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;

1. Rural Practice Dentist
2. Metro or Suburban Dentist
3. A Mid-career Dentist
4. 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.

1. 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.
2. 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”.
3. Why is EBITDA or Excess Earnings important to a practice valuation? It is an accurate measure of cash flow and profitability.
4. A revenue multiplier is the best way to value a practice. T/F False. It is not an appraisal method.
5. How did you determine that number? Someone either makes it up or refers to anecdotal evidence.
6. 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.
7. 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. 
8. 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.
9. 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.
10. 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.

Steve Wolff

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.

1. A classified ad in your local dental society publication will reach most buyers. T/F
2. What documents and metrics will you need to provide to buyers and their lenders in the form of a Prospectus?
3. Why is EBITDA or Excess Earnings important to a practice valuation?
4. A revenue multiplier is the best way to value a practice. T/F
5. How did you determine that number?
6. How is a cap rate calculated, how is it used and what rate is typical?
7. Dental schools are a great place to find buyers for your practice. T/F
8. Smaller practices with potential are easier to sell because the buyer can afford them. T/F
9. 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.

Steve Wolff

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.

• 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;

1. 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.
2. 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.
3. A Buyer’s credit score and work history is more important than their net worth.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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+%!
9. 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.
10. 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 protected]. 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.

Steve Wolff