Merge Right

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

People Want a Number

Most of my friends and family know that more than any other sport, I’m a pretty big baseball fan. My two favorite teams are the Kansas City Royals and whoever is beating up on the Yankees. Debbie and I will attend Spring Training, plan a game at the “K” during most homestands and even try to work in an away game or two each season. I have a pretty good working knowledge of the players and coaches on the team, including some in the minor league pipeline and to top it all off, I have suitable baseball attire for three seasons of weather. I have come to realize that modern baseball has become a game of a massive amount of statistics so it should come as no surprise that a copy of Keith Law’s Smart Baseball would catch my eye at the local library. BA, RBIs and ERA just won’t cut it any more. Imagine my surprise though when Chapter 10 started this way:

“People want a number. They don’t want lots of numbers. They want one number that answers the question. That’s a mixed bag. because one number destroys all nuance. It doesn’t show your work; it just gives the answer, without context. You could apply this to many spheres of life, and it’s no less true in baseball as anywhere else. Fans and writers want to point to one number that sums the whole player up. He’s a 20-game winner. He’s a 300 hitter. Incomplete picture be damned, let’s just slap a number on that fella and call it a day!”

It was like deja vu all over again! Hardly a week goes by that someone doesn’t ask me what the secret formula is for valuing a practice. Just like the baseball fan, they don’t want the facts, they just want a number. I recently had an article published in the Missouri Dental Association’s Focus Magazine regarding practice appraisals and valuation and had this to say about “a number”;

NEVER trust a report that relies on some standardized multiple or “Rule of Thumb” as there is none. That rationale relies on at least two bogus assumptions. First is that the rule is applied to practices of all shapes and sizes when in fact practices with different revenue levels have historically sold for variable percentages of gross collections. Secondly, it assumes that two practices with identical revenues, one being a rural Medicaid-based practice and the other a high tech suburban office will sell for the same price. I can assure you that is not the case.
I think I’m sticking with that. Now if I can just get my head around WAR.*

Steve Wolff – UMKC Class of 1977

*Wins Above Replacement (WAR) is an attempt by the baseball community to summarize a player’s total contributions to their team in one statistic.

“Wrapped Around the Jawbone”

If you went to dental school, or ever let it slip at a social event that you are a dentist or practiced more than a week, you have no doubt had to sit and quietly listen to some tale about a brother/sister/mother/ father/ etc. whose lower molars had roots that “wrapped around their jawbone,” and what a gruesome procedure they had to endure in their removal. (Another favorite is the rationalization for a woman’s dental woes being that their baby, while in-utero, “sucked all of the calcium out of their teeth.”) Knowing that it is a waste of time to debate the anatomical or physiological absurdity of those stories, we sit quietly and listen while the meter continues to run on our life’s patience and energy.

We at ADS MidAmerica find ourselves in a similar situation when retirement-aged docs pull us aside and start telling us about their exit strategy of bringing in a recently graduated associate and integrating them in to the practice while slowly easing themselves out. We used to think this plan would work out about one time in twenty (The Five Percent Solution?) but have come to believe that we were overly optimistic. While not getting too deep into a discussion that is best done face to face, let me list a few reasons this strategy might be doomed. Rest assured there are more.

  • You don’t have enough revenue. Potential doesn’t count.
  • You don’t have a big enough facility.
  • You’re not really ready to share the revenue.
  • You’re not willing to share patients, nor do existing patients want to leave your care.
  • You don’t have a written plan with dates and trigger points.
  • You forgot to get a restrictive covenant with the associate.
  • You are not financially secure outside of this transaction.
  • You don’t know what you’re going to do after you officially retire.
  • In short order, the associate will not appreciate your company.
  • You risk the possibility that the staff may like the associate better than you.

While folks will argue with us that these rules don’t apply to them, the fact is that most if not all do. If this is the basic plan for your retirement, we need to have a cup of coffee NOW. There is no charge for the consultation and maybe, just maybe, we can point you towards a more likely outcome.

Dr. Steve Wolff – UMKC Class of 1977

The Four-Headed Monster

A Blog Post from Dr. Steve Wolff

Dr. Charles Blair told us this day was coming. The demise of indemnity insurance and the proliferation of the PPO model has changed several aspects of the dental practice and industry. While a few offices (especially in rural areas) can operate without participating in an ever widening umbrella of preferred provider organizations, the fact is that most practices are affected in several ways, some of which they have not yet realized.

The first and most obvious is the downward trend in reimbursement. Most providers quickly realize that they are getting paid less for any given procedure than they were in the recent past. As third party payers (for better or worse let’s lump them together as “insurance companies”) negotiate deals with employers or institutions over the amount of benefit they will pay based on a set premium dollar, the provider of those services is generally not invited to the table. Consequently, since the buyer always wants to pay less and the payor always wants to provide a more attractive package of benefits, the provider becomes the shock absorber that balances the equation. Without benefit of representation, you now receive $69.00 compensation for a procedure for which you used to receive $105.00.

The next issue to rear its ugly head is the need for ongoing “Credentialing”. In spite of the generally good track record Dentistry has amassed over the last several generations, dental offices are now expected to participate in a location specific, ongoing paper chase to presumably assure the payors and consumers that they are being treated by the purest and most chaste of hands. Since there is no universal credentialing (like maybe a license issued by a state board or some evidence of ongoing education?) this process must be repeated ad nauseum with every company even remotely related to a claim for payment of services. Once again, the provider has no voice in this process and must endure the cost and time commitment to be in compliance.

Here’s one I’ll bet you hadn’t thought of:  the chance of getting a colleague or a locum tenens doc to come into your office in the event of an emergency in order to keep the doors open is becoming a distant memory. Notice in the previous paragraph I referenced the “location specific” paper chase. The fact is that if you provide services in an office, you must be credentialed in that specific office in order for the practice to bill and receive payment “In Network”. Since by definition an emergency demands immediate action, the realization that credentialing will require weeks if not months to accomplish will certainly make it difficult for patients to be seen and staff to be paid.  And don’t even think about billing the work under the host doctor’s name – as that is seen as out and out insurance fraud, the penalties for which can be catastrophic. Years ago I participated in a mutual aid society made up of nine docs who agreed that if any one of us went down the other eight would work half of a day in the office to keep things running. The lack of portability of credentialing now makes those arrangements difficult if not impossible.

Lastly is the wa-wa that most directly affects our business. That lack of portability that makes locum tenens work difficult also makes a practice transition a little more painful. Now after a seller accepts a buyer’s offer, one of our first steps is to begin the credentialing process. The hope is that when the buyer takes over their new practice, they can be paid for their work. Since this process can take so long (months), we can find ourselves in limbo as the buyer has to titrate between their desire to get started in their new office and timely payments for service. While in the recent past we worked on a 45-60 window to closing, that date can now be hard to pin down.

So we’ve pointed out the problems and whined about them a bit, what do we do next? Unfortunately there does not seem to be much the individual doc can do. They just don’t have enough horsepower. Sure they could stop participating in PPOs but the realities of business and cash flow make that a hard choice for most practices. It would seem to me that legislation is going to be in order and the first step in getting things under control might be to leverage the emergency coverage issue. Who wants to bear responsibility for letting patients be left stranded in the middle of care?  Standardizing the requirements and allowing a doctor’s license and credentials to follow them would be a start. Working under the host doctor’s (or their estate’s) supervision would seem temporary fix.

While that legislation might not correct all of the problems, at least it would give the providers a seat at the table in the ongoing discussion. Keep this in mind however: in my children’s lifetime, a single payor system of payment (read Uncle Sam) will be in place for all health care needs. Plan accordingly.

Dr. Steve Wolff – UMKC Class of 1977

When do I tell the staff? Part 2

from Dr. Steve Wolff

We ended our discussion in Part One with the timing of making the “Big Reveal” to your staff. Again, while instincts might suggest that you let everyone in on your plans early in the game, our advice is to minimize the time spent in the “Neutral Zone.” Treading water is hard work and it isn’t fair to make it more difficult than necessary. It is important that everything now go smoothly and according to plan.

The new doctor should be introduced so as to put a face with a name. The buyer should have received instruction on reassurances they can make to their prospective employees along with some things that for now are best left unsaid. We recommend that the buyer initially plan as few changes as possible – including work days, business hours, office décor and financial policies. Evolution – not revolution – seems to be better accepted by both staff and patients.

While one of my broker colleagues once described this phase as akin to “cheating on your wife and then asking her to help pick out a birthday present for your girlfriend,” the fact is that the transition now needs the assistance of the team. Among other things, announcement letters will need to be sent to patients of record on the day of closing, and staff members can be very helpful in the production and mailing of those letters. Making them part of the process seems to begin the move toward the new normal.

Confidentiality needs to be maintained with regard to patients and the dental community. While our closing rate is better than 98%, lightning can strike: what a mess you will have if the deal falls through and your retirement has already been announced.

By the date of closing, the staff will begin to move toward the New Normal. Tears may still be shed (by both doctor and staff), but they will soon adjust and will perhaps come to realize that by extending the life of the practice, their jobs may be more secure than ever. In our experience, if properly coached, counseled and implemented, staff losses are very small. You can take some comfort in knowing that even the Israelites eventually made it to the Promised Land.

A final thought from Dr. Bridges: in the chapter of Managing Transitions on dealing with nonstop change, he states that “People have to understand that the point of change is to preserve that which does not change.”  Assuming that the core mission of the practice is to provide quality dentistry, changing the doctor may be the one thing that most assures that care will be available into the future.

Dr. Steve Wolff – UMKC Class of 1977

When do I tell the staff?    

A blog post from Dr. Steve Wolff

I will tell you that those words invariably come up pretty early in any pre-sale consultation or listing agreement conference. Since a retirement aged seller has worked with some members of his team for a long time (often decades), they have often developed into members of an extended family as opposed to a strictly employer/employee relationship. Consequently, our advice on the subject often seems counterintuitive as keeping secrets in such close quarters is difficult. Maybe a little coaching is in order.

While his very successful book, Managing Transitions, appears more oriented toward larger companies or organizations, William Bridges teaches lessons to be learned, even in the world of Mom and Pop dental practices. Bridges describes three stages in a transition. The first is “Letting Go”, or in our world, the “Big Reveal”. Next comes the “Neutral Zone” and lastly, the “New Beginning” or what we refer to as The “New Normal”.

The Transition clock starts with the Big Reveal. Even if your plans fall through or change, the staff is now on notice and moves into the Neutral Zone. The toothpaste has now been squeezed out of the tube and it is very hard to get it back inside. Bridges uses the example of the Israelites wandering in the wilderness for 40 years. Moses will tell you that they were not particularly happy campers. While your people may love the office culture and find the work to be meaningful and rewarding, the primary reason they come to work is to be paid for their time. Anything that threatens that is upsetting. Formerly focused team members may now lack direction and can be very insecure. You may suffer attrition as they take matters into their own hands and find other employment. They may find themselves in uncomfortable and disingenuous conversations with patients over future treatment or plans with the doctor. Maintaining confidentiality is hard as they will find it difficult to not share the news.

As you might imagine, it is generally in the seller’s best interest to keep this waiting period as short as possible. Meeting the new owner will help, especially if the new doc has received some coaching before the meeting BUT that meeting cannot happen until there is agreement in principle to a Purchase and Sale agreement, the financing has been secured and the closing date has been set. Hmmmm. Not the way you planned it?

Stay tuned for Part Two. . . .

Dr. Steve Wolff – UMKC Class of 1977

By the Numbers –

a blog post from Dr. Steve Wolf

Here are a few numbers that buyers and sellers of dental practices may find interesting:

6003: Largest class of dental students to date – 1978.

$250,000: current baseline student loan debt.

$2800: my student loan debt upon graduation in 1977.

160: UMKC Class of 1977 celebrating their 40th reunion at the Midwest Dental Conference.

1: Number of Women graduates in UMKC Class of 1977.

102: UMKC class of 2016

65: University of Nebraska College of Dentistry Class of 1977

47: University of Nebraska College of Dentistry Class of 2016

76: net loss (33.78%) of graduates at UMKC and UNCD 1977 vs. 2016.

100%: Financing available to qualified buyers from banks with practice acquisition financing experience.

5%: Chances that an associate will segue into ownership while seller stays and retires in the future.

0%: Chances the above scenario will work if not fully detailed before the beginning of the Associateship

1161: Professionally Active General Dentists- Kansas (Kaiser Family Foundation)

2361: Professionally Active General Dentists – Missouri (KFF)

945: Professionally Active General Dentists – Nebraska (KFF)

2.5%: Presumed annual retirement rate based on a 40 year career

50%: Practices that have poor marketability as a result of revenues or geography

$400,000: Baseline revenues for a sustainable, transitionable solo general dental practice

$600,000 – $800,000: Transition “Sweet Spot” for a general dental practice

5%: optimistic projection for the percentage of sellers who understand the effects of asset allocation.

If you have questions about any of these numbers and are wondering what impact they may have on your practice and transition plans, please do not hesitate to give us a call or drop us a note. We deal with the effects of these numbers every day and will be happy to discuss.

Dr. Steve Wolff – UMKC Class of 1977

 Practice Sustainability V.2017 – A Blog Post from Dr. Wolff

[Note – those of you who are readers of Dental Economics magazine will recognize Dr. Wolff’s November, 2013 article from that magazine.  Click here to download a PDF.

A recent series of potential seller conferences has again brought the issue of practice size to the surface. I always feel a little bad that I have to be the one to break the news to them that their life’s work may not be marketable to the next generation. I guess too that I am a little disappointed that it is such a shock to them since we have been preaching about this for the last several years. Attached is an article published in the Missouri Dental Associations Focus Magazine in early 2014. If there were any need to update our thoughts on this subject it would be that the floor continues to rise. The continually increasing student loan debt service means that more and more net income will be necessary to make ends meet.

Dr. Steve Wolff – UMKC Class of 1977

Practice Transition Deal Killers –

 An Article in Five Parts – Part Five

[Note – those of you who are readers of the Missouri Dental Association Focus magazine will recognize this post from Dr. Wolff’s September/October 2016 article. Click here to download a PDF of the article.]

Many people assume that the sale and transition of a dental practice is a small and simple process. After all, how difficult can it be for a Mom and Pop sized business to transfer to new ownership? Well the fact is, there are many long and tedious steps involved in getting from a listing to a closing, directly involving the lives of the sellers, buyers, office staff and often thousands of patients. While most issues can be resolved by negotiation in good faith, there are a few things that can pop up which will have a direct effect on the value of the transaction and often, the feasibility of a sale. In some cases a little pre-sale planning might have averted disaster but often the problems are inherent to the business. In this series of posts, I’ll take a look at five elements that effectively kill off a practice transition. In it, we’ll examine a few circumstances that bubbled to the surface in the past – but rest assured, there are probably other land mines waiting to be discovered.

I’ve saved the best (or worst) for last; Real Estate.

This seems to be the one that most often delivers a knockout punch from left field. If as the seller you own and want to sell the building the practice is located in, I can almost guarantee you that there will be problems associated with that sale. Problems so serious that the buyer may walk away or you find your practice may prove to be virtually unsellable. While clients are thinking up new challenges every day, let’s look at a few possible stumbling blocks to getting through a transition;

  1. The building is obsolete. There was a time when a cozy, 1000 sq. ft. office with three operatories was the standard. Doctors built those offices on the nicest corners in towns all over the country but the 2016 reality is that the buyers want at least four and probably six operatories and your building is of little interest to them. Throw in a dated design that has not yet reached Historic Registry designation makes this a tough sell. We find that having real estate involved reduces the number of prospects for the practice by about 75%. Insisting that the buyer simultaneously purchase the building will result in some indigestion.
  2. The building is in a bad location. We will discuss Rural vs. Metro listing in a minute but for now let’s go back to 1975 when the building was platted and built. The area was probably picked because it was located in a growing part of the city with good access and parking. The office might have been in a quiet neighborhood somewhat centrally located to its anticipated patient base. Calendar ahead 40 years and most of the city’s growth is now miles away, the intersection near your office is five lanes wide and the road development in 1990 took up 40% of your parking. Patients are now traveling several miles for their appointments and the surrounding buildings have pawn shops and title loan offices as tenants. This too may be a tough sell unless the practice is discounted enough that the buyer can afford a new buildout in a more comfortable area. Hopefully the old building site can be sold to Taco Bell.
  3. The building is probably overpriced. Let’s get real, dental office space is not useable for much of any other purpose. Trying to get a premium price for a property that has a limited functional value, in addition to the sale of the practice will find few takers. Yes, you spent a fortune in plumbing and leasehold improvements but the value may have been in your control of your work space and/or pride of ownership. Your equity position may not be as strong as you think. We find, too, that the Great Recession has left many building owners upside down on their mortgage and buyers and lenders are too savvy to cure your problem. If you built a building in the last 15 years and took out a long term mortgage, there is a good chance that the sale of your practice and building will result in a net after tax loss. Many have found that they are better off to keep working (if possible) for a few more years, at least benefiting from some ordinary income.
  4. Your kindly partner slits your throat. Building partnerships are a disaster waiting to happen. If you have a partner in the building housing your practice, I can assure you that partner has a say in your choice of successor for your practice. They have veto power. While they might have been happy partnering and practicing with you, who’s to say that they will be ok with your buyer? One way or another, they will have to sign off on your sale, either as a landlord or for a right of first refusal and I have seen more than one case where they declined. Talk about a fun office Christmas party!

Dr. Steve Wolff – UMKC Class of 1977

Practice Transition Deal Killers – An Article in Five Parts – Part Four

The understandable choice of the wrong bank is another deal killer

Many people assume that the sale and transition of a dental practice is a small and simple process. After all, how difficult can it be for a Mom and Pop sized business to transfer to new ownership? Well the fact is, there are many long and tedious steps involved in getting from a listing to a closing, directly involving the lives of the sellers, buyers, office staff and often thousands of patients. While most issues can be resolved by negotiation in good faith, there are a few things that can pop up which will have a direct effect on the value of the transaction and often, the feasibility of a sale. In some cases a little pre-sale planning might have averted disaster but often the problems are inherent to the business. In this series of posts, I’ll take a look at five elements that effectively kill off a practice transition. In it, we’ll examine a few circumstances that bubbled to the surface in the past – but rest assured, there are probably other land mines waiting to be discovered.

Part 4:The understandable choice of the wrong bank is another deal killer.

I say this is understandable because most of us live our entire lives not really understanding the different types of banks and bankers. Personal relationships with very pleasant bankers might seem like a smooth and easy way to do business but the world of dental practice finance is actually a relatively small niche in a specialized area of banking. Going to the wrong teller’s window may not only prove to be a waste of time, it may actually torpedo your deal.

For our purposes, there are two general types of lenders or lender divisions. The most common and the type a dentist has generally done most of their business with deals with hard assets like cars, boats, houses and dental equipment. These are known as Asset Based Lenders and their business model is based primarily on the value of collateral offered by the buyer. Even when referred to as “Small Business Lenders”, they frequently look to cover their loan with additional assets or guarantees such as co-signers or assistance from the Small Business Administration. While these are great folks to visit with when you want to buy a new car or some equipment upgrades, they will not be very helpful with practice acquisition funding. For that type of funding you need the services of a bank whose model is based on Cash Flow and understands that the vast majority of the purchase price of a dental practice is almost always made up of intangible assets. If you are not dealing with the right type of bank, believe me you are headed for disappointment.

The problem comes when Asset Based lenders get involved and really, really, really want to be helpful.  As the process works its way through the various management layers and loan committees, the buyer and seller are left treading water, waiting to see if funds are ever going to be available to consummate their transaction. Weeks turn into months and ultimately the lender reports that they will not be able to do the deal without the personal guarantee of most of the buyers’ family tree. Sensing that something must be wrong, the buyer freaks and withdraws their offer when in fact the right bank could have given them a tentative approval for funding in just a few days. Smaller and/or small town banks are particularly known for this, again because they want to be helpful. On rare occasions they will have some Community Development Funds that they can use for an acquisition but even then the terms will be very restrictive.

Dr. Steve Wolff – UMKC Class of 1977