Practice Transition Deal Killers – Part Two

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 2: Poor representation kills a lot of deals with improper valuation at the top of the list.

There seems to be no shortage of “experts” on the subject of practice valuation and we find owner’s opinions of their practice value to often be way off base. Their logic seems to be based on some magic formula that failed to take into account, among other things, cash flow and market data. I can assure you that there is very little “Stupid Money” in the marketplace that will come to closing without some justification of value. We find buyers and their bankers to generally be more knowledgeable than sellers about practice valuation and overpricing an office gives the impression that the seller is greedy, doesn’t know what they are doing or both. You are cruising for a crash if you do not have a thorough, current, accurate and justifiable valuation of your practice.

Most accountants are terrific people and do tremendous work for their clients. Some however are sloppy. Since dentists are the trusting souls that they are, they abdicate this part of their practice’s management and the recordkeeping proves to be difficult to understand. Ultimately this interferes with the buyer’s ability to convince a lender to front them several hundreds of thousands of dollars for the purchase. Doubt arises too about the ethics of the practice and what else may not be properly tracked. Questionable shifting of personal expenses may have saved a few dollars in taxes in prior years but now comes back to haunt the seller. Make sure your accounting and tax preparations are clean and understandable, requiring as little adjustment as possible to determine the true profitability of the practice. The buyer is already losing sleep over this transaction. Don’t give them another reason to worry.

And who can forget our attorney friends? Like the accountants, most are terrific folks, working in the best interest of their clients. We refuse to come to closing without all parties being appropriately represented by counsel. That being said, some have no idea what they are doing and may be responsible for a good deal to crash and burn. Just because a son, daughter, brother, wife, nephew, uncle, aunt is an attorney does not make them qualified to represent a dental practice buyer or seller any more than we would place multiple implants on a patient just because we’re dentists. Dental practice transitions are high trust transactions that involve a considerable amount of intangible value and cooperation. An attorney bent on “winning all the wins” and making sure the other party “loses all the losses” is a recipe for failure. Find an attorney with experience in dental practice sales and a reputation for getting deals done. The few dollars you save by having a friend or relative represent you could prove to be very painful.

Dr. Steve Wolff – UMKC Class of 1977