- IMPROPER VALUATION – Most practice owners do not have access to sufficient and pertinent market data to properly value their practices. The popular Rule of Thumb approach is overly simplistic and statistically correct only a small percentage of the time.
- VAGUE EXIT PLANS – The Selling doctor has no firm strategy for when and how he will exit the practice. Hoping to just “work something out” will result in disappointment as the collections and/or seller’s health begin to slip, as they almost always do.
- NO TRIGGER POINTS – When a contract has been proposed for some sort of a buy-in/buy-out, there is often a lack of definitive time and dollars amounts that detail when the seller will exit the practice. The prolonged waiting time will eventually cause the Buyer to move on to other ownership opportunities.
- BUYER NEEDS – While sellers will hear the facts and figures surrounding the financial obligations of a Millennial buyer, they fail to absorb what effect that has on practice ownership. Practices with inadequate historical annual revenue will be difficult to sell as an ongoing business entity.
- INADEQUATE INFORMATION – FSBOs (For Sale By Owner) fail to collect and properly format enough information about the practice for a Buyer’s Prospectus or even more importantly, a loan application. While the bar is relatively low for a buyer’s access to capital, post-recession lender documentation requirements are at an all-time high.
- MISREPRESENTATION OF FACTS – All of us want to present ourselves and circumstances in the best light. However, being blind to the realities of their practice or facility is a good way to receive a firsthand education about our legal system. While not intending to do harm, not all FSBO sellers are able to maintain their objectivity.
- UNQUALIFIED BUYERS – Yes the bar is low but some buyers are still unqualified, perhaps as a result of inadequate experience, credit history or a flawed business plan. Failure to properly qualify a buyer almost always ends badly, often after weeks, if not months, of trying to make a square peg fit in a round hole. FSBOs believe every prospect is a buyer.
- POOR LEGAL REPRESENTATION – Not that the attorneys involved are bad attorneys, but FSBOs often take the path of least resistance and retain friends and relatives as counsel that has little if any experience in dental practice transitions. The price may be right but the experience will be painful.
- BREACHED CONFIDENTIALITY – DIY marketing almost immediately results in a loss of confidentiality. Soon everyone knows “the Deal” and has an opinion. Colleagues, buyers, students, patients, vendors, staff and referring doctors will all soon know your business.
- OBSOLETE OR OVERPRICED REAL ESTATE – Often the seller’s beloved building is unattractive to the potential practice buyer. Failure to be realistic about its value and functionality has killed many deals.
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 firstname.lastname@example.org. 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
While most have heard the name Dave Ramsey, many may not be quite as familiar with one of his protegees, Chris Hogan or his book, Everyday Millionaires. For this book, the author mined the data available on thousands of millionaires in the United States to explore their habits and similarities. While there are many interesting insights, one that caught my eye concerned a subject that crosses my desk with incredible frequency, the subject of dental practice partnerships. Below is an edited version of Mr. Hogan’s perspective on partnerships and their effect on business and financial success.
“One of the riskiest financial behaviors I know of is engaging in partnerships with other people. I’ve seen friends or family members go in together on business and investment deals and I’ve seen them go sideways more often than not. Even if you know and love the other person, a partnership can ruin your chances for wealth building.
A legal partnership is basically a business marriage. You’re going all in on an investment with another person, mixing your money with theirs, putting your financial well-being in someone else’s hands. You’re fully trusting this person to do what they say they’re going to do. You’re also trusting that nothing tragic or unexpected happens in that person’s life, because if it does, that tragedy happens to you too. Partnerships most often fall apart due to what I call the four D’s: drugs, divorce, death, and debt. (CSW note: We add a fifth D to that list, disability) If your partner, for example, develops a substance abuse problem, you now have an addict controlling your financial destiny. If he or she gets a divorce, you could have someone else’s crazy ex coming after a huge piece of your business. If your partner dies, their adult kids may come after his piece of the company, leaving you with second- generation partners you don’t know or trust. If your partner buys a ton of expensive equipment using debt without checking with you first, you’re now on the hook for it whether you wanted it or not. I’ve seen all of these things happen.
A whopping 97% of millionaires believe they control their own destinies. Each one sees his success as being completely up to himself. A partnership robs you of that power. Partnerships turn self- responsibility into joint-responsibility and sadly, the world is full of people who can’t be fully trusted.”
Over the years, we have seen the bad outcome resulting from poorly designed and/or executed partnership arrangements. While there is enough success to create just enough plausibility to continue on the partnership dream, the fact is that most partnerships fail and when they do, the results are often painful and expensive. Frankly, failed partnerships and associateships serve us best by contributing to the buyer pool for our listings. Since there are plenty of buyers, we don’t really need that kind of help so we urge extreme caution with these liaisons. Remember, whether you want to believe it or not, most will fail.
Steve Wolff, DDS
Believe it or not, that question is generally the first one we ask of a potential seller-client when we have been called into conference about selling their practice. Some of the answers are pretty predictable; more golf, fishing, skiing etc. along with volunteering at their church, travel and an expanded presence in the life of their grandchildren. Others are a little disconcerting; from “I’m sure my wife will find something for me to do” to “as little as possible” It seems that everyone has opinion about the new form retirement should take on for the Baby Boomer generation but the consensus seems to be that some realistic advanced planning will likely make this a more productive and satisfying stage of your life.
Not to make this a book review but texts like Robin Ryan’s Retirement Reinvention might be worth a read. It would be a shame to retire from a successful career in dentistry only to fail with a miserable retirement.
You might be wondering why this is any of our business. After all, isn’t it just our job to sell the practice and put a check in the bank for our client? Well the answer is both Yes and No. While we hope that our work contributes to our client’s financial wellbeing (Question number two; Do you have enough put away to live comfortably into the future?), in the final analysis, a successful transition includes the stories about both buyer and seller living happily ever after. We like to hear that the seller is pleased with the outcome of this legacy and that the buyer has gotten a head start on a successful career. Both take a lot of work but that’s ok. If you are considering moving toward retirement, please do some realistic planning about your future. Where do you want to live? Do you have a hobby that could become a new part time career? Does your church need a new sound technician? Are you and your spouse ready to be together many more hours per day than you have experienced over the last 40 years? Do you need to get on top of some health issues? The list goes on so pick up a copy of a credible book on retirement (Robin Ryan’s seems pretty realistic)and give these things a little thought. Trust me, it will make our first meeting go much smoother.
Those that know me have no doubt heard my rant from the soap box about having plans in place to manage the transition of your practice in the event something unexpected happens to you. We seem to average about one crisis call a year. We’ve had two calls so far in 2018 so this is a very real thing. This last one was personal. Dr. Dennis Myers was not only a hard working and dedicated guy who never stopped trying to expand his knowledge and skills, he was also a close friend with a huge heart who was a source of joy to me and my family.
Unfortunately, that heart misfired on the afternoon of June 2nd and by the following morning had ceased to function. He was 72 years old and his memorial service was held on June 8th. While no one is likely ever perfectly prepared for sudden death, Dennis did one thing that had a profound effect on his patients, staff and estate. He signed a Memo of Direction which allowed us to cut through the red tape of his trust, probate and estate and get busy with the valuation of his practice. Consequently, the Buyer’s Prospectus was prepared and the practice was on the market NINE days after his death.
Subsequently, we were able to attract the attention of Dr. Mark Beard and the sale of Dr. Myer’s practice was closed on October 1st. Dr. Mark is a quality guy and I know Dennis would be pleased with the outcome of his tragedy.
Below is our Memo of Direction. It’s a WORD document you can change so whether you leave our name in place or substitute someone else, please do your family and estate a favor and fill one out and leave copies with your personal papers, spouse, executor and attorney. Practices do not survive very long if the doors are closed, staff members are looking for new jobs and your patients are being seen somewhere else. Don’t let your life’s work dissolve as a result of not taking five minutes to take care of business.
Whether it be by letter, text or a phone conversation, the message below is one we have to deliver way too many times. I regret the fact that my words are such a shock to most of the recipients as they have either chosen to not believe them or simply were oblivious to the market. If you are the owner of a small practice that is providing you with some pre-retirement income and deferring the dip into your retirement savings while providing good service to your patients, then more power to you. Don’t be surprised though to get a letter like this:
Dr. B. Boomer,
I am in receipt of you practice information and it was a topic of discussion this morning at our weekly staff meeting. While you and I have had some communication in the past, it was not until you disclosed your annual revenues that we were able to determine a course of action. You’re probably not going want to hear what I have to say.
Unfortunately, we will not be able to be of assistance to you. From a practical standpoint, the threshold of annual revenues for transitionable practices is around $500,000. We simply are unable to find buyers for practices below that number and frankly, in the Midwest the number is moving quickly towards $600,000. With Student Loan debt often $300,000 or more, our buyers need more immediate revenue in order to cover that debt plus any acquisition debt along with the practice overhead before they can take home a paycheck. For the same reason, unlike those of us from the ‘70s, there is not much stomach for start-ups as nationally only about 5% of the new grads go directly into ownership. Young docs would rather go to work for a “Corporate” office and get a steady income than risk starting cold.
Occasionally someone close to an office like yours might be interested in your files and phone number. We have had reasonable success in merging a small practice like yours with another local office. Be aware though that they will not want you or most of your equipment as part of the deal. Know too that this transaction has better not be the cornerstone of your retirement account. Otherwise (and I have to use this line way too often), work until you are done working, lock the door and put a notice in the newspaper to advise patients how they can obtain their records. I would recommend a call to the Dental Board to make sure you are in compliance.
I’m sorry I didn’t have better news for you but I’m sure you have provided a great service to your community. Best of luck to you.
It’s certainly not unusual and completely understandable that these two words are often used interchangeably to describe the value assigned to an object. Maybe that object is a car, a head of lettuce, a baseball game ticket or even a dental practice. While we often assume the assigned value is always in dollars, maybe it’s defined by hours or even mental and/or physical energy. Interestingly, it can also be a combination of several standards of value. For our purposes here, we will be addressing the often-confused concepts regarding the value of a dental practice as it relates to its price versus what it costs. Understanding the difference may decide whether you own your practice or continue working for someone else.
There should be an asking price for every practice that is on the market but how that was determined is of valid concern. In many cases the number comes from a rule of thumb that someone read about in a journal or magazine article or in some cases just anecdotal conversations. If that is the case, the buyer has every right to be leery. For our purpose, our seller-client pays for a full appraisal of the practice in advance of the listing. Several different legitimate methods are used along with the database of sales data we have accumulated after 25 years and soon to be over closed 270 sales. A running compilation of the last 25 arm’s length transactions confirms that we are usually pretty close in a sales price to appraised price comparison.
After completing the appraisal, we assist the seller in determining an asking price. Depending on the case, we may feel that price is the top of the market while in other cases a margin is added to account for either a rinsing market (such as we are now experiencing) or to let negotiations allow for supply and demand. Ultimately the seller sets the price as we don’t want to make the market. We just observe and compile the data. Notice that we have not yet discussed cost because that is the consideration the buyer must now give to the viability of an opportunity. While we don’t ever want anyone to just blatantly over pay for a practice (frankly, it’s bad for business), the price may be of only modest concern if the cost is manageable. If the buyer can pay the overhead, taxes, student loan debt and acquisition debt and still make a living in an opportunity that fits their career plan and geographic preference, then maybe the price is not so important. Let’s do a little math;
If the asking price is $400,000 for a practice in the area you want to serve and would be a good jumping off point for your career plans, should you walk away if the seller will not accept your $360,000 offer? The cost of this practice would be $4242.00 (10-year loan at 5% interest) for the asking price as opposed to $3818.00 to service your offer. In truth, you are not walking away from a $40,000 difference in price but rather a $424.00 difference in cost. That amounts to about one porcelain veneer crown every other month. You can argue with the appraiser and seller but in the end, if you walk away, you lost out over half a crown.
Steve Wolff, DDS
We have recently had conversations with a rather large number of doctors whose practices are probably too small to be transitioned to a new owner-operator. While the majority of this text is taken from an article I wrote in 2015 for Dental Economics, there are a few new twists that make revisiting this topic worthwhile.
As more and more practices established in the 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 a chain of custody of patient records. With enrollment to local dental schools in our market more than a third less than previous levels, a significant number of retirement age doctors will not find buyers for their practices if revenues are less than $400,000.00. Positioning their practices for a merger into another may prove to be the best exit strategies. Certain factors contributing to the marketability and successful transition of these practices seem to bubble to the top.
Retaining one or more key staff people: It is no secret that many patients will 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 very powerful effect on patient retention. Besides their familiarity with the patients, a willingness to promote their new boss goes a long way towards acceptance of the changes the new office and doctor may present. Pre-appointed hygiene visits can be “money in the bank” for the new doctor if properly handled.
Geography will matter: Although it will be surprising how far patients will travel to see their long-term doc, common sense suggests that the closer the office is to the old location, the more likely patients will visit the new doctor. Patients of a mature practice might have all initially lived close to the office but over the years may have moved several times and find themselves living a couple of zip codes away. Even though dental care may require only a few trips per year, some patients may be reluctant to drive past numerous other dental practices to get to see the new doctor. We suggest that the Buyer review a Zip Code report as part of their due diligence in order to help predict the number of patients that will eventually make the trip.
Fees and Insurance compatibility: The Buyer needs to closely review fees and make sure they are relatively close to those in their office. If the retiring doctor has not kept current with their fees, the Buyer may find themselves in the role of the Bad Guy when they introduce the patients to the realities of current UCRs. The patient may feel that the new doctor is overcharging and will leave the practice. Ironically, even if they go somewhere else and find out the facts of 2018 life, they will not return to the original practice. By the same token, careful review must be made of the participation in various PPOs. In today’s world, if you do not accept the patient’s insurance, they will likely go elsewhere.
Letter to patients: Perhaps nothing is more important to a successful merger than the careful construction of the selling doctor’s retirement letter. Since there will likely not be any opportunity for the selling doctor to continue seeing patients, the announcement of his plans, the sincere 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. Patients have trusted the seller for years, often for decades, and will generally trust his instructions to visit the new practice.
Diplomacy: Although the buyer should know the seller’s reputation within the dental community, the new doctor will need to be especially careful about being overly judgmental regarding treatment the patient has received under the care of their trusted friend. They should work first to build a relationship with the patient and can then educate the patient about their treatment philosophy and plans. Expect too that the newly acquired patient base may have a disproportionate percentage of older patients and being sensitive to their needs will go a long way towards keeping them in the practice.
When properly executed, a merger may be the fastest and likely least expensive way to expand a practice. The buyer needs to do their homework and be as sure as possible that they are getting what they think they are getting. Fair pricing of the target practice and good planning will return the buyer’s investment many times over. Their only regret will be that they didn’t do it earlier.
Steve Wolff – UMKC Class of 1977