Exit Planning in the COVID Era
By Are you ready to transition?
Is your practice ready to transition?
What is the market like?
These are all key questions to ask yourself. When is a good time to start thinking about all of this? The real answer is as soon as you buy or start your practice, but the more practical answer is dependent on you. If there any chance you will want to transition in the next five years, you should start working on your transition today.
Personal readiness and practice readiness are both more important than current market conditions; however, considering the COVID crisis, I am going to focus on market timing.
If any of the following sounds even slightly familiar, raise your hand:
I was ready personally, and my practice was ready in August 2019. I choose to wait because (pick one or more):
- I have a kid with one year left in college
- I have one year until I can draw Medicare
- There is one more room in the house I would like to finish
- My spouse retires in a year
- I pay off my house in a year
- I turn (insert round number like 60 or 70) next year and I would like to wait until then
- Etc. …
Now, for those of you that raised your hand, consider the reality of August 2020. How does that August 2019 decision to wait look? Questionable at best.
My intent is not to beat up on those of you that this struck a chord. Rather, I want to emphasize the need for starting early and getting help.
Transitioning is a difficult process. Do not go it alone. Contact an experienced, qualified transition specialist and get the ball rolling. We are here to help.
Do you have more questions? Attend our Practice Transition webinar on Thursday, 10/1 at 6pm ET/ 3pm PT, presented by Corey Young, DDS, MBA, and Katie Collins, CFP. Reserve your spot today at omni-pg.com/register.
Read MoreThe Cost of a “Perfect” Practice in the COVID Era
Should you buy now in this COVID environment? Everything seems kind of scary. It might be better to stay with that nice, safe, secure job and wait for the perfect opportunity to come along? That said, there are a lot of practices coming on the market. Maybe now is the perfect time to buy? Let us look at two hypothetical practices and see where you would be in ten years with each.
PRACTICE A: The practice is located a little further out than you would like. The equipment, while exceptionally well maintained, is twenty years old. The doctor, who is booked out for weeks, does zero marketing and restricts new patients to about ten a month. Additionally, the doctor wants to be able to fully retire as soon as possible.
- Overhead: 50%
- Gross: $700,000/year
- Net: $350,000/year
- Acquisition price today, due to COVID environment: $350,000
- Current interest rate: 4%
- Loan of $385,000 (acquisition price plus one month of working capital) over ten years: $3,898 monthly payment/$46,775 annually/$467,753 over life of loan
HOW IT PLAYS OUT: Despite the doctor leaving fairly quickly, patient retention is strong. By employing a modest marketing program and updating treatment planning you grow the practice by fifteen percent each of the first two years, leveling out to 5% growth for the next eight years.
Total income over ten years: $4,705,000
In ten years, banks are willing to lend up to 110% of annual gross, having adjusted their arbitrary ceiling a few years earlier. Your practice, still operating at 50% overhead, can be sold for 110% of annual gross. Plus, as a bonus, you just paid your practice off.
Net asset value of practice year ten: $1,433,000
Sum of income and asset value: $6,138,000
PRACTICE B: The practice is in a great spot. There is even a coffee shop next door! The doctor is current and has a robust marketing program bringing in fifty new patients a month. It took you three years to find this “perfect” practice, but your patience paid off.
- Overhead 60%
- Gross $900,000/year
- Net $360,000/year
- Acquisition price in three years, market having recovered $600,000
- Interest rate in three years 6%
- Loan of $660,000 over ten years: $7,327 monthly payment/$87,924 annually/$879,282 over life of loan
HOW IT PLAYS OUT: The transition goes very well. Being the well-oiled machine that it is, annual growth of five percent continues for the next seven years. Though it took you three years to acquire, you did make $200,000 a year while working at your corporate job prior to purchasing.
Total income over ten years: $2,651,841
While your practice is profitable, it is not at the top end of profitability, the bank is willing to lend 95% of gross. Additionally, you still have three years left on your loan with outstanding principle of $240,858.
Net asset value of practice, ten years from now: $904,924
Sum of income and asset value: $3,556,765
The cost of a “perfect” practice (at least in this scenario) versus jumping on the great opportunity? About 2.5 million.
Thinking about buying a dental practice? Attend our webinar on Friday, 10/2, presented by Corey Young, DDS, MBA and Katie Collins, CFP. FREE – space is limited! Earn 1 hour of CE – reserve your spot today: omni-pg.com/register
Read MoreQ&A on Covid’s Effect on Practice Values and Sales
By Rod Johnston, CMA, MBA, OMNI Practice Group
As dentists start going back to work and opening their offices, they have a lot of questions on their minds. The questions range from Human Resources related questions to questions on selling their dental practice. While I am not an HR expert, I can answer the questions on practice values and sales. Or, at least, I can give my thoughts and opinions like everyone else. Below are some questions that I have received with the answers I provided. Disclaimer – the answers I provided are my own only and are based on my opinion, the opinions of other “experts” and past history.
Question #1 – How are COVID and the mandatory shutdown going to affect the value of my practice?
Answer #1 – Good practices in good locations are going to sell for a good value in the short and long term. Practices that are in a good area with good cash flow and profitability, good patient base with great staff will sell for a price similar to that of prices pre-COVID shutdown. Buyers reps and consultants will argue that there should be a “COVID Discount” because we don’t know if patients and numbers are going to come back. I call cow-pucky on their argument. For these good practices, there is a reason they are good practices. The goodwill – location, staff, reputation, even the selling doctor is still there. Patients will need work done and the numbers will follow. I’ve spoken with several doctors in the past two days who have nice practices and they reported that their schedule is filling up into the end of June already. There is pent-up demand.
Now, for those practices performing below average of under $450,000 per year with not great margins, older equipment, and transient patient base, they may need to take a discount to sell. They probably would pre-COVID as well, but its even more firm now. The discount can be 10% to 20% depending on the practice.
Question #2 – Are Buyers still Buying Practices?
Answer #2 – In short, yes. We have been marketing our practice listings continuously throughout the shutdown. We have received a number of calls and e-mails with interest in practices. The high demand metropolitan areas are getting the most interest, but we are still getting interest in other areas as well.
Question #3 – Can Buyers get Bank Financing?
Answer #3 – As President of the National Association of Practice Brokers, I have been in contact with many banks across the country. There are some banks that provide practice financing that have completely stopped lending on practices at the moment. They reported that they will start lending again when everyone is back up and running. There are others who have been continuing to lend. Practice sales have occurred even during the shutdown.
Question #4 – Are Banks changing the way they are approving and structuring the transaction?
Answer #4 – Most of the banks have told us that they want to see 60 to 90 days of productivity after the practice has opened. They would like the production to be a minimum of 75% to 85% of pre-COVID production before they’ll approve the loan. For example, a practice producing $100,000 per month pre-COVID will be expected to produce a minimum of $75,000 per month for the two or three months after re-opening. This depends on the bank and there may be exceptions to the rule.
On deal structures, some banks are saying they are lowering their loan amounts to 75% of the production and some will remain at the pre-COVID number of 85%. If the price of the practice is above 75%, the seller will be asked to “carry-back” a portion of the loan. For example, a seller with a practice valued at 85% of collections that is being purchased by a buyer who is using Bank X which has a loan to gross collections of 75% will be asked to carry a note for the last 10% of the value of the practice over a period of time. The term or length of time of the carryback can be negotiated to some degree.
Question #5 – What are the most important things to do if I’m thinking about selling my practice in the near term?
Answer #5 – As “they” say, Cash Flow is King. You need to get your collection numbers back to near where they were pre-Covid as quickly as reasonably possible. You should also evaluate the profitability of your practice and see where you stand compared to where you should be. Ratio analysis will tell you if your payroll, supply, lab expense, etc., is too high, or where it should be. If you need help with the analysis, give Omni a call.
If you have any other questions related to selling your practice either now, or in the future, please feel free to call us anytime. We are always here to give you any guidance and advice that we can. Stay safe and be healthy.
Read MorePurchasing a Practice Post COVID-19
OMNI Practice Group
A lot of “experts” have been giving their own predictions on the Covid-19 Pandemic. The truth of the matter is, no one has a crystal ball and knows what tomorrow will bring. So far, most experts have been off on their predictions. What we do know is that there will be a “post-Covid” and life will get back to some form of normal in the relatively near future.
We as a society have historically been through pandemics such as the Spanish Flu, HIV/Aids, Hong Kong Flu, and others. Pandemics are definitely game changers and force us to look at how we live, work, educate, etc., This pandemic will be no different. Some states are beginning to open up as I write this article. Some veterinary clinics and hospitals have already made some changes. Dropping off animals outside the office, taking patients directly into exam rooms, using telemedicine, etc. are just a few examples of changes made in some practices. Some of those changes will be short lived but some will be permanent. But the truth is there will be changes.
One thing that I promise you will not change is that animals will continue to exist and people will still have pets. I’m 100% certain of that. As such, animals will continue to need care. Unless plumbers start doing veterinary work, that means they will need to see a veterinarian in a veterinary hospital! It will just be a matter of how the new game of veterinary practice will play out with new rules in place. In sports, rules change all the time. Players and coaches just adapt to those rules and adjust to playing under those new rules.
Another rule that may change is valuations on practices in the near term. I have heard a gamut of theories from brokers, bankers, veterinarians and the grocery store clerk. But they are just that… theories. My advice would be to stop listening to your friends, relatives and others who don’t have any more knowledge than you do about the future of practice valuation. Here’s what I know for sure, good practices with good margins pre-Covid will be good practices with good margins post-Covid. They will sell for a normal value, even post-Covid. I also know patients will come back to the veterinary hospitals. This will be true for most all offices. I’ve spoken to several veterinarians who have told me they have full schedules already in the immediate future. For those practices that are below average to average practices, there may be some adjustments to values in the near term. Banks have told us that they may adjust their valuations as well. I don’t expect huge discounts, but perhaps a discount to account for some of the new expenses or reduction in production.
As a potential buyer of a veterinary practice, you should look at the practice as if it was pre-Covid. In the long-run, that practice will get back to “normal”. If you find a practice that has been what you’re looking for, you need to do your due diligence and be confident that normal will happen again. Those who do will be ahead of the game.
Medical Professionals: COVID-19 and your Commercial Lease
In Washington State, Governor Jay Inslee has halted all non-emergency services and elective procedures for the next 8 weeks forcing most medical offices to close during this time (hospitals, surgery centers, dental offices, etc.)
Rent is still due!
The obligation to make a rent payment is not automatically stopped because your business has been forced to close! Here are some ideas of what you can try:
Talk to your Landlord.
Engage with your landlord right away. It may be news to them that your office has been forced to close, leaving you with little to no ability to produce revenue. They might in a situation to help, though this is a negotiation not a guarantee. Ask your landlord if they would be willing to waive or reduce your rent, a 90-day deferral of rent could be option, or just pay the CAM/NNN – anything can help. Offer to make it up over time once the doors are back open and you’re treating patients. Remember the landlord may be having their own financial hardships, but they do have an interest in you being able to pay the rent for years to come.
Check-in with your Insurance Agent.
Some insurance policies have coverage for unique circumstances in the case that you are not able to run your business. This may help with covering rents and loss of wages.
Legally…
I am not an attorney, nor is this an attempt to provide legal advice. So, check-in and consult your attorney, make sure they specialize in Commercial Real Estate Law with a focus on Medical leases and contracts. On rare occasions, your lease may include Force Majeure, which could offer relief in unforeseeable circumstances that prevent someone from fulfilling a contract, but this is unlikely. After a quick review of a traditional WA State Commercial Brokers Association Lease, there was no Force Majeure clause within the document.
Ask your attorney about Common Law which is prevalent in many states. This may address the impossibility to perform and make an income, it doesn’t automatically relieve you from your rent obligation, but the fact that you are forced to perform only emergency procedures in WA State may allow for an avenue for relief.
Loan…
Banks across the nation are offering short term Small Business Loans at low rates as a method for giving small businesses financial aid. First, check-in with specific banks that focus on loans for Medical providers. Small Business Loans are available now. Some larger national banks may offer other loan programs or allow for deferred payments for the time being. Now may also be a good time to refinance your practice loan into a lower rate loan and saving you money.
If you need help getting in touch with a qualified attorney, banker, want to talk about your specific circumstances and ideas, or just want to tell me I am wrong, please contact me at Steve@omni-pg.com.
Connect with Steve on LinkedIn: https://www.linkedin.com/in/steve-kikikis-378b8697/