Communication is the Key to a Successful Dental Practice Transition
As dental practice brokers, we are often asked “What is the most important factor in facilitating a successful dental practice transition?” The simple answer is Communication. While it is imperative for the buying doctor to build a strong team of advisors, complete due diligence on the practice, secure financing, and navigate the closing process, all else could be lost if there is no effective communication between the buyer and seller during and following the transition of ownership.
As part of the due diligence process, the buying doctor should schedule a face-to-face meeting with the selling doctor well in advance of closing. We typically recommend this meeting be held at the seller’s office after operating hours, with the practice broker attending if possible. The initial meeting is designed to allow both parties to get to know one another, ask any questions they may have regarding the practice or each other, discuss practice philosophies, etc. During this meeting, the parties may also exchange contact information so they can reach out to each other directly to discuss any remaining questions or concerns leading up to closing (while also keeping the practice broker in the loop).
The buyer typically learns a great deal about the seller and practice during this interaction and leaves the meeting knowing if the opportunity is the right fit for them. Once the buyer and seller have met and established a personal connection, we also find that negotiations are more amicable and the closing process goes much smoother.
With a fee-for-service and/or personality-driven practice (where most of the patients are coming to the practice specifically because of the seller’s personality), we have found that a second meeting between the buyer and seller in a more casual setting such as lunch, dinner, or happy hour can allow the parties to loosen up and gain additional insight into each other’s personalities, interests, practice philosophies, etc. It is important to mention that we suggest the parties steer clear of discussing pricing, allocations, or any other negotiable items during any of these meetings.
Throughout the closing process, the buyer should clearly communicate his or her expectations of the seller leading up to and following the sale and the seller should notify the buyer if he or she is unwilling or unable to fulfill these obligations. Regardless of the seller’s post-closing plans or obligations, the selling doctor should plan to serve as a resource to the buyer following the sale and be available for a phone consultation to answer questions and offer advice.
By effectively communicating throughout the transition process, the buyer and seller will have established a solid foundation for a smooth and successful dental practice transition.
-Rod Johnston, MBA. CMA
When Do You Know You’re Ready for Your First Dental Practice?
You have been out of dental school for over a year now, working as an associate, or a GPR assignment. You’re getting antsy as the owner keeps giving you the new patient exams, fillings, and the mean, nasty patients they don’t want to see. You’ve got the itch for a change, either to do a startup or buy your first dental practice. But, how do you know you’re ready? Here are a couple of questions to ask yourself:
1. Are you confident in your clinical skills?
2. Do you have savings to live on for 6 months, just in case of emergencies?
3. You have a part-time associate position that will keep the bills paid.
4. You have good chair-side skills and can get patients to accept treatment.
5. You know, at least the elementary aspects of running a practice.
If you answer yes to these questions, you’re ready to buy your first practice. You should start taking courses on practice management. The county associations often have courses on various aspects of running a practice. There are also Dentaltown podcasts, courses at your community college, etc., which will help you get ready.
So, if you’re on the sidelines, not sure if you’re ready to own your practice and can answer yes to these questions, jump on in, you’re ready. Give us a call if you’re still not sure.
-Rod Johnston, MBA. CMA
Seeing the Jungle through the Trees
All practices have something wrong with them. Some have more problems than others. The key to analyzing and acquiring a practice is having a vision and being able to know how to overcome and fix the problems.
Case Study #1 – A practice has historically produced $800,000 but is now down to $400,000 with no new patients coming in the door. Turn and run, or look into it further? If you looked further you would find that the doctor has had a health problem. He’s turning away 10 to 15 new patients per month while he’s getting treatment. He has been doing primarily hygiene appointments and x-rays for the past two years. By the way, he is booked out 3 months in hygiene and has over 1,200 active patients. The purchase price is $300,000. A buyer with vision purchases the practice and in his first year, he collected $900,000.
Case Study #2 – A practice in a nice neighborhood has been in existence for 45 years. The doctor is 67 years old and as it often is with older doctor practices, the collections have gone from $1.2 million down to $500,000. As it also is with these practices, he still has one full time and one part-time hygienist, two front desk, and two assistants. His overhead is 75% and he’s taking home $100,000 per year. The equipment is old and the practice hasn’t been updated since Jimmy Carter was President. It’s a dog of a practice. We sold the practice to a buyer for $350,000 who bought it primarily for the good location. The lease was up for renewal, so we assisted the buyer in getting money from the landlord to buy new flooring and repaint the interior. He re-upholstered the old Adec chairs. He offered one of the front desk employees a small severance package to leave the practice. He had the entire staff working the phones and sending letters to patients to get the hygiene columns filled. Within two years he was collecting over $1 million.
Case Study $3 – A practice is collecting $350,000 in a downtown metropolitan area. The doctor is earning around $40,000. There is a hygienist, assistant, and front desk staff. The practice formerly produced $800,000. The doctor is doing a lot of “watches” and not much treatment. The price is $275,000. Bank XXX tells the first buyer they will not loan on the practice because there is no cash flow. The first buyer walks away. Buyer two comes along and likes the practice. She’s also told by a different bank that the practice will not cash flow. We explain the opportunities in the practice to the buyer and how it doesn’t cash flow based on prior years’ collections. However, we are certain the practice will grow a minimum of 10% in the first year and more likely 20%. We suggest to the buyer that they let us help them find a lender who will lend on the practice based on future, projected collections. We speak with a couple of banks and find one who sees the vision of the practice with a young buyer who is ambitious and wants to grow her own practice. The bank agrees to loan on the practice. The doctor does $50,000 her first month in the practice and grew the practice 30% in the first year.
These are all true examples of transactions where doctors were able to see the forest through the trees. They had a vision and confidence in their ability to grow a practice. Not all practices are like these, but if you can see that the practice has a good foundation, or a good location, or good “bones”, you can pick up a practice where you’re not spending $1 million to get a practice that may not grow, but rather spending a lesser amount for a practice that will grow. We are happy to help identify these opportunities or point you to the right resources who can help you out in your quest to be a practice owner.
Do Not Wait to Buy a Practice
Do Not Wait to Buy a Practice
By Rod Johnston, MBA, CMA
Do you ever sit back and wait for something to happen thinking that if you wait, that
something could turn out perfect? But, then you end up waiting a little too long and you
end up missing your perfect opportunity? Whether that certain thing is a cake that you
think you need to wait a few more minutes to bake and then you end up burning it. Or,
the stock price of a company whose stock is going down and you want to wait a little
longer to let it drop some more and then you wait too long and the price shoots back up.
Or waiting for interest rates to drop and then all of a sudden the Federal Reserve
increases the rate.
For many dentists, acquiring a practice has been like that. You wait for the practice that
has the perfect location. You wait until you know how to do as many procedures as you
can. Or, you wait for the practice that has four operatories, collects $800,000 per year,
on a busy corner street with great visibility and 40,000 cars going by every day. We
know who you are. The problem is, waiting comes at a cost. You only have so many
years on this earth. For every year you wait to begin owning a practice, you may also
be adding another year on the end when you want to retire.
On average, a practice owner earns anywhere from a low of 20% to a high of 40% more
than an associate, depending on the source. All the while you’re owning a practice and
making an average of 30% more than your associate friends, you are building what’s
called equity in your practice. That means, the practice you purchased for $800,000, as
an example, with a 10-year loan is increasing in value to you as you pay the loan down.
So when you retire and sell the practice for $800,000 or more and you have the loan
paid off, you will have $800,000 in cash, less transitions fees, to put towards your
retirement. Your associate, if they never own a practice, will get to put $0 from the sale
of a practice towards their retirement.
To further explain the math, an average associate makes $185,000 per year. If you own
a practice, you would make 30% more on average per year which equates to $55,500
per year. Over a 20-year dental career, if you put that $55,500 into a bank account with
no interest, you would make $1,110,000 MORE than your friend who was an associate
their entire career. That’s on top of the equity of $800,000 from the sale of your
practice. That gives you a total of $1,910,000 over your friend the associate. This is all
assuming you are an average dentist and can learn a few things about practice
management during your tenure as a practice owner.
That all sounds great you say, but I have $500,000 in student loan debt. Even more
reason to get into practice ownership. By making more, you pay the student loan debt
off sooner. Banks are still eagerly lending to dentists on good practices. The failure
rate for dental practice owners is less than .03%! The only business to fail at a lesser
rate than dentists is…….Mortuaries! You literally just need to show up, do a little
dentistry and you will succeed.
But, you add, “I didn’t get into dentistry for the money.” Awesome, you probably got into
dentistry to provide the best standard of care you can. Working for a DSO and even
some solo practice owners may not have the same standard of care that you have.
When you own a practice, you get to determine what that level of care may be. You also
get to determine what procedures you get to offer and perform. In addition, you get to
hire and fire staff, pick which supplies and materials you want to use and even which
scent of soap you want in the patient bathroom. Mahogany wood scent is my choice if
you’re asking.
From generation to generation, dentists have owned practices. DSO’s and other dental
owned groups are increasing in number. The American Dentists’ dream should still be to
own their own practice if for nothing else, pride. Pride of ownership and pride of a good
quality of care. Make this year the year you take a step in the right direction and buy a
practice.
We’re always here to help in any way we can.
The Importance of a Good Team When Purchasing a Dental Practice
Buying a practice can be a daunting task. That’s why it’s important to not only have the skills and education to analyze a practice, it’s also important to have a good team on your side. On your team, you will want a Certified Public Accountant that has a big emphasis or specialization in your field. They need to know the industry, numbers, etc., they should also be accredited in practice valuations. The second person on your team will be a dental specific attorney. There are too many idiosyncrasies to not have someone who doesn’t specialize in your field. Non-compete provisions and other conditions are specific to dentistry. A banker that specifically works on practice loans is another important member. They will know the reasons why a practice may be what it is and explain to the underwriters what’s going on in the practice. You will also want a broker who has done many transitions. Having an experienced broker will help make the transition as smooth as possible. Another person that may be necessary is a dental consultant. The consultant can help analyze the practice and make sure it’s what you are looking for. Omni Practice Group has a list of many of these team members. If you would like our preferred list of vendors, please e-mail us at info@omni-pg.com.
Read More