Seller Carrybacks and Dental Practice Transitions Today
By Jen Bennett, Practice Transition Advisor
You’ve heard the term “Seller Carryback,” but what does it mean?
Seller carryback financing is when the seller of a given property, or in this case, a seller of a dental practice and assets, acts as a lender for the buyer if a conventional bank will not offer the full amount that the buyer needs to close the sale.
Years ago, it was commonplace for a retiring dentist to act as the lender for someone to purchase a dental practice. Seller financing was driven largely by the fact that banks and financial institutions had yet to embrace the industry like they do today. Therefore, there was a wide variety of structures, interest rates, terms, etc. that were built into those transitions and the exchange of funds between the buyer and seller.
Much like the rest of dentistry, the industry and the financing supporting transitions have evolved. In most transactions, it is quite common for the seller to receive all the cash at the time of closing, which is ideal. However, certain circumstances still exist where seller participation in financing is a requirement. In these cases, the buyer’s lender will require the seller to carry a certain portion of the purchase price. Usually, that amount is 10-25% of the total purchase price. Why would a bank need that, you might ask? Some common scenarios include: a declining revenue trend, uncertainty around the buyer’s production capability, and tight cash flow, to name a few.
Every lender has different standards around seller participation, but here are some common features of that path in the current environment:
- Term: Most carrybacks are amortized similar to the buyer’s bank loan. Payments based on a 10-year repayment are common.
- Rate: Since these loans are typically junior to the bank loan it is not unusual to see a seller note 0-2% higher than the banknote. Right now, around 5% is reasonable.
- Prepayment Penalty: Sellers typically want to receive the funds over a shorter timeline of 10 years. Most carrybacks do not have prepayment penalties so that the loan can be paid off or refinanced within 24 months of the transition.
With talks of increasing capital gains taxes in the near future only time will tell how prevalent carrybacks will become.
For more information, please feel free to contact Jen Bennett.
Read More5 Practice Transition Pitfalls and How to Avoid Them
A successful transition involves preparation and knowledge. There are numerous things you should do to get your practice ready to sell and making even one mistake can cost you. Here are five transition pitfalls and how to avoid them.
Letting your production and profitability go down prior to selling. We have seen many practices that were producing $300k to $500k a few years prior to contacting us, but collections and profit tanked when the veterinarians cut back on their hours and their associates didn’t make up the difference. This can result in hundreds of thousands in lost practice value. As you head closer to a transition, keep your production numbers, and your profit, up.
Counting on selling your practice to your associate. This always sounds like a great plan. But statistics show that over 70% of associate-to-own opportunities do not make it to a sale. What happens if your associate decides they want to practice in another town? Or your associate finds an opportunity in another practice? Protect yourself by getting everything in writing and using an intermediary if possible. In addition, consider having your associate put away money in a non-refundable escrow account.
Not evaluating all options. When we ask veterinarians if they are okay with selling to a corporate buyer, we often hear, “No way.” Here’s why you should keep an open mind. While an individual buyer may be limited to paying 2 to 4 times earnings before interest, tax, depreciation, and amortization (EBITDA), some corporations are willing to pay 5 to 10 times EBITDA, and sometimes even more. We have negotiated sales to corporate buyers that got the sellers $1M more than originally expected. That’s a million dollars to help pay for grandchildren’s education, give bonuses to hardworking staff and enjoy retirement.
Telling your staff too early. A common question we get asked is, “When should I tell my staff about the sale of the practice?” We suggest waiting until the agreements are signed. Telling staff too early may result in them leaving for another opportunity. For those who stay, it creates a fear of the unknown. Who’s the new buyer? Will my job stay intact? Will my pay be the same? What about my benefits and hours? Waiting may not seem like the right thing to do, but it really is.
Going it alone. Corporate buyers are throwing out offers to potential practice sellers left and right. Some are even hiring DVMs to tell you that you do not need representation, that they will handle everything. But is their offer the best one you can get? Without representation, how would you even know? A good practice transition broker knows all the different buyer types and what kind of terms and pricing they typically offer. If you try to sell your practice on your own, you could sell to the wrong buyer for the wrong price.
These are just a few of the many pitfalls you might encounter when selling your veterinary practice. With experts on your side, you can avoid them – and other costly mistakes.
Want to make your transition as smooth as possible? We can help. Contact us for a free consultation.
Read MoreWhat is My Practice Worth?
By Megan Urban, Practice Transition Consultant
Have you ever said something like this? “In the 90’s I was producing over $1.5M. Five years ago I was producing $900,000. My practice must be worth at least $1.0M and this area has huge potential.” Value is not based on “long ago past” numbers nor “potential” numbers. Buyers don’t pay for what you did over 3 years ago nor potential. They have to put in the work for the “potential”, so they don’t pay you for that and most banks and appraisers look at the last 3 years.
First of all, production is not nearly as important as collections. In some offices, the two numbers might be pretty similar, but in many, there is a huge variance due to large insurance write-offs, any in-office discount plan, and uncollected production. Next, how much of your collections are you taking home?
Let’s talk about what your practice may be worth, potential action items, and who should assist you to value and sell your practice. It is one of the most important decisions in your life that impacts your income.
Gather your team of trusted advisors. Now is not the time to listen to friends and family that aren’t familiar with the dental industry and do not have many years of experience. You will want a reputable transition consultant (broker) and dental-specific CPA and attorney. Your transition consultant will have a list of dental-specific CPAs and attorneys that do much of the work in your area. The CPA will help you to maximize any retirement plan you have, reduce taxes, and pay off the debt in a way that makes sense for your specific situation. The attorney will ensure all sale agreements, non-compete, and re-do treatment is correct, as well as any work back or carry back documents.
To help with a simple and successful transition, ensure your financials or books are clean. Work with your CPA to ensure personal expenses are not being run through the practice. Know what your actual take-home is out of your collections. If collections are high but all expenses are high too, the value won’t be as high as you’d like.
Take a look at your AR and try to collect as much as possible and do any necessary write-offs. AR can be purchased by the buyer and the over 60 or 90 days old is not worth much unless you can show the patients are keeping up with monthly payment plans.
Most dentists don’t think they have many credit balances, but there are sometimes surprises here. Some credit balances may be correct and you need to do your due diligence to refund the money or better yet, finish treatment. Check that the credits are not an error. EOBs are difficult to read and an insurance adjustment may need to be modified or corrected. Credit balances are often adjusted directly off the purchase price.
So, how much is your practice worth? Your transition consultant will complete a full valuation and prospectus and then together you can set the price. If collections and/or income have been declining, that’s fine if you’re happy, just understand that buyers don’t pay for “old days numbers” and “potential”.
Read MoreThe Business Side of Veterinary Medicine – Theft & Embezzlement
Experts estimate that more than 70 percent of veterinarians are embezzled with an average loss of $200,000. But, because the embezzlers often steal small amounts of money over many years, the thief is never noticed. The US chamber of commerce estimated that 75 percent of employees steal from their workplace and that most do so repeatedly.
A majority of people, if given an opportunity, will take advantage of a situation to steal from their employer on the following frequency:
-3 percent will steal daily
-7 percent will steal weekly
-20 percent will steal 4-12 times a year
-70 percent will steal 1-2 times a year
-4 in 10 doctors experience theft in some form from the practice. 1 in 3 veterinary practices experiences monetary theft from their practice.
The significant types of theft in veterinary practices are:
-Time
-Office supplies
-Veterinary supplies
-Goods and services in Kind
-Money
All types of theft can hurt the bottom line of the practice. The Monetary thief, in most cases, has the most negative effect on the practice bottom line. Most veterinarians find it hard to believe that their handpicked, trusted, longer-term staff would steal from the practice.
Here is an unfortunate, and real-life, example. A veterinarian had a highly successful practice with five employees. One was a long-term office manager who came to work early and left late every day. She managed all the financial transactions daily along with the insurance and statement billing. The office manager took an extended vacation. While she was gone, the office sent out statements and received numerous calls from patients that their statement was incorrect and that either their insurance had paid the bill, or they paid on the day of service by check or credit card. The doctor had the staff investigate all the disputes and found out that the office manager had embezzled more than one hundred thousand dollars over the years. He was devasted and could not believe that the long-term, most trusted employee had done this to him.
Methods that have been used by staff to steal from the practice:
Zero Charge- Patient comes in for services, and the office staff member posts a zero-balance charge and pockets the money. At the end of the day, the computer collections balance to the deposit slip. No one notices.
Falsify Deposit Slip– Employee brings the doctor a deposit slip to sign for the day matching all the collections taken in for the day but then takes out all the cash from the deposit bag or envelope and changes the deposit slip when depositing the money.
Multiple Adjustments to Accounts- Courtesy discounts like cash discounts or senior discounts are used. Employee charges the full amount to the patients and keeps the cash discounts and pockets it.
Fictitious Vendor- Employee sets up a fake business with an account and has doctor sign supply order checks for supplies. The employee deposits these checks into an account and keeps the money.
Internal Controls
Make sure that even your closest friend in the veterinary practice is being watched. Here are some suggested internal controls to help prevent thief and embezzlement:
Segregation of Duties– Make sure one person does not control all cash flow processes.
Daily Audit Trail– Review daily transactions to catch zero balance postings.
Rotate Duties– This will help to reduce the chance for embezzlement.
Verify the End-day Report to Deposit Slip– Ensure that you see the end-of-day report and it balances with cash deposits. The doctor should be responsible for depositing funds in the bank.
Review Bank Statement– Take time to review the statements monthly.
Require Vacations– All employees must take vacation days that they have earned.
Performance Plans– If the practice meets specific goals and the practice is increasing its revenue, give incentives to employees in monetary form.
Background Checks- Make sure you follow through on background checks before hiring new employees.
Verify References- Check all references.
Having internal controls will help protect the practice and staff that are honest and want to do a good job. It will also help everyone stay focused on their tasks and goals at hand and take away the opportunity for someone to embezzle. You don’t want to have good employees turn into liabilities.
Omni Practice Group has been helping veterinarians for over 15 years developing plans to transition their practice. Our goal is to help you find the right buyer and make a smooth transition of your practice when the time is right. Contact us today for a free no-obligation consultation with one of our Practice Transition Advisors.
Read MoreThe Business Side of Dentistry – Theft and Embezzlement
By Kevin Brady, Practice Transition Advisor
Experts estimate that more than 40 percent of dentists are embezzled with an average loss of $50,000. But, because the embezzlers often steal small amounts of money over many years, the thief is never noticed. The US chamber of commerce estimated that 75 percent of employees steal from their workplace and that most do so repeatedly.
A majority of people, if given an opportunity, will take advantage of a situation to steal from their employer on the following frequency:
-3 percent will steal daily
-7 percent will steal weekly
-20 percent will steal 4-12 times a year
-70 percent will steal 1-2 times a year
-4 in 10 doctors experience theft in some form from the practice. 1 in 4 dental practices experience monetary theft from their practice.
The significant types of theft in dental practices are:
-Time
-Office supplies
-Dental supplies
-Goods and services in Kind
-Money
All types of theft can hurt the bottom line of the practice. The Monetary thief, in most cases, has the most negative effect on the practice bottom line. Most dentists find it hard to believe that their handpicked, trusted, longer-term staff would steal from the practice.
Here is an unfortunate, and real-life, example. A dentist had a highly successful practice with five employees. One was a long-term office manager who came to work early and left late every day. She managed all the financial transactions daily along with the insurance and statement billing. The office manager took an extended vacation. While she was gone, the office sent out statements and received numerous calls from patients that their statement was incorrect and that either their insurance had paid the bill, or they paid on the day of service by check or credit card. The doctor had the staff investigate all the disputes and found out that the office manager had embezzled more than one hundred thousand dollars over the years. He was devasted and could not believe that the long-term, most trusted employee had done this to him.
Methods that have been used by staff to steal from the practice:
- Zero Charge- Patient comes in for services, and the office staff member posts a zero-balance charge and pockets the money. At the end of the day, the computer collections balance to the deposit slip. No one notices.
- Falsify Deposit Slip– Employee brings the doctor a deposit slip to sign for the day matching all the collections taken in for the day but then takes out all the cash from the deposit bag or envelope and changes the deposit slip when depositing the money.
- Multiple Adjustments to Accounts- Courtesy discounts like cash discounts or senior discounts are used. Employee charges the full amount to the patients and keeps the cash discounts and pockets it.
- Fictitious Vendor- Employee sets up a fake business with an account and has doctor sign supply order checks for supplies. The employee deposits these checks into an account and keeps the money.
Internal Controls
Make sure that even your closest friend in the dental practice is being watched. Here are some suggested internal controls to help prevent thief and embezzlement:
- Segregation of Duties– Make sure one person does not control all cash flow processes.
- Daily Audit Trail– Review daily transactions to catch zero balance postings.
- Rotate Duties– This will help to reduce the chance for embezzlement.
- Verify the End-day Report to Deposit Slip– Ensure that you see the end-of-day report and it balances with cash deposits. The doctor should be responsible for depositing funds in the bank.
- Review Bank Statement– Take time to review the statements monthly.
- Require Vacations– All employees must take vacation days that they have earned.
- Performance Plans– If the practice meets specific goals and the practice is increasing its revenue, give incentives to employees in monetary form.
- Background Checks- Make sure you follow through on background checks before hiring new employees.
- Verify References- Check all references.
Having internal controls will help protect the practice and staff that are honest and want to do a good job. It will also help everyone stay focused on their tasks and goals at hand and take away the opportunity for someone to embezzle. You don’t want to have good employees turn into liabilities.
Omni Practice Group has been helping dentists for over 15 years developing plans for dentists to transition their practice. Our goal is to help you find the right buyer and make a smooth transition of your practice when the time is right. Contact us today for a free no-obligation consultation with one of our Practice Transition Advisors.
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