An Ownership New Year’s Resolution
By Michael Dinsio, Next Level Consultants
As a buyers’ representative and business coach, I talk to hundreds of doctors a year. Many themes emerge from these conversations, but the one that pains me the most is hearing how dentists delay considering practice ownership early in their career. Many desire ownership and watch as friends become owners with a thought of maybe someday. But, for themselves, they hope and wait till the “perfect” situation presents itself, if it ever does. As we roll into the new year, my hope is that more doctors get off the bench and into the game. The time for ownership is right now. Here is why.
#1 MONEY is Cheap
As once a dental specific banker, I can tell you interest rates have never been lower. With rates as low as sub 4% on 15 year practice loans, the cost of money is cheap for buyers. What does this mean? Lower payments equal more cash flow. Even with practices being priced higher than historical averages, lower payments offset the cost to make the purchase affordable. The lower payments also allow buyers to invest in new equipment, stronger marketing, and consulting services to set them up for success. These types of investments help buyers confidently take the leap into ownership!
#2 The Market is Primed
For over a decade, industry experts have predicted a slowdown of practice sales. Fortunately for the 25,000+ graduating dentists every year, this has not been the case. I predict that in 2020 more dentists will put their practices up for sale than ever before. Here’s why.
First, in 2020 the average age of the baby boomer generation will hit 65 and they become eligible for Normal Retirement Age (NRA) benefits. As their retirement benefits start to roll in, many will consider selling their successful practices.
Secondly, the stock market is at an all-time high. Last month the market hit another peak, as investors focus on the progress of the U.S.-China trade talks. Overall the Federal Reserve is upbeat and continues to keep interest rates low. For those retiring baby boomers, this means they can comfortably retire with the nest egg they have, not feel pressured to keep working.
Lastly, Washington State continues to increase taxes. Although a capital gains tax has been voted down, it continues to be an annual discussion in Olympia. New and expanding taxes are always a threat. Kitsap Daily News reported that, “Washington is one of seven states with no state income tax, and one of nine without a capital gains tax, making it an outlier among West Coast states.” Governor Jay Inslee released a three-year plan that contained a proposed 9 percent tax on certain capital gains over $25,000. Sellers may have dodged a bullet this time, but many owners will consider selling sooner to avoid the looming threat of higher taxes.
#3 TIME is valuable
It’s not a secret that small investments over the long term will yield more than large investments over the short term. In short, time is on your side. Working as an associate definitely has some benefits. The corporates make sure of that. With that said, the ownership opportunity dentists have in front of them is difficult to quantify. Just like a mutual fund or a piece of property, dental offices have real value. When my clients choose ownership, they are not only benefiting paycheck to paycheck, but they are also building real value in an asset to sell in the future.
I recently had coffee with a dentist and an old friend. In 2012, when I first met her, she was considering buying an office. I remember the first practice she looked at: it was in a desirable location, the equipment was in good shape and the financials were average. Despite my recommendation to buy, she ultimately passed on the opportunity.
When we sat down, she was so excited to tell me that she just received news of an accepted letter of intent to purchase her first practice. While I’m excited for her, the delay of 8 years got me thinking. If she had purchased in 2012, by now her initial loan would have likely been paid off and her business would most likely have surpassed a million in revenue. Eight years of lost income and equity over trying to find “the perfect practice.”
As a New Year’s Resolution, resolve to take your career into your own hands. The average associate struggles to make ends meet juggling two to three associate positions. For all that hard work, their income ranges anywhere from $120,000 to $150,000 per year and they have less than $25,000 dollars in savings. Yes, becoming an owner is daunting, but the statistics speak for themselves. Default rates remain lower than ever in this industry. The money is right, the market is primed, and time is ticking.
Make the decision in 2020 and invest in yourself!
Considering a Veterinary Practice Loan? Know What Lenders Look For – Before You Apply
Applying for a loan is probably not at the top of anyone’s list of favorite things to do. Sometimes applying for a loan can feel like a very opaque process, and often times it may seem endless. When you consider a Veterinary practice loan, you may wonder how to make the process easier, and what you can do to best position yourself for approval.
Different lenders have different parameters for approval. Some lenders place more importance on some factors and less on others. While not all lenders are alike, there are certain common factors most banks consider. Understanding these factors can help you position yourself in the best way possible to multiple lenders.
Increase cash flow, eliminate credit card debt
Cash flow is one of the most important things a lender considers. The monthly expenditures reflected on your credit report – such as personal mortgages, car loans, credit card bills, and others – affect your cash flow. High monthly bills can negatively affect your cash flow, while lower monthly bills can positively affect your cash flow. Consider how much credit card debt you carry from month to month. If you pay your credit card balances down to zero every month, this does not negatively affect you; however, if you do carry a balance, this can negatively impact your cash flow. To best position yourself to be approved for a Veterinary loan, you’ll want to carry less than $25,000 in credit card balances from month to month.
Student and existing business loans come into play
Student loans may also affect your ability to obtain a Veterinary business loan. Many Veterinary lenders don’t consider the total amount of student loan debt outstanding as the deciding factor but will look at your total monthly payment. This is where you may consider Income-Based Repayment as an option to lower your monthly payments and improve your cash flow. Be sure to ask your lender about whether this may be necessary.
If you already own a Veterinary practice, lenders will consider the monthly payments on any business loans you have. Most Veterinary lenders will look for a global debt service coverage of at least 1.20x. This means that for every $1.00 of debt you owe – both business and personal monthly bills annualized – you have at least $1.20 to pay it with, from all your annualized income (income from either your salary, practice profit, distributions, guarantor, etc.) A great exercise before applying for a loan would be to calculate your current ratio beforehand so you can either pat yourself on the back, or make changes to increase your chances for an approval.
Liquidity is key
Another thing to consider is your current liquidity – the amount of cash reserves you have, outside of retirement savings. Conventional veterinary lenders typically like to see at least six to 12 months of reserves when they consider your loan request. This means you have enough cash set aside to cover your monthly bills for six months to a year. If you are a current practice owner considering a loan, a good rule of thumb is to have between 5% and 10% of the total loan amount in cash reserves. Again, every lender’s requirements are different, but having adequate cash reserves in place will put you in the best possible position with multiple lenders.
Consider collateral
Conventional Veterinary specialty financing looks at collateral a little differently than SBA lending or non-specialty financing. Goodwill in an existing practice should suffice as collateral for Veterinary-specific lenders. Typically, they can lend up to 80-90% of total collections on a Veterinary practice without the need for additional collateral or a seller carry-back note. This amount will vary depending on the lender and the situation; keep this in mind if you have an existing practice and are planning to apply for a loan. When you’re considering a startup loan, you do not need to put your house, your spouse, or first-born child as collateral. Specialty Veterinary lenders will allow you to use the future potential of goodwill, as well as the equipment you purchase, as collateral for your startup loan.
Know before you borrow
As mentioned before, criteria for approving a loan may differ from bank to bank. This process may be arduous for the borrower, but know the criteria beforehand and you can best position yourself for practice financing. You can potentially alleviate the frustration of a loan decline before it happens. The good news is that rates are still at historic lows, and access to Veterinary-specific financing has never been easier. With this knowledge, you can prepare yourself for future success, for both the loan process and Veterinary practice ownership.
Are You Considering a “Dental Practice For Sale By Owner”?
Many dentists will seek to sell their practice by themselves, presumably to “save money”. Sometimes the grass is greener on the other side so we do things out of emotion instead of “doing the math”. If you have a couple of hundred hours of spare time and love working with intelligent, challenging people, and showing your dental practice to strangers on evenings and weekends, you are going to love the process of selling your practice.
For most dentists, their practice is one of their most valuable assets, so if that sounds like you and you would like to go “For Sale by Owner” then now is the time to start to prepare. Probably a good time to study a little law, accounting, marketing, advertising, sales, and perhaps negotiations. Think about how you are going to tell your staff or decide to wait until they figure it out. Be sure not to lose them or your practice may become more difficult to sell (and you could lose more in practice value than the commissions you are saving). If your practice has seen better days you might consider sprucing it up a bit or maybe a little remodeling? As a do-it-yourselfer, you will save even more money.
Ask yourself “how do I value my dental practice” and balance that with what the market will bear. Keep in mind that the buyer will always think they are paying too much and the seller thinks they are selling too low. Once you’re ready to go, write your ads, contact (play phone tag with) the various media vendors to figure out how to best execute your marketing plan. Piece of cake, pay the man and place your ads. Soon your phone will be ringing, don’t forget to follow-up with the inquiries in your new email address.
Schedule the viewings after hours, on your day off, and on the weekends. Don’t be too disappointed when something happens and the person doesn’t show up or when the “tire kickers” don’t give you feedback. Soon if all goes well you will receive a Letter of Intent. There will likely be a number of things you’ll need to do to assist the buyer with their due diligence so be prepared to assemble all the information ahead of time if possible. If you are leasing the office, do whatever you can to negotiate with the property owner for as smooth as a transition as possible with the buyer. WARNING: half of all deals fall apart because of landlord conflicts with the seller or buyer. If this happens to you, and there is a 50-50 chance it will. Be prepared to start over and keep your emotions in check.
Is it worth it to “Do It Yourself” to sell your dental practice? It depends upon how many hours it takes, how much distraction you are comfortable with, and how much quality of life you are willing to sacrifice.
The legal community has a saying, “He who represents himself has a fool for a client”.
Inspiring Your Successful Dream Practice
Transition your current practice to the productive, low volume, insurance-independent, profitable practice you used to dream about in dental school.
GIG ENTREPRENEURIAL MASTERMIND SUMMIT
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April 23-25- 2020
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The Many Different Types of Dental Practice Transitions
By planning your transition carefully and working with a trusted broker in the dental practice marketplace, practice sellers can ensure each element of the process is completed smoothly. But first, it’s important to learn more on the types of dental practice transitions available for those considering a sale. In this article, the team at OMNI Practice Group explains the processes involved in several types of dental practice transitions.
Partnership
Selling a portion of your practice via a partnership has its own pros and cons. One of the pros is that if you can find a partner with similar interests and philosophies as well as a set of skills that enhances your practice and you get along well, you’ve found a winner. The cons are that those types are difficult to find. The ADA states that 70% of partnerships fail. However, if done right using experts in partnerships, you can have a successful and happy partnership transition.
Walk Away Sale
A walk away sale involves the seller removing themselves and their business interests from the practice the moment the sale is completed. This could be ideal for those in the process of retiring or relocating to a new area across the country. But sellers must analyze whether they truly want to walk away from the business they helped create. To complete a walk away sale effectively, sellers must tie up all loose ends many weeks before the buyer completes their transaction. This ensures a seamless handover process and allows the buyer to immediately enter the business with a fresh start.
Sell and Work Back
This can often be very gratifying. The seller sells 100% of the practice but stays to work as an employee in the practice. The seller may cut back their hours or may keep up the pace. The seller and buyer work together, and the seller may even mentor the buyer. The seller no longer has any management responsibility or ownership. He simply does clinical dentistry. As long as the two get along, this can work out wonderfully.
Customized Transition
Working with a dental practice transaction broker can help sellers customize the sale according to their unique requirements. Brokers are experts in managing the transition process, from organizing the timing of asset sales to implementing buy back procedures once the sale has been completed. It’s important the company the seller works with has a full understanding of their business plans before they begin the transition process, as this will help reduce potential issues as the transaction is completed.
By having a clear understanding of the available dental practice transition options, owners can ensure the right model is found for their sale process. To learn more, contact us today!
info@omni-pg.com
877-866-6053