Like many of you, I am soon to start my eighth week at home as a result of the Missouri directives. We are reading, watching and listening to the chatter about the business of post-pandemic dentistry and how this is going to affect the value and sale your practice. Part three of a four-part series, “what I would be doing if” I were a Mid-career Dentist will have a little different punchline than Part One or Two.
Let me emphasize again that technology is going to become much more important going forward as are demonstratively higher standards of infection control. Those that are behind the curve will find themselves with patients and even staff who are reluctant to come to your office. Until a reliable vaccine is found and made universally available, those who have endured weeks, if not months, of quarantine will be very demanding.
Here’s what I would be doing if I were a Mid-career dentist, regardless of whether my practice was Metro, Suburban or Rural. Unless you are compelled to relocate or recareer, you do not have time to call our office tomorrow morning or any other time in the near future as you need to get busy. With the myriad of confusing projections, plans, guidelines and limitations being suggested by the likes of the CDC, NIH, ADA and others, you should be spending every available hour planning how you are going to go forward in the best interest of your staff, your patients, your family and yourself. Golf games can wait as, after your family, you need to be taking care of your business.
- I would be researching negative airflow systems for my office along with any other proven air treatment equipment.
- I would be strategizing with my staff about aerosol spray management and surface cleaning.
- I would be trying to figure out how to safely treat enough patients in a day to be able to pay my overhead.
- I would be very thankful that a person of influence convinced me to have six months of emergency funds available in ready cash so that I can still put food on the table while we figure out how to get through a crisis.
- I would be remembering back to the waterline controversy twenty years ago and how we managed patient fears about a dental office being a dangerous place. To that end, I would be planning my marketing strategy to reassure patients and my community that we were a safe and conscientious place to come to.
- I would make sure that my membership in organized dentistry (read that ADA, State and local societies) was up to date and that I was planning to be an active participant. Maybe I don’t agree with every initiative but the sheer magnitude of this situation calls for strength in numbers. You need a voice at a high level.
- Lastly, I would remind myself that we are members of a privileged profession that has always enjoyed the respect of the community and that you are the backbone that will get us to the other side of this.
Not to worry, our company has been here 27 years and we’ll be here when the time is right.
Steve Wolff, DDS
UMKC Class of 1977
Now at my home office for the fifth week of the stay at home directives, we are taking in information daily about what the dental practice market will look like when offices return to daily operation. Will the value of my practice go down? Will patients have to be socially distanced in the office? Will repeated PPE changes be mandated? Once again the honest answer is, no one knows what is really going to happen but for those of us in practice after David Acer infected Kimberly Bergalis with HIV in 1987 will remember, infection control of blood borne pathogens became an all-consuming issue. There is no post-pandemic playbook or data set to refer back to but surely dental practices and their management of aerosols in the operatories will be part of a new normal.
We may be noticing a few early signs of how the world might work going forward and can draw a few commonsense conclusions about how all of this going to play out in the sale and transition of your practice. Part two of a four-part series will focus on “what I would be doing if” I were a Metro or Suburban Dentist.
As I noted in Part One, technology is going to become much more important going forward as are demonstratively higher standards of infection control. Those that are behind the curve will find themselves with patients who are reluctant to come to your office. Until a reliable vaccine is found and made universally available, patients who have endured weeks if not months of quarantine will be very demanding.
Here’s what I would be doing if I were in a Metro or Suburban practice and hoping to retire in the next three years…
- I would call our office tomorrow morning and schedule a meeting (probably still virtual for a while) to discuss a strategy for maintaining your practice and its value.
- I would quit listening to war stories and anecdotes from people who have very little, if any, experience in practice transitions. The tea leaves are suggesting that there is likely to be considerable competition among sellers who have decided that the time to hang up the handpiece has come.
- I would want to know how I fit into the market and what I needed to do to remain attractive to what may possibly be a large and hungry pool of scared buyers.
- I would want to know if my building could simultaneously be sold to the buyer of my practice and on what terms. Do It Yourselfers are going to have a hard time putting together an appropriate information package about their practice as, while some will not say enough, some will say too much.
- I would want to know what lenders are requiring of potential borrowers and if financing is even available for my practice and building.
As for me, I would want to be at the head of the line of opportunities in what will no doubt be a very interesting market over the next few years.
Steve Wolff, DDS
UMKC Class of 1977
Finding myself at my home office for now the fourth week of the consensus stay at home directives, we like everyone else are wondering what the dental practice market will look like when we get back to some new normal. The honest answer is, I don’t know. There is no post-pandemic playbook or data set to refer back to. Our company survived the Dot Com bust, 9/11 and The Great Recession but I believe history will show that those were minor bumps in the road compared to our current circumstances. We may be noticing however a few early signs of how the world might work going forward and some of those signs might well apply to us. Consequently, I’m going to pen a four-part series on what I would be doing if I were a;
- Rural Practice Dentist
- Metro or Suburban Dentist
- A Mid-career Dentist
- A recent graduate or associate Dentist
Events of the last month have indicated that technology is going to become much more important going forward. Churches are going to have to change. Business of all types will be exploring new models and service and delivery businesses will have to become tech centers. To name a few, healthcare, the auto industry, airlines, finance/banking and social networks are all going to change. Dentistry is going to need to make some changes as well.
If I was practicing in a rural practice (defined by prospective buyers in our market as somewhere more than an hour away from downtown St. Louis, Kansas City, Wichita, Springfield or Omaha/Lincoln), and looking to retire in the next ten years, I would be on the phone with ADS-MidAmerica tomorrow morning to schedule a face to face meeting to discuss a realistic exit strategy.
I might not hear what I would like to hear but at least I would want to know my choices.
- I would want to know about the necessary metrics for a practice to be a sustainable business for a new owner.
- I would want to know about the shift in buyer demographics in the last 40 years and what effect that will have on the likelihood of their being a buyer now and in the future. Interestingly, there may or may not be a buyer, but it may not be for the reasons I think. We may possibly be in for another shift in career plans similar to the ‘70s and ‘80s as young docs just might find the security of ownership is best enjoyed away from the big city markets. How and why could that be?
- I would like to discuss the difference between obtaining personal if not generational wealth as a result of ordinary income versus equity and capital gains. Even the IRS recognizes the difference so it must be meaningful.
- I would like to know if experienced help is available to assist me in transitioning my practice as things are a lot more complicated than they were when I went in business.
Frankly, not knowing the answers to these questions would leave me unsettled, relying on anecdotes and misinformation and wandering in the darkness of the post-pandemic world.
Steve Wolff, DDS UMKC Class of 1977
As we discussed in the last blog post, Steve Jordan of the PMAgroup, LLC penned a list of 36 questions for Dental Economics that a practice owner might ask themselves or prospective advisors about the sale of their practice. We took 10 and challenged you to see how you did. I’m sure you’ve been anxious to find out the answers.
- A classified ad in your local dental society publication will reach most buyers. T/F False. While friends and colleagues may notice, most buyers will never see a printed ad.
- What documents and metrics will you need to provide to buyers and their lenders in the form of a Prospectus? That’s a question for a blog unto itself as the answer is “way more than you think”.
- Why is EBITDA or Excess Earnings important to a practice valuation? It is an accurate measure of cash flow and profitability.
- A revenue multiplier is the best way to value a practice. T/F False. It is not an appraisal method.
- How did you determine that number? Someone either makes it up or refers to anecdotal evidence.
- How is a cap rate calculated, how is it used and what rate is typical? Capitalization Rate is used in conjunction with EBITDA to calculate a value for a business entity. EBITDA/Cap Rate = Value.
- Dental schools are a great place to find buyers for your practice. T/F False. Unlike the ‘70s and ‘80s, nationally less than 5% of the graduating students go directly into ownership of a practice.
- Smaller practices with potential are easier to sell because the buyer can afford them. T/F False. Small practices may be riskier as they often don’t throw off enough earnings to pay overhead, acquisition debt service and costs, student loan debt and taxes and have anything left for living expenses. Every practice has potential but you need cash to pay bills.
- Student loan debt makes it impossible for buyers to borrow from a lender meaning you may have to carry part of the financing. T/F False. Assuming it is not out of the current norms, industry savvy lenders expect student loan debt and do not require seller carryback.
- What is involved with Due Diligence? Whatever is required by the buyer to be sure they’re getting what they think they’re getting.
While we hope this has been informative, we don’t mean to ignore the current pandemic and the stress it has brought to your practice. I wish I could tell you how this was all going to work out but unfortunately there is not a playbook for this situation. We know that things will eventually get back to some form of normalcy and we will enjoy the opportunity to visit with you about your plans and share our vision of the market. We believe that things may happen quickly and urge you to be prepared.
While business cliques such as this and others like; “At the end of the day” and; “It is what it is” get thrown around to the point of ad nauseum, there is a strong element of truth attached to it with respect to practice transitions. Let’s face it, most docs have very limited if any experience in practice valuation, marketing and sales. Admittedly there is a certain order to the process but I can assure you that every one of the 285+ sales we have had over the last 27 years has been unique. Dealing with roadblocks, maintaining order and fairness is an everyday part of our business. I’m pretty sure you would not sit in the left cockpit seat of a passenger jet without proper training so how can you be expected to know what to do when you have no experience in dental practice transitions?
A few years ago my friend Steve Jordan of the PMAgroup, LLC penned a list of 36 questions (there are potentially hundreds) for Dental Economics that a practice owner might ask themselves or prospective advisors about the sale of their practice. I’ll take 10 and let’s see how you do. There are no trick questions.
- A classified ad in your local dental society publication will reach most buyers. T/F
- What documents and metrics will you need to provide to buyers and their lenders in the form of a Prospectus?
- Why is EBITDA or Excess Earnings important to a practice valuation?
- A revenue multiplier is the best way to value a practice. T/F
- How did you determine that number?
- How is a cap rate calculated, how is it used and what rate is typical?
- Dental schools are a great place to find buyers for your practice. T/F
- Smaller practices with potential are easier to sell because the buyer can afford them. T/F
- Student loan debt makes it impossible for buyers to borrow from a lender meaning you may have to carry part of the financing. T/F
- What is involved with Due Diligence?
I’m happy to score any answers you might be willing to submit but suspect you’re asking for trouble if you don’t get nine out of ten correct as these are common, everyday elements of our business. If you have any doubts, connect with us by phone, text, email or facebook and let’s find a time to meet to see if we can be of service to you, your staff, your patients and your family.
UMKC Class of 1977
As more and more practices established in the 60’s, 70’s and early 80’s come on the market, it seems likely that a good number of them will need to be merged into existing practices in order for the retirees to perpetuate care of their patients and maintain custody of records. With enrollment to local dental schools in our market significantly less than previous levels, a significant number of retirement age doctors will not find buyers to sustain their practices into another generation. Doctors whose revenue is less than $500,000 often find positioning their practices for a merger into another may prove to be the best exit strategy. We have assisted sellers in ten of these in the last five years and have acquired enough data to establish some solid trends contributing to the marketability and successful transitioning of these practices.
Geography will matter: Common sense suggests that the closer the office is to the old location, the more likely it is that patients will visit the new doctor.
Fees and Insurance compatibility: The Buyer needs to review fees and make sure they are relatively close to those in their office. Also, in today’s world, if you do not accept the patient’s insurance, they may go elsewhere.
Letter to patients: The announcement of the Seller’s plans, the introduction of the new doctor and the advisement to the patients as to the custody of their records will go a long way in “laying the sword upon the shoulder” of the new owner.
Retaining staff people: It is no secret that many patients may have more connection with the office manager, assistant or hygienist than they do the doctor and having one or more come to the new office has a powerful effect on patient retention.
Do the math. Even if you score poorly on the previous points, these deals are usually good for all of the parties. While we find that traditional wisdom suggests that 85-90% of patients may be retained by the new owner in a traditional transition, mergers such as these bring a lot of variables and that may not happen. Surprisingly, they can be very successful for the buyer even if a much lower percentage make the switch. While we’re often asked how much a patient record should sell for, the better question might be how much additional revenue the buyer can expect as a result of the transaction. Annual collections of the target practice, a realistic patient count, the production capacity and overhead of the receiver practice along with comparable sales data such as we have accumulated can show just how quickly the payback will occur and what the long-term benefit to the deal will be to a practice.
I’ll let you in on a secret; once someone does this and works through the process, they are anxious to do it again as they realize there is no cheaper or faster way to build up a practice.
While the recent grads understand all too well the effects of their Student Loan debt, doctors seeking to transition their practices for the most part remain clueless on how this liability does (or does not) impact the process. Not a week goes by that someone doesn’t fail to point out to me that “buyers can’t get money to buy my practice” because of their student loan debt. I’m sure that is disappointing for all of the lenders to hear in the face of their marketing efforts so let’s set a few things straight;
- We can get a qualified buyer 100% financing for a practice purchase PLUS operating capital for cash flow expenses PLUS 80% financing for the practice occupied real estate through a number of sources at very competitive rates.
- A “Qualified Buyer” does not mean someone without debt. Student Loan debts are a fact of life and virtually ALL buyers will have some. Nor does it mean that they have piles of cash in savings. The opposite is the norm.
- A Buyer’s credit score and work history is more important than their net worth.
- Unlike the good old days of the ‘70s and ‘80s, only a very small percentage (<5%?) of graduating students will go directly into practice ownership.
- One of the effects of Student Loan debt is the need for immediate income. The first installment payment is due in November after graduation. Consequently, start-ups or opportunities with minimal cash flow but “great potential” are not attractive.
- If your practice does not collect enough revenue to pay the overhead, Acquisition and Student Loan debts and have money left over to provide a reasonable standard of living, it will not be a very attractive opportunity, regardless of location.
- In our market, the buyer may need a working spouse or a part time job to qualify for financing if practice revenue is less than $500,000.
- Interest rates are at an all-time low and this is having a positive effect on practice values. This will NOT last forever. Raise your hand if you remember borrowing money in the ‘80s at 20+%!
- Good news for potential sellers; young doctors will eventually need to own their own practice if they aspire to your lifestyle. Over the long haul, practice ownership affords a better standard of living, both financially and in personal freedom.
- To be fair to those doctor’s comments I referred to earlier, in some parts of the country, monstrous Student Loan debts are having a serious impact on the ability of a buyer to acquire a practice. $300,000 is not unusual here but some areas are creeping up toward $500,000. So far we have been able to make the numbers work but simple math suggests that market values and access to capital could be in for some tough times if this becomes the norm.
Steve Wolff, DDS, UMKC Class of ‘77
Some years ago now our youngest son Chris was working towards an undergraduate degree in business at UMKC. As an exercise for one of his marketing classes, they were to create a business plan and website for a hypothetical venture. He chose askchris.com. The premise was that if you were agonizing over some decision and just needed a little common-sense advice, you could submit your situation to him online and for a small fee, he would give you an opinion. For example; “in a neighborhood of taupe houses, would it be OK to paint my house purple?” Or what about; “our second child is on the way. What do you think about us buying a new Mazda Miata or would a minivan be a better call?” Frankly, given some of the choices that most of us have made, I thought it was a pretty good idea and was convinced that there would be no shortage of material. While the questions sounded absurd, I have seen purple houses and child car seats in Miatas. Someone should have used askchris.com!
Sooner or later there comes a time in a dentist’s career when some decisions need to be made about the transition or closing of their practice. The years spend honing your clinical craft is very little preparation for evaluating various end-of-career scenarios. “Should I just expect to Lock and Leave?” “Should I look for an associate to come in and eventually buy me out (otherwise known as the 5% solution)?” “What is an honest assessment of what my practice is worth?” “How do I find a buyer?” “Can I afford to retire?” “Who would represent my interests and my interests only in the event of a sale?”
Having seen dentists make some “Purple House” decisions, wouldn’t it be nice if there was an askchris.com for this situation? If you are considering retirement, wouldn’t it be nice if there was someone you could call whose company had over 275 sales in this area over the last 26 years and could be objective about the marketability of your practice? Wouldn’t it be nice if you could speak with someone that has experience in court-tested appraisals that could assure you a fair valuation of your life’s work? Wouldn’t it be nice to call someone that lectures to and interacts with students and young dentists and could help find the right person to carry on your legacy? Wouldn’t it be nice if there was someone in your area who regularly works with lenders, attorneys and accountants who have experience in dental practice sales and (this is a big one if you are going to seek advice) has actually sold someone else’s dental practice? And finally, wouldn’t it be nice if there was a person that has been in your shoes not only as a dentist but also as a buyer and a seller? Let me assure you there is.
Call us at 800-311-2039 or send an email to email@example.com. Frankly I’m saddened to repeatedly hear stories about failed associateships, false hope, dead ends and bogus “appraisals”. At NO CHARGE OR OBLIGATION we will meet with you face-to-face and discuss your situation. We’ll buy lunch, coffee or a beer and listen to what you have to say. If we can help you and do business together, great. If we can help you and we don’t do business together, maybe that’s fine too. Either way, I promise that you will know more about marketability, value and possible transition scenarios than when we started. Maybe, just maybe, that minivan will start to feel like the better choice.
Steve, Wolff, DDS
ADS-MidAmerica Dental Practice Sales UMKC Class of 1977
PS: Chris successfully graduated and went on to get his MBA from the Bloch School at UMKC and his Certified Financial Planner ™ certification. He now works for Tower Wealth Managers, a subsidiary of Country Club Trust Company on the Plaza in Kansas City, Missouri as a financial planner. It’s amazing how far a little common sense can take you!
There is an interesting paradox in the world of business mergers and acquisitions surrounding the marketing of an individual company. While there is a need to “get the word out”, there is also a proven loss of value often attributed to “the word getting out”. We recognize a further conundrum in that the entire market we serve contains about 3500 dentists, which by any standard would be the population of a small town. We all know that if you live in a small town and you buy a new Corvette on Friday, everyone will know about it by Monday. If you are considering self-promoting your practice, be prepared to accept that in a short time, everyone in town, including us, will know your business.
The very nature of relationships with vendors, students, study club members, dental schools and even organized dentistry is about networking and not confidentiality. For example, the unintended consequences of conversations with dental students, who national and local statistics say are not buyers, who have conversations with other students and trusted “advisors”. They then have other spin-off conversations that may well result in your staff finding out through the back door that you are trying to make them someone else’s employees. That may well result in an awkward Monday morning confrontation. Worse yet, staff members have been known to take matters into their own hands and seek other employment. Premature exposure of your intentions to transition your practice can have a significant impact on its marketability and value. To be blunt, it proves to the market that you don’t know what you’re doing.
One of the top reasons we are retained by clients to market and transition their practice is our control of confidentiality. By way of signed agreements and vetting of buyer prospects, we control the flow of information and intrusions into the practice so that when the seller makes the announcement of their intentions, everyone is the first to know. While we aren’t naïve enough to believe that no one ever knows something they shouldn’t, we are confident that very few outside the circle of “need to know” ever know.
Steve Wolff, DDS