Years of experience in building your own dental practice has taught you the value of using your own judgment in making a career choice. It has also taught you the value of being well informed before making a major decision. Perhaps no decision will have a greater impact on your future than selling your dental practice.
PARAGON believes it is extremely important to become familiar with steps you can take to protect the value of your practice over time, how to be fully compensated for that value, and how to leave your patients in good hands when you are ready to embark on the next phase of your life. It starts by asking the right questions.
In this section, PARAGON offers our perspective on these issues and more, based on the questions we have been asked throughout our three decades of serving the dental industry.
Change is unavoidable. No dental practice is immune to the effects of time — not even yours. The key is not to pretend that change won’t happen, but to prepare for change with eyes wide open. In other words, with a dental practice transition plan.
PARAGON’s dental practice transition programs are structured to be financially and emotionally rewarding for the doctors, staff and patients. On the other hand,unplanned transitions typically occur in response to a sudden crisis or unexpected event. Unplanned transitions are much more difficult, logistically and emotionally, and much less profitable. Any dental practice that does not have a transition plan in place is exposed to the risk of an unplanned transition.
For this reason, the prepared dentist isn’t asking whether to sell, but when and how. The sooner you answer these questions for yourself, the more opportunities you will have to plan the future you want. It’s responsible and wise, and you don’t have to do it alone. PARAGON guides experienced dentists like you through these important issues every day.
Some dentists believe that they will save money by selling their practices without professional guidance. For that to be true, the doctor must make some unrealistic assumptions. He must first assume that he can actually determine and objectively substantiate a value for his practice that is very near what a professional appraiser would place on it. Then he must assume he can get a purchaser to actually believe his analysis. Not only must the purchaser believe it, he or she will want to independently verify and validate the appraisal with his / her own advisors. What are the odds that the purchaser’s advisors will agree with the seller’s appraisal? That’s right, zippo. No chance at all.
We see discrepancies of 40-50% all the time, as the purchaser postures for some intense negotiation and compromise. But assuming the seller can somehow cross the valuation bridge, he must then assume that he has all the necessary banking connections to finance the purchaser. He must assume he has the knowledge and expertise to work through all the complex legal, financial and tax issues surrounding the sale. (A poorly structured transaction can cost far more in taxes than what you would ever pay to a consultant.)
Or, if the dentist uses an attorney or accountant to assist him, he must assume they actually know something about dental practice transitions, and that they will actually help rather than hinder the process. Ultimately, he must assume his time is of little or no value, for he will surely spend hundreds of hours trying to put all the pieces of the puzzle together.
The truth is that dentists who attempt to go it alone either never sell their practices, or they eventually panic and end up negotiating away far more than it would have cost them to have it done the right way. If you decide not to use a professional consulting firm, then at least be aware of the risks you are taking with one of your most valuable assets. These risks include, but are not limited to, the following true accounts from actual happenings:
…the risk that you will waste countless hours with flaky buyers who think they can wait you out for a lower price;
…the risk that any purchaser will be simultaneously pursuing multiple practice opportunities, and may inform you after months of negotiation and posturing that he has decided to purchase some other practice;
…the risk that you and a serious purchaser will not be able to come to terms on the price or terms because neither of you can speak objectively or with authority to the issues;
…the risk that the purchaser will have an advisor who will employ an adversarial approach to the negotiations;
…the risk that you finally locate the perfect buyer, only to later watch him or her become offended by your attorney and go away;
…the risk that you will not realize the full fair market value of your practice and sell it for less than it is worth;
…the risk that you will eventually get weary of the process and negotiate away large sums of money just to get it over with;
…the risk that the purchaser you finally come to terms with will be unable to secure the financing for the purchase;
…the risk that you will still have to pay your attorney to draft extensive documents and that he will not know how to properly draft certain key provisions which are absolutely essential (they never know some of this until we explain it to them);
…the risk that the purchaser will fail to manage the practice properly and that he will run off patients and staff;
…the risk that the purchaser simply moves the patients to a new facility with new equipment and then claims he owes you no more money on your note;
…the risk that the sale will not happen during your lifetime.
OK, I agree I need a professional, so who should I call? The real question here is, “Who can you trust with one of the most important transactions of your life?” “Who can you trust?” That is the quintessential question, and rest assured the purchaser will be asking the very same thing. Who can the buyer trust? And what if his advisor tells him something different than your advisor tells you? The ideal advisor would, therefore, be someone who could be trusted by both sides to be competent, fair and objective. (This eliminates the attorneys, accountants, and brokers who represent only one side.) 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 perfect position to know how the demands of one party may impact upon the needs of the other. He could then act as an intermediary for minimizing conflict and resolving concerns.
Of course, the ideal advisor should specialize in dental practice transitions. Too many dentists entrust their most valuable asset to someone who sells dental supplies for a living and dental practices on the side. Ideally, your advisor would be competent in financial as well as legal matters, and would be capable of coaching and interacting with the lawyers and accountants who will likely be involved. An advisor who works in this capacity to the fullest extent will save you untold thousands in legal and accounting fees, and ultimately will help ensure that the transaction really happens. (Attorney’s aren’t known as deal killers for nothing!) An advisor should have direct experience in structuring successful transactions similar to the kind of transaction you wish to have.
This advisor should be performance oriented, deriving his compensation from the results of the process, not by the hour. Consultants who offer to work by the hour may doubt their ability to get the job finished. They can run up sizable bills without really accomplishing anything. Remember, until there is a closing, you don’t get paid. If the consultant is to represent both sides, he should be paid by both sides, and his fees to each party should be fully disclosed. Ideally, this advisor should have resources available to assist the purchaser in realizing the potential of the practice, thereby assuring the seller that his practice and patients will be properly cared for and that the purchaser will have the greatest chance of success.
One word of caution about attorneys. Some attorneys are reasonable people who may make some minor but meaningful contributions to the process. However, too many attorneys have little or no understanding of the business aspects of a dental practice transaction, and no comprehension of the delicate nature of the issues at stake. In an attempt to control the process (thereby generating much more in fees) they will often give absurd and destructive advice to their clients. The problem is that you, the dentist, won’t know which advice is good and which is absurd. A good consultant will. After all, a practice transition specialist deals with similar issues day in and day out. He can tell you when certain demands are out of bounds. If you happen to get conflicting advice from your advisors, be careful not to make the mistake of assuming that the lawyers always know what is best just because they’re lawyers.
First, TIME IS OF THE ESSENCE. The longer the practice sits, the less the estate will receive. After only a few short months, the practice value will diminish by tens or even hundreds of thousands of dollars! (Especially if other dentists are covering.) All too often a grieving family has not acted soon enough and has unwittingly squandered away much of the practice value. Next, THE ONLY PEOPLE WHO CAN POSSIBLY GET THE JOB DONE IN AN ESTATE SALE ARE THOSE WHO SPECIALIZE IN DENTAL PRACTICE TRANSITIONS. THE ATTORNEY CAN’T DO IT. THE ACCOUNTANT CAN’T DO IT. THE BROTHER-IN-LAW WON’T KNOW HOW. NO MATTER WHAT THEY SAY, THEY CAN’T DO IT. Call in expert advisors with the ability to get the job done. Realize that next to divorce suits, estate sales are the worst kind of engagement for a consultant. They typically do not like to get involved with all the emotion and trauma surrounding estate sales. If you find someone willing to take it on, thank them. Then listen to what they say, and do exactly what they say to do. Best wishes.
Four things… none of them are easy, but each of them will make your practice more valuable and more marketable.
First, pay off or at least do not incur any more practice-related debt. Your practice value consists primarily in your relationship with patients, not the value of your equipment. Resist the temptation to go out and purchase new equipment with the expectation that it will enhance your practice value. It will not and you will never get your money back.
Second, objectively evaluate your staff and get rid of the dead wood. There are far too many doctors who cannot bring themselves to confront the fact that they are being held hostage by staff members who have been there too long and think they are indispensable to the practice. Don’t you believe it? A truly excellent staff will make the practice much more valuable and attractive to a young purchaser. If your spouse works in the practice, she should likewise phase out (or be ready to) once the new purchaser acquires the practice.
Third, take positive and conservative steps to increase practice collections and improve new patient inflow. Generally speaking, practices with greater collections from fee-for-service (FFS) patients carry a higher market value. Practices with high patient retention and a healthy new patient flow are likewise more attractive to purchasers.
And fourth, if you don’t know how to do the three things previously mentioned, get some professional help. Some consultants will perform an in-office diagnostic analysis on your practice without cost or obligation. Often such analyses turn up important opportunities that can mean much more income and profit while improving the practice profile for the transition. Our experience has been that such pre-transition investments into your practice can pay big dividends when it eventually comes time to sell.
One of the fastest growing areas of law is the area of mediation. Mediation is simply a process whereby a third party intervenes between two sides in a dispute and works with both sides toward a resolution. If the mediator really does his job, the outcome will be evenhanded and fair to all concerned. In many respects, the same principles used in legal mediations may be applied to the sale process of a professional practice.
Not only is it possible to apply such principles, it is tremendously effective. PARAGON consultants are trained in the fine art of dual representation and have handled in excess of 1,500 clients in this fair and equitable fashion.
PARAGON truly believes that there is no reason for a practice transition to be an adversarial experience. This is especially true when most transitions result in the buyer and the seller working together after the transaction is finalized.
But probably most importantly, since 1988 over 97% of our clients surveyed indicate that they would highly recommend our services to their colleagues (many of these have indeed referred us to colleagues). It’s hard to argue with results.
If “cost” is defined as money paid to a professional firm that would otherwise be retained by the seller, then the “cost” to sell a practice is often zero. After all, for it to cost you something, you must assume you could get to the same point without the benefit of a professional firm handling the transaction. The likelihood of that happening is nil. In the vast majority of cases, dentists using professional advisors net (after fees) significantly higher dollar amounts for their practices than their do-it-yourself colleagues. 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 will undervalue and negotiate away several times the amount they would have really paid to have it done right. The sad irony is that they never know what it really cost them because they never know what they might have received otherwise. Keep in mind that a true professional will actually add value, not cost you money, as the process unfolds. His expertise in practice appraisals will ensure full fair-market valuations. His credibility as a transition specialist will give comfort to the purchaser and assist the purchaser in making some difficult commitments without succumbing to the temptation to dicker over price and terms. His focus on the big picture will help keep envy and greed from corrupting a good transaction. And finally, his broad knowledge of legal, tax and financial issues will save both doctors untold thousands they would otherwise spend to have their other advisors research, explore and revisit the critical issues.
Most consultants or brokers charge a 10% seller fee for their transition services. PARAGON has a more equitable fee structure for our dual representation transitions.
Yes, it is possible to both minimize and defer taxes due on the sale of a professional practice. This is a complex and tedious part of developing the appropriate structure for a transaction. Proper planning in this area can easily save many thousands of dollars being sent on a one-way trip to Washington. Be sure to get advice from someone who specializes in this area early in the process. An experienced transition consultant, such as PARAGON, can help you. In light of changes in the tax law and modifications to the capital gains tax, this aspect of a transaction has taken on yet additional complexity and importance. Proper planning here can really pay big dividends in terms of net proceeds and eventual retirement income.
In all likelihood, sellers who finance a portion of the sale will be asked to subordinate. This is a reality in over 95% of the practices sold across America. Here’s why. The purchaser will not likely have the down payment sitting in a checking account and will need to borrow it. A bank willing to make the purchaser a loan for the down payment will require a first lien on the practice assets (as well as any and all other assets of the purchaser). The seller will be asked to subordinate his note to that of the bank. This puts the seller in a second lien position; a prospect that can at first seem rather scary. Fortunately, this type of seller financing has gone on for enough time that we can confidently say that the odds of the purchaser failing to pay are extremely small. When we examined some 1,500 practice transactions across the country over the past 6 years, we could find only four instances where the purchaser had defaulted on his payments to the seller or where he was in arrears. Those are pretty good odds. Take them. The alternatives are far worse than the small risk you take of being in a second lien position to a bank which at best has absolutely no interest nor ability to operate a foreclosed dental practice, and at worst could only seize tangible assets (not patient records). By taking back a subordinated note for some portion of the sales price, you will maximize your net after-tax proceeds.
A few years ago the answer would have always been that a seller should expect to finance a major portion of the sale. But in recent years, third-party lending sources are getting easier to deal with as more and more successful practice transitions are being completed.
Even though all-cash deals are not out of the realm of possibility, most practice sales are still structured with the combination of a cash down payment and seller-financing. The structure has typically been a 20% down payment and an 80% note to the seller, but this ratio is not etched in stone as it once appeared to be. With strong credit-worthy buyers, it is not uncommon to see down payments in the 30% to 50% range. And in some recent closings, strong buyers are able to obtain 100% financing from a third-party lender.
However, receiving all cash for a practice may sound enticing, but in reality, it can sometimes be the worst way to sell. A primary obstacle is obviously finding a buyer capable of completing an all-cash transaction. There are simply not very many cash buyers and our experience is that those that do exist can often be quite difficult to deal with. Another consideration is that the timing of a sale may be seriously impacted by requiring an all-cash transaction. Another major negative is income taxes. The receipt of a large lump sum amount in any single tax year can often bump a taxpayer up into a higher tax bracket and precipitate unnecessary tax obligations. And finally, all-cash purchasers often demand a discount for assuming 100% of the risk of failure in the practice after the sale is consummated. We have seen these discounts exceed 50% of the fair market value of the practice. Even in a moderately sized practice, the discount can be $75,000 to $100,000.
It is our opinion that most sellers (and virtually all Pre-Sale sellers) should seriously consider some seller financing since the risk of default is extremely nominal and the interest rate is attractive.
Including real estate with a practice sale significantly complicates matters. We have seen situations where the seller has insisted upon the purchaser acquiring both the practice and the real estate. Even if a discount was offered as an inducement, our experience suggests the inclusion of the real estate turns away otherwise interested purchasers, significantly extending the time required to find a purchaser. And while it is possible to sell both to a single purchaser, you should know that historically, when real estate and professional practices are combined in a single transaction, the value of both are drastically compromised.
To maximize the return on each asset, many dentists sell the practice and rent the building to the purchaser under a long-term lease with an option to buy. This allows the purchaser time to get comfortable with the practice before taking on the additional debt associated with the building.
Always tell the staff the truth. Always! But that doesn’t mean that you have to tell them every aspect of the transaction or circumstance. For example, if an appraisal is being made on the practice, the doctor may inform his staff that he is considering bringing someone else into the practice and has hired a professional firm to conduct an analysis and make recommendations. As the process unfolds, the doctor can disclose further aspects of the game plan. When it is time to inform the staff fully of a pending practice sale, be sure to emphasize their individual job security and the need for their continuing support.
Staff members can sometimes make or break a transition. Yet most practice valuations PARAGON sees from “brokers” completely ignore this factor, and give little or no weight to a well trained and efficient staff over one that should have been fired years ago. Furthermore, most brokers fail to provide the parties with any reliable guidance on how to work with staff throughout the process to enlist their support and commitment to the process. Be sure to require that your staff be afforded every opportunity to receive counsel and guidance throughout the process from your transition consultant. If handled properly, this will dramatically improve the overall results of the transition.
Generally, the smaller the town the longer it takes to sell the practice. It can easily take up to 36 months in small towns or less desirable areas to find a willing purchaser. If you are a specialist living just about anywhere (metro or rural) you can expect at least 18-24 months. Certain specialist purchasers are very hard to locate.
For general dentists in the major metro areas, expect 6-12 months to find a suitable purchaser and complete a transaction. Once a qualified and interested purchaser has been found and all terms have been agreed upon, it usually takes about 6-8 weeks to get the transaction closed. If no bank financing is required, the process may only take 2-3 weeks.
This depends on the practice type. Specialty practice transitions are typically more successful when a transition period exists. However, the transition period is more for the transition of the referral sources than the patients. Generally, a two year transition period is sufficient.
In a general practice, contrary to what you may think, it is rarely necessary for a seller to remain with a practice for a transition period. In fact, many times the transition process is smoother and simpler if the seller simply walks away. If handled properly, patient retention will likely be very high whether the seller stays on or leaves immediately. In some cases, the patient retention actually improves when the seller walks away. Personal introductions of the purchaser by the seller are not necessary, and more often than not are clumsy and counterproductive. Your decision to remain with the practice after the sale should be viewed as an option available to you and not a prerequisite for the purchaser’s success. It is not necessary.
Yes. Once the practice is sold, let go. Whether you have sold 50% or 100%, whether you are staying on or moving on, let go.
This may be the hardest part of the sale process, but things will go much better when you give the young doctor room to make his own contribution. This may mean going along with some new processes or procedures he or she would like to implement. Keep an open mind, and always support the purchaser publicly or in front of staff. Patients will likely call you at home to express their concerns over the changes taking place. When they do, be sure to remain firm in your support for the purchaser. The more commitment the patients sense from you toward the purchaser, the more committed they will be. Resolve differences quickly, and behind closed doors.
It is always a good idea to encourage the purchaser to seek professional advice from someone who specializes in managing dental practice transitions post-sale. This person will educate and advise the young purchaser in dealing with the myriad of situations which he or she will face as an owner or partner in the practice (staff leadership and management, hiring and firing, patient retention and case presentation, regulatory compliance, financial monitoring, clear communications, etc.) Most importantly, a transition management specialist can anticipate problems in advance and help the entire practice avoid costly mistakes and detours.
One of the great myths surrounding practice transitions is that 20-50% of the patients will not stay with the practice after the sale. The truth is that in most well-managed transitions, the attrition rate is actually less than 5%. Several independent studies from various parts of the country confirm this figure. In most all cases where we have seen extraordinary patient losses, the cause was directly traceable to mishandling by the staff and doctors and not a direct result of the transition.
However, practices with the certain patient and demographic profiles will not transition without significantly higher patient losses. Fortunately, practices with this same profile typically perform much better financially for the purchaser in spite of the attrition. It may be important to know whether your practice fits this particular profile, as there are several steps that can be be taken to improve the overall transition. However, these steps must be taken well in advance for them to be truly effective. The very best way to keep the patients in the practice is for the seller to give the purchaser a strong endorsement in a letter sent directly to the patients. Most patients will then give the purchaser at least one shot at winning them over during a patient visit.
Again, multiple studies over many years have shown that the average patient attrition is quite negligible in most dental practice sales.
You may not know for sure until long after the ink is dry on the contract. Fortunately, there will be many telltale signs along the way. Keep in mind that the purchaser will be asked to take on some tremendous commitments. But before those total commitments are consummated, there will be plenty of smaller ones. The acid test in determining how the doctor will handle the major commitments will be how he or she handles the smaller ones. The right purchaser will be enthusiastic and cooperative. The right purchaser will pay a fair market price.
The transition of a professional practice is a very revealing process. As you and the purchaser move along the path of commitment, everyone will learn new things about each other and, more importantly, about themselves. Our experience is that somewhere along the way (and prior to closing) the flakes will 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 those dentists we will work with as purchasers. We look for clients who demonstrate a high degree of integrity and moral character in their dealings with us and our other clients. Then we look at their track record in making and keeping commitments. And finally, we look at their overall clinical ability and willingness to continue their learning process beyond school. If these three things are in order, you probably have a pretty good candidate.
Your practice is worth exactly what someone will pay for it in your marketplace. This may sound like a cliche – but it’s a fact.
At this time, buyers of general practices are paying 46% to 88% of the most recent twelve month’s collections. (This range excludes duress sales for death, disability or health reasons. Studies show these sales average near 30% of the prior year’s gross.) Specialists typically pay somewhat less for practices–when they can be convinced to pay anything at all. Circumstances surrounding each practice 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. Older practices typically bring less, even though they often represent the best opportunities for growth for the purchaser. The difficulty with realizing the full intrinsic value of older practices is often one of perception of value by the purchaser.
What someone will ultimately pay for a practice is entirely dependent on what they believe, how they feel, and in whom they trust. If the purchaser believes the valuation analysis, feels good about you and the staff and completely trusts that the appraiser has been objective and fair and that he or she can actually make things work, then there is a high probability that he or she will pay the full appraised value.
The person most qualified to appraise your practice is one who has actually demonstrated the ability to market and sell practices in your market at their true appraised values. Beware those who make more money off of practice appraisals than they do off of actually closing transactions. Remember, the appraisal isn’t worth the paper it is written on if the appraiser can’t back it up with purchasers ready to pay the appraised value. All too often, unrealistic ego-inflated appraisals have caused legitimate purchasers to pass on excellent practice opportunities. Most of these same sellers were eventually compelled to sell at a fraction of their original “asking price.”
The moral of this story is to know who you are dealing with. Ask lots of questions, and directly check references of specific clients (buyers and sellers) who have actually closed their practice sales through a particular firm. Some firms are very open about these references and actually regularly publish names and past transactions. Other firms and/or individuals may be quite a bit more wary about giving out names. There’s probably a reason. Ask.
There are several problems with this logic. First, earned income should never be confused with ownership equity. This is especially true in a dental practice where you can continue to earn an excellent income AND receive your equity.
Second, you could make that same argument just as effectively next year or the year after that, and thereby rationalize your way right on through until it is absolutely too late to do anything.
Third, none of us can ever be sure we have two or three more years. IF something happens to you during that time, or before you get around to bringing in another doctor, (and such things do happen) then that extra year or two will be costly indeed.
Fourth, the very best time to begin a transition is when everything is going well. Who is going to want to buy into your practice after it has started to decline?
Finally, consider the true financial cost of waiting just two more years. Let’s say you are a successful 50-year-old dentist with a practice grossing$500,000. If you wait until you are 52 years old and then sell for the same amount as you would have received at age 50, those two years will cost you over $230,000 ($234,893 to be exact, assuming a 10% annual compounding return through age 65). How long does it take you to save $230,000 from your practice income? We’ll bet it is more than two years. Think about it!
For most dentists, the sale of their practice is something they think will happen far off into the future when they are ready to quit and have plenty of money to retire. For some, the mere thought of selling is so repulsive that they proudly announce to their staff and patients that they will never retire. Anyway, no sense in worrying about something so far off into the future, right? After all, there are so many pressing things to worry about today; like training and motivating your staff, finding new patients, keeping current patients, fending off managed care, OSHA compliance, competition, taxes, computerization, and having enough left at the end of a day to go home and have a life. With all those things to worry about, who has time to think about transition?
Patients with periodontal disease don’t typically worry much about their 9mm pockets either, until someone carefully explains what is going on and what will happen if they do not seek treatment. The key to timing the sale of your practice is to first understand and acknowledge your present circumstances. At such time as a little probing along the gumline indicates that the disease is either present or progressing, then it is time to begin the treatment.
A key indicator for timing a practice sale is whether your practice gross has flattened out or started to decline. Since a large part of your practice’s value depends on the amount of verifiable recent collections, a drop in revenue often means a significant loss of practice value. From a financial standpoint, the right time to sell is before your practice stops growing.
Perhaps the best indicator, however, is how motivated you feel inside. Would you describe yourself as more of an increaser or a decreaser? Increasers and decreasers have different needs, and should approach the transition process from different angles. If you can’t wait to get back to the office on Monday morning; if you still enjoy managing and motivating your staff; or if you are constantly looking for ways to grow your practice and see more patients, you are an increaser. On the other hand, if you find your body in the practice while your mind is on the golf course; or if you have seriously entertained thoughts of cutting back your time at the practice due to stress or fatigue; or if you are bored with practice and just marking time, you are probably a decreaser. In addition, all of you will reach the point where you will begin to sense that your body is beginning to feel the effects of the constant stress and punishment which dentistry hands out. If that’s you, then you are also a decreaser (you just haven’t admitted it to yourself yet). This is true even if your practice is currently prospering.
If you are a decreaser, time is not on your side, and many thousands of dollars in practice equity are at risk. Decreasers rarely become increasers, no matter how hard they try to talk themselves into it. The longer they wait, the worse it gets. However, once the burdens of ownership are taken off their backs, we have seen many decreasers really begin to enjoy dentistry again. And the more they enjoy it, the more relaxed and productive they become. Perhaps it is because they can take a stress free vacation for the first time. Perhaps it is because they don’t have to see every untimely weekend emergency patient. Perhaps it is because they can really focus on the quality patients in their practice. Perhaps it is because they can now take more time pursuing their other interests. Perhaps it is a little bit of all of these reasons.
A decreaser’s primary motive in beginning a transition would likely be to enhance his quality of life by making the most out of his remaining time in dentistry. His secondary motive would be to lock in the value of his practice before it declines, and convert that value into an interest bearing asset. By so doing, the typical doctor can have four or five times the amount of money (from the sale of his practice) he would have received by waiting until retirement to sell. (More on this later.)
If you are an increaser, the primary reason to consider selling any portion of your practice would be to bring in another equally committed doctor to help manage the growth. Associates are not equally committed doctors. That’s why they leave. That’s why increasers who bring in associates eventually give up on their vision of how good life could be with another committed pair of hands in the practice. But it doesn’t have to be that way, and increasers simply need to learn how to structure a practice opportunity for a young doctor that is worth committing to.
If you decide to sell, you don’t have to quit. You just need to know how to structure the right kind of relationship with a new partner. Most dentists equate selling their practice with retirement, or a loss of control and status, and therefore often wait too long to begin the process. Across the country, we see more and more dentists selling their practices ten or more years before retiring from dentistry. If properly structured, these “pre-sale” arrangements can be an excellent mechanism for locking in your practice equity while maintaining your income until retirement. As with any long-term relationship, bringing in a young equity partner will require more effort than simply walking away, but the quality of life and financial rewards are well worth it.
We are not talking about a small amount of money here either. A 50 year old dentist with a practice worth $300,000 can easily have over $1,000,000 more capital available at retirement, just from the sale of his practice, than the dentist who waits until age 65 to sell. Moreover, the “pre-sale” doctor will have more control over his schedule, more time to do other things, and an income comparable to, if not better than the solo practitioner. So what’s the catch? You must be willing to enter into a Win/Win relationship with a younger doctor. That’s it. Could you do that for a $1,000,000 payday at retirement?
In summary, our experience over many years suggests that any doctor over age 50 who does not have a plan underway for the transition of his practice is jeopardizing one of his most valuable assets. Far too many doctors wait too long and receive too little. This is a highly individual and complex issue worthy of very careful planning and consideration, involving you and your family. A thorough and realistic evaluation of your individual situation can be invaluable in arriving at the best decision.
If we have learned anything over the many years of transitioning dental practices, it is that the odds against an associate ever buying into a practice are overwhelming. The odds of an associateship breaking up in disappointment for all concerned is about 90%. In fact, the only reason to bring an associate into your practice without first requiring an equity investment is if, and only if, both you and the associate have short-term goals and needs (meaning six months or less). If you hire an associate without requiring an immediate equity investment, plan on him or her eventually leaving.
Contrary to conventional wisdom, you do not have to “live together” for a year or two to see if he or she is the ideal candidate. In fact, the longer the relationship goes without the requirement of an equity investment, 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 mindset and focus for all concerned. We have seen countless sellers who have had well-paid associates in their practices for years without any problem, all the time expecting that someday they would simply sell the practice to the associate and ride off into the sunset. Virtually all of these situations have ended in disappointment and professional divorce. Some have ended tragically, costing the seller years of his retirement. Don’t put you and your practice at risk! If an associate cannot or will not make a commitment to ownership now, how can you be sure that they will when you need them to?
If perchance you have an associate in your practice now, and if you think you would like to commit this associate to an ownership role, then don’t do anything without first seeking professional guidance. We have found that the initial approach to the associate is critical in creating the proper environment in which to get the commitment. If you get things off on the wrong foot, it is unlikely that anyone can resurrect what may otherwise have been your best shot at getting an excellent transaction completed.
The absolute worst thing you can do is to hire someone to appraise your practice and then present the appraisal to the associate with the expectation that he will simply take it at face value and write you a check. If you really want to ensure that the transaction actually happens, then get some professional advice from someone who knows how to put these things together and let that advisor make the initial presentation.
Yes, but this approach should only be considered if your practice is large enough to support two or more doctors. Make sure you have adequate internal growth potential in your practice. If you do not know how to assess your internal growth potential, then seek professional assistance to get an in-office analysis of your practice potential.
For appropriate practices, the co-ownership arrangement is a very successful transition plan. It commonly involves bringing in an “heir apparent” associate and selling 50% of the practice (either immediately or on a deferred arrangement). The two doctors will then work together as co-owners until the original owner decides to sell his or her remaining ownership interest and either retires or works for several more years as an associate for the practice.
When is this co-ownership arrangement a good plan? If your practice has tremendous internal growth potential but you are currently doing all that you possibly can, then a second doctor will allow the practice to grow to the next level of achievement. The practice market value will also grow to the next level. However, be careful. This is the point in a deferred buy-in arrangement where doctors experience serious problems unless they have properly contractually structured the relationship. As the practice grows, you will consider all of the increased value to be yours since you own the practice. The associate will consider that he or she was responsible for all of the growth and should not have to purchase it. And in a sense, both of you are right. At this point, the negotiation process normally destroys the relationship. Fair cannot be negotiated, only determined! Negotiations can be avoided, however, with proper planning and a well-designed contract.
Co-ownership (partial sale) arrangements are not for everyone, but for those practices that can adequately support the plan the financial benefits can be tremendous indeed. The end result (after the final sale of your portion) is quite often equivalent to selling your practice for twice it’s current market value. Find out if your practice can support a co-ownership plan and always seek professional advice before you allow any associate into your practice. And NEVER allow an associate in the practice without a contract.
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