dental articles from 2 Dental.com

Earl M. Douglas, DDS, MBAMy last article discussed the pitfalls of partnerships and buy-ins, which include loss of control, loss of marketability, and loss of value. These are consequences of converting a real tangible practice into intangible undivided interests. This article describes an alternative to buy-ins, providing the benefits of buy-ins without the risks and losses which buy-ins incur.

Prior to considering any form of associateship, a practice must have excess production for an associate to perform. I call this excess production the “phantom practice.” It may involve having more patients than an owner is capable of treating or referring services that the owner does not perform. My rule of thumb for an associateship to succeed requires a practice to be fully booked three or more weeks in advance, or have a sufficient amount of referred treatment for an associate to perform. The owner also needs to refer some of his or her patients to the associate, rather than expecting the associate to build a new patient base.

This is how the alternative works. A dentist joins an ongoing practice under the terms of an associateship agreement for five years. The associate is paid a percentage of his collections, and agrees to a covenant-not-to- compete if he or she breaks the agreement or is terminated with cause. If the owner fires the associate without cause, the covenant is cancelled.

After five years, the employment contract ends and an office-sharing agreement begins. As a result of the development of the associate’s separate practice, a solo-group practice has been formed. Both practices share the common office and enjoy the economies of scale.

With the exception of the death of one of the parties, the covenant-not-to-compete ends. (If a surviving party does not purchase a decedent’s practice, a covenant-not-to-compete goes into effect.) Whatever practice the associate has developed during the first five-year period now belongs to that individual. The owner and the associate divide the total practice net income on a prorated basis of their individual production. If both parties produce the same amount of income, they are each paid the same amount.

This simple plan has profound benefits for both parties. First, the associate does not have to pay a large price for an interest in someone else’s practice, thus eliminating any risk, debt, or liability. There is no discount in the value of the associate’s practice, since the associate now owns his or her individual practice, not just an interest in someone else’s practice.

Another benefit is that both the owner and associate can each individually manage their own personal practices. By contrast, a partnership requires both parties to reach an agreement on every issue, even when a given decision does not work for one party or the other. Our new structure allows both dentists to utilize different management directions without the agreement of the other party and without impacting the other person. If the relationship does not work out for the associate, the agreement can be terminated with no debt, liability, or litigation.

The owner retains significant benefits. There is greater financial gain for the owner from five years of associate profits as opposed to selling half of the practice. This approach involves selling the owner’s whole “phantom practice” rather than half of his “real” practice. After five years, the owner will accumulate more money while continuing to own and control 100 percent of his own practice. By contrast, a buy-in plan results in the owner accumulating less money, suffering a loss of control, and retaining ownership of only a 50 percent undivided interest in the practice, which is then discounted.

The principle is simple. Rather than two dentists trying to divide, own, and manage a single practice, two dentists own, manage, and ultimately sell their own individual practices.

The first practice I structured in this fashion is still operating, but I was more concerned about the structures that ended. All relationships will end - it is not about if, but rather how and when. With the solo-group arrangement, the terminations have been simple and amiable. The structure provides safety for both parties: the owner continues to maintain control and ownership - and therefore the marketability and value of his or her practice. The associate gains ownership and control of his or her individual practice without risk, debt, or liability, while also preserving ownership, control, and marketability.

Any dentist considering a buy-in or partnership - whether as an owner or an associate - would be well-advised to understand the risks involved, as well as explore safer, easier, and more profitable options.

Earl M. Douglas, DDS, MBA, is the founding president of American Dental Sales. He is president of Professional Practice Consultants Ltd. Dr. Douglas personally services the southeast area of the United States, and has affiliates nationwide. He can be reached at (770) 664-1982 or write to him at 11285 Elkins Road, A-2, Roswell, GA 30076. Visit his Web site at www.ppcsouth.com.

Terry D. Watson, DDS

Regardless of where you are in the selling process, you can never start too early. Consider the following 13 tips to improve your practice now.

1. Get your fees in line. Fees should be evaluated and adjusted annually. Several resources are available to report treatment fees by percentile for a given zip code. Getting your fees in line can add practice value if instituted soon enough.

2. Do a cash-flow analysis. The total value of the practice cannot exceed the ability of the practice to generate enough cash flow to make payments on the debt required to obtain the practice and provide a reasonable profit to the purchasing dentist. The net income of the practice is adjusted to add back all income to the dentist/owner and benefits paid on his or her behalf. Owner benefits include deductions for expenses not necessarily related to the operation of the practice, but which were paid out on behalf of the selling dentist.

3. Maintain your production. Sometimes owner/doctors will start to slow down before actual retirement. This results in an exponential decline in profit and practice value. It is important to maintain the historic growth rate of the practice until the sale closes.

4. Keep new patient numbers up. Purchasers focus on this number and consider it an indication of practice vitality.

5. Get your financial records in order. Most practice profit and loss statements or income statements fail to give a true practice overhead and profit picture. Ask your accountant to group related expenses together for the purpose of determining actual overhead and profit, and to include expenses benefiting the doctor. If you own two practices, avoid a co-mingled tax return or financial statement.

6. Reinvigorate your recall system. Hygiene income usually comprises 22 to 25 percent of the total income in a typical general practice. This percentage can climb to 30 percent or more in practices aggressively utilizing soft-tissue management procedures. Generally, the higher the hygiene percentage, the better … unless a situation occurs where the doctor is underproducing, which artificially raises the hygiene percentage.

7. Review the condition of the patient records. In the due diligence process, a purchaser usually will review a representative portion of the patient records. The practice owner should maintain files with complete treatment entries, current patient information, and easily discernable treatment plans.

8. Clean up clutter and spruce up the decor. First impressions matter. Most prospective purchasers will be looking at multiple practices. Every attempt should be made to make your office stand out in the crowd. Continually invest in what it takes to maintain a fresh, updated office appearance.

9. Tune up the dental office equipment. Most purchasers expect to see modern equipment in the office. If they purchase a practice completely absent of modern equipment, they may adjust their offer to account for replacement of outdated equipment. The practice owner should keep equipment updated, both functionally and esthetically. Beware of substantial replacement of the equipment just for the purpose of selling the practice. This rarely warrants the investment.

10. Do not let the lease lapse. If you expect to sell your practice using third-party financing, be aware that the lender will require the purchaser to acquire a lease (inclusive of renewal options) for at least the length of the note (typically 72 to 84 months). Talk with a lease broker whenever you renew your lease to help you negotiate terms allowing you to transfer the lease without unreasonably locking you in.

11. Review your treatment mix. Performance of specialized dental care in a general practice that cannot be easily duplicated by a purchaser can be a major obstacle in an otherwise routine practice transition. If specialized treatment (orthodontic, TMJ, implants, etc.) comprises a significant portion of your income, be prepared to be flexible regarding practice transition requirements.

12. Emphasize fee-for-service. Purchasers generally place a significant importance on the fee-for-service component of practice income. Practice owners should attempt to keep the majority of their practice fee-for-service and carefully evaluate insurance plans they participate in. Make sure these plans may be transferred to another provider following a sale.

13. Check with your advisors.Consult with your practice transition consultant about a preliminary practice evaluation. Your advisor should be able to point out any weak spots and recommendations for correcting them.

Terry D. Watson, DDS, is the president of Watson & Associates, Inc., a dental practice transition, consulting, and brokerage firm in Dallas, Texas. He is a member of American Dental Sales and can be reached at (972) 235-3043 or by email at twatson@twatsonassoc.com.

Did you buy the “practice” you thought you were buying? As a dental broker representing both buyers and sellers (but never at the same time!) and a practice-management consultant, I have been engaged by lenders and buyers to help them work their way through practice purchases that appear to be going sour. In 80 percent of the situations, the problems they are confronting should never have happened - and wouldn’t have happened had they had good representation!Let me give you an example of one of these situations. Doctor A had a successful dental practice in a small, rural community. At age 55, he was encouraged by a dental broker to sell his practice and work as an employee in the practice until he decided to retire. He was told it would improve the “quality of his life.” That was the first step to the unfortunate situation in which he found himself. Things did not work out in terms of being an employee in the practice he had owned, so he left it and went to work as an employee in a large dental clinic. Because of the covenant-not-to-compete with the buyer of his practice, this necessitated that he and his family move. After a couple of years with the clinic, he found out that if you can be hired, you also can be fired!

Dr. A then decided that he needed to buy another practice and work there until he was ready to retire. As an employee, he had not made enough money to live on, so he had started taking some of his retirement money to pay the bills. This was something he did not want to continue to do.

The doctor found what he thought would be a nice, medium-sized practice in a good area. The office looked good and the selling doctor seemed to be a nice person. He did not want to purchase a practice with a lot of managed-care patients (HMO or PPO). The seller told Dr. A that he was not signed up for any managed-care programs.

That statement was correct. However, what the seller did not tell Dr. A was that four months earlier, he had dropped all the managed-care contracts he had. Prior to dropping these contracts, 60 percent of his patients were managed-care patients. When the seller sent a letter to his patients announcing he was no longer a managed-care provider, he made no attempts to keep those who had managed-care insurance plans as patients.

Dr. A did not find out about this situation until after he purchased the practice. Yet, he also made no effort to contact the managed-care patients to inform them that he had purchased the practice and he would like to keep them in the practice.

To add to Dr. A’s problems, the seller had attended a practice-management seminar 10 months prior to the sale in which the speaker told the attendees that they should not schedule hygiene patients for their next appointment at their current visit. As a result of this and the exit of the managed-care patients, Dr. A inherited a recall program that was falling apart and he had to let the hygienist go. Dr. A’s wife came to work for him and he dismissed his front-desk person. He also dismissed one of his chairside assistants. He now found himself in a situation where he could not pay his bills without taking even more money from his retirement. It was truly a sad situation.

At that point, I was asked by the lender to see if there was something that could be done to keep Dr. A from going bankrupt. It took two years and a lot of effort, but Dr. A is now making enough money to pay his bills, have enough to live on, and he is starting to put money back into his retirement plan.

This is only one of many situations that probably could have been prevented had the buyer sought knowledgeable and experienced help. Had he looked through the patient records, computer reports, and asked the right questions, he would have had a better sense of what the practice he bought was all about. I am amazed at how many buyers are afraid to ask questions for fear they will upset the seller. The majority of buyers never count the files to determine how many active patients the practice has and what the number means. Many do not review the patient charts to get an overview of the patients. Others do not understand what the numbers or information they do receive means.

Whether you’re a buyer or a seller, don’t leave yourself open to surprises. Make sure you do your homework and ask all the necessary questions. If you don’t know what questions to ask, hire a consultant who does!

Tom Smeed is founder and president of Healthcare Practice Management, Inc., a dental brokerage, appraisal, and dental practice-management firm. Currently, Healthcare Practice Management services clients in 16 states. He has been a presenter at ADA meetings and has lectured in the United States and Australia. He is one of the founding members and past president of American Dental Sales. Contact him at (913) 642-1988 or t.smeed@worldnet.att.net.

Last week, I was again asked to give my opinion about the merits of starting a practice from “scratch” as opposed to purchasing an existing practice. The answer is an easy one if there is an existing practice for sale in a location that appeals to you. So, as an example, let’s compare Dr. A, who chooses a start-up practice, with Dr. B, who purchases an established practice.

Dr. A decides to start a practice in a popular growing community. An attractive space is available, and demographics support the need for an additional dentist. Dr. A leases enough space - 1,500 square feet - to accommodate future expansion. He qualifies for a loan, so he can purchase the equipment, supplies, and furniture he needs. Dr. A completes his leasehold improvements conservatively, which cost $100 per square foot, minus $20 per foot provided by the landlord. Including other expenses, Dr. A’s total start-up costs are $340,000. The monthly debt service is approximately $5,200.

Dr. A begins operation with a minimal staff. He promotes the practice in several ways, and has the personal and technical skills necessary to attract patients. Within three or four months, the practice has an astounding new patient flow of 35 patients per month. He is pleased and feels confident that the practice will be successful both professionally and financially.

Dr. B chooses to purchase an existing practice. The practice has a competent staff and annual receipts that have totaled $600,000. The practice has four days of hygiene production per week, with approximately 1,200 active patients. The new patient flow is 15 to 20 patients per month or 210 per year. The practice has four operatories, and most of the equipment is 12 years old. The profit margin is 40 percent, which produces an annual income of $240,000. The agreed-upon price for the practice is $430,000. Dr. B also purchases the accounts receivable for an additional $75,000. Dr. B’s total indebtedness is $530,000. The monthly payment will be approximately $8,100.

At first, some may suggest that Dr. A’s new practice is the better choice. Dr. A has the benefit of new improvements and equipment. The new-patient flow is above expectations and the smaller monthly debt obligation suggests less risk.

Let’s take a closer look. Experienced consultants usually agree that the patient attrition rate of an established practice runs between 7 and 10 percent. However, the attrition rate for patients in a new practice is in the 15 to 20 percent range. If the new patient flow in Dr. A’s practice is 35 per month, then the actual rate of growth may be between 30 and 35. At the end of the first year, Dr. A may be fortunate to have an active patient base of 385 patients. If Dr. B’s attrition rate is 10 percent of the original 1,200 patients, then he loses 120 patients. Combined with the new-patient flow, his active patient base at the end of the first year would be 1,270, or a net gain of 70. It will take Dr. A at least three or four years to reach Dr. B’s patient-volume level.

Now let’s assume Dr. A outperforms the expected or customary performance of a new practice. His receipts for his first year of operation are $300,000. Because he has less hygiene costs, the practice has a 45 percent profit margin. Dr. A has reason to be enthusiastic about his profit of $135,000 in the first year. The debt service for the first year will be $62,400, providing a personal net income of $72,600.

On the other hand, Dr. B continues to operate the purchased practice as it had been functioning under the previous owner. The annual receipts remain at $600,000, and the profit margin is 40 percent. After providing for the annual debt service of $97,200, Dr. B will have a personal income of $142,800.

After a few years, Dr. A’s practice may become similar or even larger than Dr. B’s in terms of net profit. However, Dr. A will never recover the difference in income that Dr. B accumulated during Dr. A’s formative years.

Of course, in addition to increased initial cash flow, there are other benefits that the buyer realizes after purchasing an existing practice. Some examples include improved initial patient acceptance, instant practice organization, and a tenured staff. After considering these benefits, it is obvious that if there is a practice for sale in the area of a doctor’s personal and professional choice, it makes sense to purchase it rather than start from “scratch.”

After practicing dentistry for 30 years, Dr. Rich Seims now specializes in dental practice mergers and acquisitions. Seims & Associates, Inc. provides management-consulting and brokerage services for dental practices in the Pacific Northwest and Alaska. He is recognized as a seasoned facilitator and discreet confidante. Seims & Associates can be reached at (888) 720-7220, or by e-mail at rich@seims.com. Visit his Web site at www.seims.com.

There are several ways in which dentists can grow their practices. Some of these methods range from expensive marketing campaigns to expanding services or products offered to patients. Although these methods may prove to be effective, we have found the best and most profitable way to grow a practice is a “practice merger.”In essence, a practice merger involves the complete movement of a seller’s practice into a buyer’s facility. Even though these practice mergers can be extremely beneficial to both parties, certain fundamental elements should be in place to maximize the benefits of a practice merger.

The buying doctor must have a facility that can accommodate the additional patients and/or dentist.

The buying doctor must have the personnel and ambition to accommodate the new patients.

From the selling doctor’s perspective, it is best not to have a lease or, if the doctor does have one, it should be a short-term lease obligation. If the selling doctor’s equipment has little or no value, this is not necessarily detrimental, since the acquiring doctor may not be interested in the practice’s “hard assets.” However, even if the selling doctor’s equipment is ultimately discarded by the buyer, the purchaser may still be able to deduct the “allocated value” of the discarded equipment. Finally, the two practices need to be fairly close to one another, since the goal is to have the selling doctor’s patients end up at the buying doctor’s office.

If the above criteria are met, a practice merger can be amazingly beneficial to both parties. From the selling doctor’s perspective, it may be the best and only way in which to sell his or her practice. For example, if the selling doctor has an older facility and equipment, the practice itself will not be attractive to a potential buyer. However, if the seller still has a substantial number of loyal patients, those patients do have value and make a practice merger a better option. Trying to sell this practice as a turnkey operation would most likely diminish its value and possibly make it unmarketable. From the buying doctor’s perspective, the benefits of these practice mergers are economically self-evident. The following example will illustrate this point.

Assume that Dr. Buyer’s practice collects $500,000 with a 70 percent overhead (i.e., $150,000 profit). Dr. Seller’s practice collects $300,000. If Dr. Seller’s practice is successfully merged into Dr. Buyer’s practice, the end result will be Dr. Buyer’s practice collecting $800,000 annually. Even more importantly, the relative overhead of Dr. Buyer’s practice will decrease significantly. In essence, Dr. Buyer is simply “stacking” Dr. Seller’s practice on top of his or her existing practice and overhead structure.

The net effect is that only Dr. Buyer’s variable expenses will go up (e.g., supplies, lab fees, assistants’ and hygienists’ salaries), and the remaining fixed expenses will be more efficiently utilized. In this instance, Dr. Buyer’s profit should increase from $150,000 to over $300,000.

Best of all, this additional cash flow becomes a future annuity of revenue for Dr. Buyer as the years go on. Moreover, the additional production increases Dr. Buyer’s practice value to a greater extent than the purchase price he or she paid the selling doctor.

Naturally there are variables; however, our experience reveals that most practice mergers actually see an increase in production from the selling doctor’s practice after the merger. If it is handled properly with the expertise of a competent transition specialist, a practice merger can be a very rewarding and profitable acquisition for the purchasing dentist.

Kevin Shea is president of Shea Practice Transitions, P.A. He covers the states of Minnesota, North Dakota, South Dakota, northern Iowa, and western Wisconsin. Shea has more than 20 years of experience in the brokering of practice sales, as well as the representation of buyers for purposes of practice acquisitions. Contact him toll-free at (877) 275-2727, locally at (952) 920-9411, or e-mail him at kshea@sheatransitions.com.

Our organization has served dentists considering transitions for more than 30 years. We find that many dentists are planning for transition at an earlier age - from 35 to 60.In the past, the majority of dentists waited until their late 60s to early 70s to retire, and then realized their practices had decreased in value. The value declined because they had taken more time off and served fewer younger families. They had not tried to attract new patients in their last few years of active practice, and most of the patients they did have were older patients who had been with them for many years.
Today, more options are available to provide sellers with a variety of transition strategies.

The four ways to sell a practice are: 1) sell the practice and exit immediately, 2) sell the practice and stay on as an associate, 3) initiate a buy-in/buy-out plan with an associate leading to partnership, and 4) initiate a deferred sale to an associate.

Some examples of these four strategies include:

1) Sell the practice and exit immediately

Many practitioners who have owned a practice for more than 25 years are ready to sell and retire immediately.

☛ A 62-year-old dentist practicing in a small rural mountain community owned a beach property in the Mid-Atlantic area. After practicing successfully and funding their retirement, the dentist and his spouse sold the practice and immediately moved to their beach home.

A growing number of younger dentists are selling their practices in one area of the country and moving away. In this case, the transition results in an immediate exit from the practice.

☛ A 50-year-old dentist had practiced successfully for more than 20 years near an East Coast major city. The dentist’s wife had family in California, and wanted to move there. The dentist sold his practice successfully and bought a practice in California.
2) Sell your practice and stay on as an associate

A number of dentists enjoy providing the dentistry, but do not enjoy the burdens of solo practice ownership. They want to take more time off, and they do not enjoy staff issues and dealing with insurance companies.

By selling their practices and merging into another practitioner’s office - or staying on part-time after the sale - they can practice for an extended period after transitioning.

☛ A healthy 65-year-old dentist was tired of ownership and ready to take more vacations. We identified a large growing practice in the area which purchased the practice at full-market value and allowed the seller to remain as an associate. The seller has chosen to remain in the practice for five years.
3) Equity buy-in and buy-out

A number of owners in their mid-40s and 50s are creating a plan to allow their existing or future associate to have an equity buy-in and buy-out of their practice. This allows the seller to grow the practice, maximize compensation, increase the practice value, and assure the future sale of the practice.

A 45-year-old dentist had a 30-year-old associate. The practice was growing and the associate had worked successfully in it for two years. A healthy plan was created to have a 20-year buy-in and buy-out. The seller has now avoided the common problem of hiring and losing multiple associates.
4) Deferred sale

When a solo practice owner wants to retire in four years or less, we encourage identifying an associate and targeting a future sale date. Value, price, terms, and timeline are established in the beginning.

Some solo practice owners are not candidates for partnership, but enjoy this deferred sale concept.

A dentist moved and renovated a new facility to prepare for a deferred sale. A candidate was identified as a buyer and agreements were signed for the future sale. A budget was created to ensure the growth of the practice and to allow the senior dentist to maintain his income during this four-year period. This strategy is designed for the owner who wants to remain in control of the practice.

These four transition strategies allow sellers to prepare for their exit with a plan that is designed for their needs. The key is to plan your transition now!

John F. McDonnell is the founder of The McNor Group, a dental brokerage, accounting, and practice-management firm. He is a member of American Dental Sales, and can be reached by phone at (888) 273-1014, by e-mail at JohnF@McNorGroup.com, or by writing to 1301 York Road, Suite 800, Lutherville, MD 21093. See the ADS classified ads in Dental Economics® for names and phone numbers of ADS members in your area.

Dental Economics July, 2005
Author(s) : John McDonnel

There are many reasons why dentists might want to have their practices appraised. Some of these reasons include:

1. Sale or purchase
2. Associate buy-in
3. Partner buy-out
4. Mergers
5. Death or disability
6. Estate value
7. Divorce

No matter what the reason for the sale, it’s important to understand the term “value.” There are three values for most dental practices:

1. Seller’s
2. Economic
3. Market

The purpose of this article is not to provide formulas for determining these values, but to discuss their meaning.

Seller’s value is what most sellers apply to their practice. Whether it is relative or not will depend on the seller. Some sellers underestimate the value of their practice because they don’t have a clear idea of its true value. They know there is value in the tangible assets, but they often look at the replacement value, which is clearly not the value of existing equipment in any practice.

They then add value for goodwill, which is realistic. What is not realistic is adding value for the “blood, sweat, and tears” a dentist has put into his or her practice. Also unrealistic is adding an additional value for “building out” a new facility. Although there is value in the owner’s time and energy, it is not something a typical buyer is willing to pay for when purchasing a practice.

In most situations, the seller’s opinion of value will be the highest and most unrealistic assessment.

It would stand to reason that the economic value of the practice would reflect the most reliable value. This number is arrived at when a dental practice appraiser, who thoroughly and objectively reviews practices, is hired to determine value. The major components making up this value are the tangible assets (dental equipment, furniture, fixtures, and office equipment) and intangible assets (goodwill).

When assigning value to tangible assets, appraisers consider the age and useful life of the equipment. Tangible assets fall between depreciated book value and replacement value and an economic useful life, to which a representative value is applied. Intangible value is determined by goodwill, which is comprised of location, active patients, staff, cash flow, and other factors.

The ultimate economic value of the practice is based primarily on the metrics generated - active patients, gross receipts, and most importantly, adjusted net income or cash flow. Once these factors are reviewed, the appraiser will render his or her opinion regarding the value of the practice.

From a pure numbers standpoint - and viewing the practice as an isolated asset - this opinion of value may be accurate, but unrealistic.

Two practices with nearly identical financial numbers, equipment, physical characteristics, and staff may have similar values, but may not generate the same selling or purchase price. The market factor or market value will have a dramatic impact on the two practices. As in real estate, the mantra, “location, location, location” is all-important when viewing a practice. This is never more obvious than when practices are located in rural areas verses urban areas, the right side of the tracks versus the wrong side of the tracks, or the run-down area versus the new growth area.

Hiring an appraiser who is familiar with your area and who practices within that locale will help you determine whether you set a realistic value for your practice. The right professional is critical as you attempt to maximize your practice value. Pricing your practice to the market will ensure a fair price for both you and a buyer, and will ensure a timely sale.

The value placed on your practice must pass the “justification test.” After expenses, will it pay the debt service, provide adequate cash flow to the buyer, and withstand the need for future new equipment, as well as fluctuations in business cycles? Adequate cash flow is always relative to any buyer, but it has to be more than a buyer would earn as an associate to justify the risks that are part of any sale or purchase.

John M. Cahill, MBA, of John M. Cahill Associates, has more than 30 years of experience in the dental industry, including all aspects of appraisal, sales, purchases, and buy-ins in connection with dental transitions. Cahill is a member of American Dental Sales, Inc. He can be reached at (510) 844-0330, or by e-mail at john@jmcahill.com. See the classified ads for names and addresses of ADS members in your area.

Dental Economics August, 2005
Author(s) : John Cahill

Many dentists are hiring associates to help in their practices. As part of the initial interview, the topic of future equity or purchase is briefly mentioned. For the majority of practices, little or no further discussion of transition takes place after that. Thus, instead of having a future buyer, the result is a messy breakup.

There are many reasons why practice owners choose to have an associate:

* To provide coverage when the owner is on vacation
* To help with a busy practice and provide growth
* To provide procedures or services that the owner does not want to perform
* To prepare for transition

Since the graduation rate of dentists is only 4,000 annually - and nearly 4,500 retire, die, or are disabled each year - future dental practice owners have more choices. Today, it is more important than ever to discuss and have a written plan for a transition with your associate.

Examples of associateship failures

* A successful and busy owner had an associate for seven years. The topic of equity being available to the associate was briefly discussed, but never acted upon. There was no contract in place when the owner found out that the employee had opened up a practice directly across the street. The owner lost 500 patients who had been regularly treated by the associate.
* An owner of a multidentist practice employed three part-time associates and only worked 20 clinical hours a week. One of the associates worked for 10 years, three days a week, and produced $500,000. There was no discussion of an equity position in the practice during this 10-year time frame. The owner decided to sell the practice and the associate wanted to buy it. The practice was valued and the associate was shocked at the price. Due to the lack of planning, the associate left this practice and both parties are starting over.

Examples of associateship successes

* A 45-year-old owner hired an associate to help with his growing practice. After 18 months of success with the younger dentist, the two dentists decided to formalize a buy-in, buy-out plan. The junior dentist was given the task of finding a transition consultant to facilitate the process. In just three months, a fair win-win agreement was completed and the transition began in the following calendar year. Both parties have been extremely happy with the result.
* A 60-year-old owner moved to a new expanded location to prepare for her transition. An experienced associate candidate, ready to own a practice, was identified. Before beginning the associateship, the owner had her practice valued and hired a transition specialist to create a financial model for the future purchase. The two dentists decided upon a deferred sale. A sale price and timeline was established for the transition. The sale took place 36 months from the beginning of the associateship. In this case, the owner chose to remain as an employee of the buyer for two years after the sale.

Planning for a healthy transition

* Have open discussions about current and future plans.
* Choose a person who has philosophies of patient care and management that are consistent with your own.
* Choose a professional organization to facilitate the transition and provide the following:
* a practice valuation
* realistic financial models and cash projections
* facilitation skills to negotiate on your behalf
* key points to be included in an agreement
* Create a growth plan for the practice to ensure the transition’s success.
* Have a written updated financial plan.
* Be proactive.

The time to plan your transition to your associate is now. Too often, good people have painful breakups because of a lack of communication and planning.

Benefits of a successful transition

* Peace of mind
* Increased profitability
* Higher practice value
* Less stress
* Shared leadership
* Earlier retirement

Don’t wait! Talk to your associate before it’s too late.

John F. McDonnell is the founder of The McNor Group, a dental brokerage, accounting, and practice-management firm. He is a member of American Dental Sales, and can be reached by phone at (888) 273-1014, by e-mail at JohnF@McNorGroup.com, or by writing to 1301 York Road, Suite 800, Lutherville, MD 21093. See the ADS classified ads in Dental Economics® for names and phone numbers of ADS members in your area.

In the course of a year, we will receive several calls from a grieving spouse or staff member, informing us that the doctor has suddenly passed away. The spouse or staff member has been given our name by other dentists, the dental society, the dental association, or the dental board. The question is always the same: how can we help them and how quickly can we get involved? Sometimes, the call comes from a dental office that has a “Memo of Direction” on file with us. I’ll explain more about this later.

The problems for the callers are many:

* What should we do about the patients who are scheduled for treatment?
* What should we do about patients who are receiving treatment and whose procedures are not completed?
* What should we do about disposing of the practice?

If by chance they have been contacted by parties interested in purchasing the practice, how should they proceed and what is the practice worth? (We have heard of potential buyers contacting the office or the spouse before the funeral!)

In many situations, peers of the deceased call and offer to help out. Certainly, they can finish up any work in progress and handle emergencies. These offers to help are only for a short duration, because these friends have their own practices to operate. In fact, one of our services is to provide a temporary dentist to cover the practice.

In these situations, we prioritize what needs to be done and work with the staff or spouse to value the practice in an expedited manner. We also do all we can to advertise the practice as quickly as possible, employing all the avenues available to us, including the Internet, local and regional publications, and direct mail. In these circumstances, confidentiality about the practice being for sale is not critical. Most of the area dentists will know that it is available and, quite often, we recieve calls asking us if we are the listing agent. Information about the volume of the practice, net incomes, and other particulars must be disseminated with care and only after the appropriate disclosure agreements have been signed. This is something that the staff or spouse will likely want to delegate to us.

Do practices of this nature sell? Certainly, they do! Do they bring the same price as they would if the dentist was living? They rarely do. Do they deteriorate very rapidly? That depends on many of the above factors, with the most important being if the office has a fill-in dentist and if the staff is committed to pulling together until the practice can be sold. Whether or not the staff is willing to stay on following the sale and if hygienists will continue to see recare patients also play a major role in maintaining practice value.

How are patients notified of the doctor’s passing? In a small town, most will find out quickly by word of mouth or the local newspaper. In the city, many will not learn about the doctor’s death until the practice is sold. Should a letter be sent to the patients soon after the owner’s passing or should it be delayed? What should the letter say? These are things that we routinely deal with and are part of our service to the doctor’s estate.

There are several myths about what happens when the doctor dies. Some prospective buyers have told us they are reluctant to purchase the practice because all the patients have left. We do not find that to be the case. We find that patients show a lot of loyalty to the office, the spouse, and the staff, especially if the office is open and they believe a new dentist is going to take over the practice.

Another myth is that the practice will provide very little value to the estate. That is directly related to many of the factors we have discussed here. Was the practice covered by a fill-in dentist? Are there hygienists who continue to see patients? Can the spouse continue to operate the practice with hired dentists and for how long?

What can be done proactively to plan for such an eventuality? Groups of dentists can get together to form an association to cover for each other in case of death or disability. An agreement is made among eight to 10 dentists to cover the practice. Then, a schedule is created to make sure the practice is well supervised. A “Memo of Direction” can be drafted and placed with the spouse, the attorney, the accountant, or a designated friend who will provide guidance to help the participants make decisions regarding the practice. This document would notify them to seek out individuals, such as ourselves, to assist them.

There are ways that forward-thinking doctors can plan for the unforeseen, just as they can purchase life or disability insurance. Some of the best insurance to have is a plan for the emergency sale of the practice in the unlikely event of premature death.

Evan Myers is founder of Evan Myers and Associates, a dental brokerage, appraisal, and transition consulting firm. He has worked in the dental industry for 35 years. He is a founding member of American Dental Sales, and a member of the Practice Valuation Study Group. Contact him at (800) 311-2039, or evanmyers@comcast.net.

Dental Economics November, 2005
Author(s) : Evan Myers

At a point in every dentist’s career, the time comes when he or she needs to devise and implement a transition strategy so that the practice built over the years will continue on in the hands of a young purchaser. This can be one of the most rewarding times in a professional’s career for both the buyer and seller if performed properly. If shortcuts are taken and executed improperly, both dentists and their families are susceptible to continued liability and the destruction of typically a doctor’s single largest asset.

Many established dentists are questioning how you know when you are ready for the sale of your practice.If you can answer the following three questions affirmatively, chances are you are at the point where you should consider selling your practice:

1) Financially, can I afford to sell my practice?

You should begin by appraising all of your assets, including your practice. Review them with your financial advisor. Your advisor can assist you in determining your current financial position and your needs and wants in retirement. You now will have the ability to analyze whether or not your investments will support your retirement plans. Once you find that you are approaching the point of financial freedom, it is important to properly diversify your assets so that fluctuations in the markets will not significantly derail your efforts now that you have committed to a transition strategy.
2) Is there something I would rather do than practice dentistry?

Develop a plan outlining what you would do with your newfound time and retirement freedom. Do you want to travel, play golf, sail the world’s oceans, or spend time with your family? Part of determining the when and how a transition should occur is planning for life after practice ownership. If you find there is nothing you would rather do each morning when you wake up than go to the office - and yet you have reached financial freedom - you may want to explore a preretirement sale. This option will provide increased freedom and cash out of your equity, while allowing you to continue to enjoy practicing with your successor. However, if your answer to the first question is “no,” a preretirement sale is generally not an acceptable option.
3) Is the quality of the dentistry I provide to my patients deteriorating?

First and foremost as a health-care provider, you have a duty to provide the quality of care your patients expect. If the quality of your care declines, you will find yourself with a rapidly deteriorating practice and quite possibly a lawsuit.

After answering these questions, you should be able to determine if you are ready to design and execute a transition strategy or to identify a target date when you will want to pursue this. Once you have set the target date, you can work backwards to identify the time frame you will need to begin to formalize your plans and start searching for a buyer.

The transition time of a sale can take anywhere from a year or two for a traditional retirement sale to a minimum of 10 years for a partnership buy-in/buy-out. Often, dentists want to obtain an associate for a period of time prior to the transition, so they can “groom” the purchaser. This strategy requires a minimum of five years to accomplish properly. If your target date is less than five years out, the only feasible options are a traditional retirement sale or, if the practice is large enough, a retirement sale with the continued employment of the seller post-closing.

Peter Ackerman, CPA, is a principal of The Dental Marketplace, and past president of American Dental Sales. He provides practice brokerage, appraisal and consulting services throughout Illinois, Missouri, Indiana, Iowa, and Wisconsin. You can reach him by phone at (312) 240-9595, or via the ADS Web site at www.dentalsales.com.