is a tremendous financial advantage!
For those buyers who CAN produce 100% of the doctor production, the cost versus benefits of the seller remaining with you as an associate must be measured in alternate terms. With the seller providing part of the practice production that you could otherwise provide, there will indeed be some costs attached to the luxury of having the seller remain as your associate. The issue now becomes a matter of your freedom and your “quality of life.” You must determine if it is worthwhile for you to pay the seller 40% for production you could do. NOTE: the other production related costs (lab, supplies, etc.) would be incurred by the practice regardless if you or the seller provided the production so the cost of the seller providing the production is limited to the 40% seller
compensation.
How much is it worth for you to be able to take an extra day or two off each week? How much is it worth for you to have a structure in place that supports additional doctor time so you can achieve significant growth (all doctors reach a point where they simply can’t do more without another set of doctor hands)? How much is it worth for you to be free to take multiple weeks of vacation knowing that your practice will continue to produce and cover the overhead while you are gone? How much is it worth to you for the luxury of the personal transference of the patient and staff
relationships? How much is it worth to you for the personal transference of referral sources? How much is worth to you for the business administration education you will receive from a seasoned veteran of the real world of dentistry? There is often more to a decision than just the dollars and cents. The PARAGON PreSale structure provides significant advantages even to those high-producing buyers.
And finally, let’s discuss those buyers who feel they CAN produce 100% of the doctor production AND find no significant transition value to the seller remaining as their associate. If you are this buyer and reading this article then you are likely considering the wrong practice opportunity! If the opportunity is structured as a PreSale it is most likely because the seller is only willing to sell the practice under the PreSale structure. Don’t waste time and money trying to change the structure of the opportunity. PARAGON has already fully investigated that possibility with the seller. If your PARAGON consultant has told you that the seller is not willing to change the days of the week and/or the number of years that the seller desires to work after the sale, then this is a non-negotiable part of this particular practice opportunity. Thus this opportunity may not be right for you. If not, tell your PARAGON consultant so he or she can find you an opportunity that does meet your specific needs and goals.
Make decisions based on accurate assistance and advice from a reliable and knowledgeable source! Please understand the proforma that PARAGON provided to you has already accounted for ALL expenses associated with the seller remaining with you after the sale. Regardless of what others may be telling you, it is not necessary to add additional expenses to the bottom line of our proforma to determine your costs. Everything has already been accounted for!
If you are confused, talk with your PARAGON consultant so the two of you can break down the TRUE passive income potential as well as the TRUE benefits of the transition structure of the practice opportunity you are considering.
