Settling Liens Prior to Listing Your Practice
By Jen Bennett, Omni Practice Group
In preparation for listing your practice, there are several steps to consider, but one important step that is often overlooked is settling any outstanding liens against your practice. As you know, “A lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt. A creditor or a legal judgment could establish a lien. A lien serves to guarantee an underlying obligation, such as the repayment of a loan.”
All liens tied to your dental practice must be settled prior to, or at closing. In some cases, the seller can use the proceeds of the sale to pay off outstanding debts such as equipment loans or business loans, which would be settled during the escrow process.
Sellers are often unaware of liens still showing as active. By performing a UCC (Uniform Commercial Code) search liens can be identified. These debts may have already been settled, but the lien holder either failed to file the lien release or filed it incorrectly. For these reasons, I highly recommend performing your own UCC search prior to listing your practice for sale. A “UCC search is a process through which business owners contact the secretary of state for the state in which their business is located and request all the UCC information (related to your practice). In some states, you won’t have to contact your secretary of state’s office at all – instead, you can use an online database for UCC lookup.” For Washington State, visit the Department of Licensing website https://fortress.wa.gov/dol/ucc/ to conduct your own search.
If you find any active liens that have already been settled, simply contact the debtor directly and request that they file a UCC-3 Termination Statement, which is essentially proof of debt termination. And don’t forget to ask for a copy of the UCC-3 so you have documentation to provide to your escrow officer. This is a simple task but can slow down the closing process if not addressed in advance.
Read MoreDental Practice Buyer FAQ
Where / How do I start?
Where do you want to live? Not that you can’t change your mind and sell, move, or buy again. But it’s typically best to determine where you want to live, such as in close proximity to family members, or near an airport, or close to beaches and surfing, or near ski resorts. Are you a city dweller? Are you a nature enthusiast?
Next, contact a reputable transition consultant/broker to discuss the general process and to get answers to your questions. This broker will also recommend dental lenders, dental CPAs, and dental attorneys.
What is your confidence level with all procedures? For example, if you do not yet place surgical implants, you will want a practice that doesn’t place implants. However, if placing implants in a particular practice keeps their production numbers high, it might make sense to consider the practice and keep the seller on for these procedures until you can take them on.
If you are currently working, be sure to print out a production by procedure report so your advisors can see what experience you have.
Can I afford a practice?
We can recommend several dental specific lenders to assist you and they expect you to have student debt. They will ask you for your tax returns and debt details such as student loans, cars loans, home mortgage, etc. Then once you find a practice that you like, the bank will analyze the cashflow of the practice and work with you to determine if or how much they can lend on that specific opportunity.
Do I need to utilize a dental-specific lender, attorney, and CPA?
Sometimes dental buyers have a relative that is an attorney or another advisor, but when both the buyer and seller utilize dental specific folks, the job gets done correctly and in a timely manner. You are a dentist but may not feel confident with complete boney third molar extractions. It’s the same thing. Using the right people will give you the best experience and result.
What do I need to know about a practice?
The listing transition consultant will provide a Prospectus reflecting all the important aspects of the practice and can walk you through the details. No practice is perfect, and you will want to go in knowing what is happening now and areas of future opportunity. Below are just a few of the items that may be in the Prospectus and if it’s the practice you want, you will have due diligence time later and we can provide an example of how the process typically works.
- Cash flow
- Procedure frequency
- Active patient count
- Accounts receivable and credit balances
- Hygiene stats
- Insurance participation
- Team information
What else should I know or think about?
The listing transition consultant will provide you with a Closing Checklist of what needs to be addressed. Your consultant/broker will work closely with your other advisors to complete a Letter of Intent and conduct due diligence. Your attorney will complete all purchase and sale documents, non-compete agreements, redo treatment provisions, etc. Your CPA will help with taxes relating to the purchase, and set up payroll and accounting, etc.
Should / Can I purchase the real estate?
Many young dentists assume they can’t afford the real estate piece or that the seller wants to wait to sell in the next year or so. We strongly believe the best person to own the dental real estate is the dentist practicing there. Depending on the cash flow of the practice, you may not need any money down and if you do, the seller will often carry the loan on the down payment and the bank will carry the remainder.
Do I have to keep all or most of the existing staff?
It is recommended that you do keep the existing staff. If they are good at their jobs and have well-established relationships with the patients, their presence most definitely contributes to a smooth practice transition.
However, there are always exceptions. If the practice overhead is very high due in part to high salaries of some staff members, then it may be recommended that staff be cut back. Or there may be instances where a seller has kept an underperforming employee on board and letting that person go may be a healthy decision for the overall morale of the other employees.
In Summary
The sooner you purchase a practice, typically the more money you make over the life of your career. The more you make, the more your CPA gets involved to assist you to keep more of what you make by implementing tax and retirement planning. So, start today by talking with your practice transition specialist/broker.
Read More10 Tips to Help Make a Workback Successful
Bruce Johnson, DDS, Practice Transition Advisor at Omni Practice Group, has personally been involved with 3 practice sales and workback agreements. In this video, he provides you with 10 tips to help your workback transition be successful.
Buying Another Location
It’s very exciting to think about adding a location! Here are some issues to think about before making this big decision.
Why? If it’s to increase collections, maybe you can simply add more days or extended hours at your current location. Verify what your current patient retention is to determine if you need to mine from existing patients. Is there any area nearby that is underserved?
Where? Check your current zip code demographics and determine where most of your patients come from and if it makes sense to market that specific area. Do your due diligence regarding the number of dentists in the areas around you to make a good decision on where you may be more successful.
Will you have current patients going to a new location? You don’t want to add a location only to find that a large number of patients switch to the new location. Some cannibalism is fine, but remember the point is to increase patients/collections, not move them from one location to another.
How will you handle patients going to both offices? Contact your dental software company and have them set up the same system in the new location and set up provider numbers for each location so everyone can see past and diagnosed treatment, as well as health history, AR, etc.
How will you know if both locations are profitable? Work with your CPA to have books that show you numbers for each location as well as together, so that means you will need to post collections, payroll, dental supplies, lab, utilities, etc. per location. Monitor provider production in each location. Are some dentists and hygienists more productive in one location, and if so, why?
Who will work it? If you have a team that wants more hours, that is ideal since they already know the systems and processes you have set up. Be sure to have team members clock in hours to each location as applicable.
Need another dentist? Interviewing is critical to find the right fit. If the associate will be working alone in one of the locations, you will want to do a lot of training, so they understand their role, responsibility with the team, and simply set your expectations, then continue to monitor. Work with your dental attorney to create a job description, employment agreement, compensation, non-compete, etc.
How do I manage multiple locations? Consider hiring a manager that can oversee training, team schedules, and general practice management.
Work with your transition consultant (broker) to assist you! Contact us today.
Read MoreWhat Dentists Need to Know Before Selling to a DSO
Selling your practice is a major decision you face. You must decide when is the right time to sell? At what price will you sell? To whom do you want to sell your practice? And how will you transition out? These last couple of years haven’t helped any with Covid not going away anytime soon, the economy during a recession, and potential tax increases at the state and federal levels. To add to all of that, now corporate buyers, called Dental Service Organizations, or DSOs, are becoming more and more prominent. I would like to talk about DSOs and make sure you know who they are, what their goals are, and what you may be getting yourselves into.
There are many shapes and sizes of DSOs. Some start out as a small group, owned by a dentist or a group of dentists and backed by a local or national bank. These small groups grow and eventually outgrow their bank, then look to other forms of financing to grow into a DSO. That’s when they reach out to private equity groups that have billions of dollars of cash from investors to provide to the DSOs. The private equity groups invest in the DSOs in exchange for ownership. That can come in many forms, but they usually take the majority ownership in the group. I won’t get into how they structure the ownership too much since private equity groups are not dentists and some states require someone to be a dentist to own a practice, but just know that they typically have a dentist own a piece of the DSO in order to tread in the grey area of legally owning a practice. Some attorneys will argue that this isn’t even legal, but they get away with it.
The DSOs look for practices that are well run with annual collections above $1 million. Some DSOs will buy practices that are doing less and merge them into a practice nearby. Or they buy a practice because it is in a great location, and it will help fill their footprint. They also like to buy a practice that has six to eight operatories. They love it if it has more than eight ops. They also do not want to go in and update the practice. They will do it but expect to receive a lower price.
One of the major requirements of the DSOs is that the selling doctor and any longtime associates stay after the sale is complete and work back in the practice. Most want the seller to stay a minimum of three years. That can be negotiable for a shorter or longer period. You might find a small group or associate who will let you leave shortly after the sale, but those are few and far between. For the most part, if you do not want to stay on and work, they do not want your practice. The employment salary is typically market. Some will pay more; some will pay less. Several DSOs have benefits that the seller will be able to participate in as well. If you have a great benefits package that you are currently providing your staff, there is a pretty good chance that will be reduced to the benefits package the DSOs offer their other practices.
When DSOs look at a practice, expect to run a lot of reports, both from the practice management system and from your accountant. They also will want to know what you’re paying your staff, benefits, sick time, holiday pay and any other compensation or days off you may provide them. Again, if you give your staff a few extra personal holidays, extra bonuses, or any other perks, you can expect those to be eliminated. If you have special payments or provide free dental work or discounts, there’s a chance those will be cut as well.
When DSOs write up an offer, they need to be read very carefully. Even though these are non-binding, the DSOs will refer to them during the entire process. Once the offer, called a Letter of Intent or LOI, is signed off on by both parties, it will be handed over to the attorneys to draft up an agreement. After it’s handed over to the attorneys, the purchase and sale agreement will be written according to the LOI.
The DSOs make their offers challenging to understand. Some will give you a purchase price that includes accounts receivable in the price. You might read the offer and say, “Wow, they’re offering me 100% of last year’s collections.” No, they’re not. They’re offering you 70% of last year’s collections and they will pay the market rate for the accounts receivable. The offer will pay you a percentage of the purchase price upfront. It’s typically around 70% of the purchase price at closing. They will have you carry a note or finance the last 30% and pay you a market interest rate. You may receive a lump sum payment each year while you work back. If you have a three-year work back employment agreement, you may get one-third of the 30% paid the first year, one-third the second year, and one-third the third year. However! You are typically required to keep the production level or net income of your practice up to a certain level. If you do not, you will either get a pro-rated amount, or you may not get paid that portion at all! Go back and read that again, as it is important. If you are counting on that last 30%, there is a bit of a gamble. What happens if they change the culture and the entire staff, and many patients leave? What happens if you have health problems? What happens if there’s a pandemic (we know that happens)? What happens during a recession? There are so many things that can happen in those three years.
Another thing to watch out for is how do they make the calculation for net income. Most will charge the practice a 5% – 15% management fee. They require you to make a net income number, but now they added a management fee on top. I’ve seen this in place where they added staff to the practice as well as an associate. The doctor didn’t make his net income number to no fault of his own.
I have heard stories of DSOs offering practices above-market prices. We have been involved in several DSO sales lately and we have not seen a DSO pay above market for a practice. They have typically paid the market price. If your friend tells you they received 120% of collections, ask them to prove it. DSOs will quote prices on occasion based on EBITDA. That’s “Earnings Before Interest, Tax, Depreciation, and Amortization”. It’s a term used in the investment world for private equity as well as Wall Street. There are different ways to calculate EBITDA that private equity groups can manipulate, so don’t get caught up in quoting prices based on a fancy word. I’ve heard doctors say they sold their practice for 5 or 6 times EBITDA only to find out they input that management fee and the note payment into the EBITDA calculation. It truly wasn’t anywhere 6 times EBITDA.
There are good DSOs and not-so-good DSOs out there. Some will completely change the culture of your practice. They will scare staff away with benefit and salary changes. Some will keep everything the same to the best of their abilities. But the staff knows you will eventually leave, so they may more readily look at other opportunities.
The best advice I can give you is that if you are looking at an offer from a DSO, be sure and have an expert review the offer. Many of the local attorneys and brokers have worked with the DSOs. They know who are good and who may be a bit challenging. They also know the inside secrets the DSOs have where they may try to sneak something by you. I’ve seen doctors sell to DSOs and quite a few months later leaving the final 30% on the table. They just couldn’t take working for someone else in a different manner than they were used to. Know what you’re getting yourself into before you take that leap.
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