PREPARING FOR THE EMOTIONAL ROLLER COASTER IN YOUR VETERINARY PRACTICE TRANSITION
Selling pet food or even charts is easy. It’s just an object that you are giving to another doctor to own. But, I’ve had many doctors who realize their life will be different going forward after their transition. They may have staff they have worked with for 25 years or more. They have seen patients grow from being a child to being a parent and some even become grandparents. Now their children and grandchildren are patients of the office. You have vendors and your CPA that you have gotten to know personally and confide in. Staff, patients and the vendors have all become family and you will not be seeing them as often as you have in the past.
You will also be changing your life in that you no longer are the owner, manager and decision maker with people relying on you to lead them. You may no longer have to wake up and go to work every day. Believe it or not, you may even have “spare” time and have to find new hobbies, rekindle old ones or maybe even find take care of the honey-do list.
The good, if not great news, is that the staff, patients and vendors are thankful for the years of service you have provided them in addition to your friendship. They want you to enjoy life and spend time with your real family – spouse, your parents, kids, and grandkids. Preparing for this emotional aspect of your veterinary practice sale will help make your veterinary practice transition into retired life a much smoother process.
Not All Valuations Are Created Equal
Practice valuations and those that value practices can come in all shapes and sizes. Did you know that there are probably 20 different methods you can use to value a practice? Did you know there are 5 to 10 different certifications or accreditations one can work towards obtaining?
Rule of thumb valuations are ones that are typically quoted and overly abused. The typical rule of thumb in a dental practice is a value based on a percentage of the practices gross collections. For metropolitan areas, the rule of thumb can be from 85% of collections up to 100% of collections. For a rural area, the value is typically 65% up to 85% of collections. Sounds simple and straightforward, but why can this be inaccurate?
The first reason is the practice may have a good gross production number, say $800,000, but it also may be mismanaged with overhead of $750,000 leaving $50,000 leftover for debt service and salary for the doctor. Do you want to work for nothing? Using a rule of thumb approach, this practice, if in downtown Seattle or Portland, would sell for between $700,000 and $800,000. Secondly, you don’t know what is being run through the gross revenue production number. Is the practice on capitation plans, DSHS, or another low reimbursement program? Low reimbursement means low money to the practice, narrowing the margins. If you get a high volume of the low reimbursement programs, you can bump up your gross and leave little to pay off debt and doctors salary.
Another valuation method that can be dangerous is called the cash flow method. This method calculates an adjusted cash flow to the practice. The valuator will then normalize a doctors’ salary and calculate a value based on how much debt the practice can afford to pay. In some practices, the valuator will use a forecasted number to get the value even higher. This helps the seller when selling a practice, but is bad for the buyer as he or she is stuck paying a high debt payment each month.
Omni follows standards set by the Institute of Business Appraisers and the Society of Certified Public Accountants Certified Valuation Analyst program. We have on staff an Accredited Business Appraiser as well as two Certified Valuation Analysts. We use three different valuation methods to determine the value of a practice – the Production Acquisition Method, the Capitalization Rate Method and the Book Value method. Each of these methods focuses on a different aspect of the practice. After we calculate all 3 methods, we blend them to determine the total value of the practice. Blending these methods gives us a value that looks at the assets, cash flow and overall collections of the practice – a full picture of the entire practice and not just a glimpse of one aspect of the practice.
If you are interested in hearing more about Omni’s Practice Valuations, send us an email or give us a call at 877-866-6053 today!
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
The Many Different Types of Veterinary Practice Transitions
By planning your transition carefully and working with a trusted broker in the Veterinary practice marketplace, practice sellers can ensure each element of the process is completed smoothly. But first, it’s important to learn more about the types of Veterinary 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 Veterinary 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 veterinary medicine. As long as the two get along, this can work wonders.
Customized Transition
Working with a Veterinary 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 Veterinary practice transition options, owners can ensure the right model is found for their sale process. To learn more, contact us today!
FAQ’s by Dentists Who Are Thinking About Selling Their Practice
The earlier the better, but no later than 3 years prior to selling your practice in order to optimize your sales price and find a good buyer match. Practice values are typically based on 3 to 5 years of financial information with the numbers weighted heavier towards the most recent years. If you focus your last 3 years in your practice on maximizing collections, overhead and updating your practice, you will come out money and time ahead.2. Will I get a higher price if I ramp up production for another year?
Typically not. Since values are based on up to 5 years of production and net income, simply ramping up numbers for one year will not increase the value a whole lot. In fact, if it goes up too much in one year, a potential buyer and banks may even question why the production suddenly went up in one year.3. Should I buy new equipment or remodel before I sell my practice?
If you are 5 to 10 years away from selling your practice and your practice is looking dated, then you should update the practice. The updates can range from simply painting the practice and installing new carpet, up to replacing patient chairs, adding new x-rays and other technology. If you spend a lot of money too close to the sale date, you will not get the depreciation write-off that you would be doing it much earlier. The exception to this rule, there’s always an exception isn’t there, would be digital x-rays and computers. If you are not digital, don’t have computers, or your computers are 10 years old, you should consider adding or updating those before selling.
4. What are buyers looking for in a practice?
Individual buyers like to see a well-run practice with a decent amount of production, typically over $500,000 per year, average to low overhead (below 65% is good), somewhat up to date look and feel to the practice and a good location.
Group practice or DSO (Dental Service Organization) buyers like to see similar things, but also want the seller to stay on and work in the practice for another 1 to 3 years depending on which Group or DSO buyer. They prefer larger practices collecting over $1 million. Larger group or DSO buyers want the seller to carry-back approximately 20% or more of the purchase price of the practice. This means you get 80% of the purchase price upfront and then you receive the other 20% after you’ve completed your 1 to 3-year work requirement and have met established production and other targets in the practice. If you don’t reach those targets, you may not receive the final 20%.
5. I have an offer from a DSO or Group Practice buyer, why do I need a broker?
It’s been said that “the man who represents himself has a fool for a client”. A broker wears many hats in a transition. Finding a buyer is only one small role they play. The broker also looks at the offer and looks out for the clients’ best interest. DSO and Group practice offers are all not alike, so brokers must also play the role of analyst and look at each offer. They have to understand accounting, finance, the law, contracts, and even human resources. If you try to do this all yourself, you will end up costing yourself, your family, your staff and patients more time, money and grief than if you just hired a broker in the beginning. We have case studies where we have caught things in the offer that would have cost clients hundreds of thousands of dollars. We have helped negotiate and solicit more offers that have put much more money in client’s pocket than what the clients first offer was. Or, saved them a major headache and/or time.
6. The person representing a Group or DSO buyer told us they prefer us (seller) to not work with a broker. Why is that?
They don’t want you to use a broker because it weighs the negotiations in their favor and gives them an upper hand. They have powerful attorneys, CPAs, and professional negotiators to pit against you. They may first knock on your door with a friendly neighborhood dentist as their representative, but behind that friendly representative lurks the professionals hoping you don’t have anyone helping you out. They’re able to get lower prices, better terms and buyer favored contracts if the seller doesn’t have a broker.
7. I own my building, should I keep it as a rental for future retirement income?
In the current real estate market, the short answer is “no”. Especially if you’re considering a DSO or Group buyer. We have pictures and case studies of sellers who kept their building only to have the buyer move out of the building two years later to a new building they built down the street. Or, they acquire another practice in the area and merge yours into their practice. The seller is left with an empty building that was a dental practice and will be difficult to find a tenant. The exception might be if you have a beautiful building in a fantastic location on a busy street with great visibility and the building is in pristine condition. These buildings make up less than 10% of dental buildings.
8. I want to do an associate to own transition. Can you help me with that?
Absolutely. We can help with pretty much any type of sale. Whether you want to do an associate to own transition, a straight sale to an individual, a group or DSO sale, or anything in between, we can help. We will show you all the options and scenarios to help you make the right decision. Often, doctors think they want an associate to own transition and not sell to a Group/DSO. But when we start talking to them and asking a lot of questions of both them and the potential associate, we find that associate to own isn’t the best type of transition for them. The ADA says 70% of associate to own transitions fail before they make it to closing. We’ll help walk you through each scenario to do what’s best for you and your family.
9. I want to continue working in the practice after I sell, is that possible?
It depends. If you sell to an individual and your practice isn’t large enough to support multiple doctors, then the answer is probably not. But we can help identify the right buyer for you who will allow you to do what you want to do. In fact, one of the questions we ask of the seller is “What is your dream transition scenario?” We then go from there and do our best to make your dreams come true.
10. I want to make sure my staff and clients are taken care of. How do we make sure that happens?
We like to call ourselves matchmakers. We spend time getting to know you as a dentist, practice owner, family person, etc. We ask a lot of questions to find out what your needs, wants, and dreams are in a transition. We then go out and find a perfect match whether it’s an associate, individual buyer, or even small Groups and DSO buyers have their own unique personality, culture, philosophy, and terms. We make sure that the buyers we present to you, who will want to buy your practice are a good match for you and your practice.