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I agree with Madeleine Albright, former Secretary of State, when she said, “Every step in life should be more exciting than the last.” If you are contemplating an exciting new stage in your life, from buying your first practice to retiring from dentistry, then a roadmap is critical to your success. However, it is the journey that is important, not just arriving at your destination. For a successful transition, understanding the process is the most important step. Then the numbers, forms and details can make sense.

Over the course of my 30-year career, I have appraised over 2,200 practices and completed almost 500 successful transitions. So, let’s begin our journey and explore the transition process.

 

From the Start: The Practice Appraisal

The practice appraisal is the foundation for selling or buying a practice, merging a practice, or recruiting an associate for a future practice buy-in. So, this is our first stop on our journey.

What’s in a Dental Practice Appraisal?

My comprehensive appraisal begins with a personal visit to your office. During this meeting, I ask background and clinical questions about the practice; analyze financial information; and complete an itemized, room-by-room inventory of your clinical and office equipment, furniture, instruments and supplies.

My appraisal not only provides an accurate practice value, but it is also designed to tell the story of your practice to potential buyers. A recent seller told me, “In comparison to other practice appraisals, your work is more thorough and comprehensive, yet straightforward with explanations and benchmarks.” It will also point out the positives and potential negatives of the practice, which may give you time to make changes to enhance future value. To help your planning, both personal and financial, the appraisal should be done one to two years in advance. It can easily be updated when you are ready to take action.

 

Finding an Associate and/or Buyer

The second step to transitioning a dental practice is finding a buyer or an associate.

The next stop is focused on recruiting the “perfect” buyer or associate. It is a good idea to try to match the personalities of future buyers or associates with sellers. That will help minimize any future potential patient loss in the transition. The worst thing to do is to recruit a “gunner” buyer for a clinically conservative seller. Or recruit a buyer with an ingoing patient demeanor for a personable, outgoing seller.Get a Letter of Intent form for the roadmap to success.

If you are recruiting an associate/buy-in candidate, it is important to have an Associate Agreement. I use my Associate Agreement Questionnaire to help custom design an associate contract. The key elements are remuneration, benefits, scheduling, restrictive covenant, the equity acquisition schedule, and (most importantly) termination options. It also incorporates key elements of a future buy-in agreement. This questionnaire can then be shared with your attorney to design a legal agreement, if desired.

 

Turning to the Transition Team

Now is the time for a pit stop on our journey. As an ADS Transitions colleague of mine says, “The transition broker has the hardest job in the world. She has to bring two dentists, their spouses, two attorneys, two CPAs, and a banker to the same table and keep everyone happy!” Building your team is essential. The key is to choose advisors who are familiar with dental practice transitions. Nothing is worse than to pay for an attorney or a CPA to learn about the process. In this instance, experience definitely counts.

 

Further Down the Road: The Letter of Intent

Once you have selected the buyer or associate, a Letter of Intent is used to complete the major details of your practice sale or future buy-in. This is an important stop on our journey, and it is a key document for you. It outlines the price, financial terms, timing, non-compete covenants, potential future seller employment, and other aspects of the sale. It is also used for associate buy-ins, practice mergers and expense-sharing arrangements.

My Letter of Intent is about three pages long and is written in plain English. It is not a legally binding document (except for confidentiality protection), but it does demonstrate commitment by both buyer and seller. The buyer will now be able to complete the due diligence phase of the transition. This allows the buyer to review and validate substantial clinical and financial information about your practice. It is an excellent time to review with the buyer a random sample of your patient charts for demographic information and to compare clinical treatment philosophies.

Get a Letter of Intent form for the roadmap to success.Start Negotiations on Your Roadmap to Success

Now is also the time for the buyer to start lease negotiations with the landlord or yourself, if you own the office. Typically, a buyer will wait to purchase the office building if it is owned by the seller. Instead, most sellers offer the buyer a long-term lease (a critical factor for most dental lenders) with a Right of First Refusal or Option to Buy the building later. In my experience, the most common reason for not meeting a transition timeline is a problem with getting a long-term lease. So, the earlier the better in terms of landlord contact.

Legal and Financial Planning

At this stop on our journey, your lawyer will draft the legal sale agreements, using the letter of intent as the basis. Sellers and buyers will review the sale terms with their CPAs for financial and tax planning. Luckily, with current tax laws, the buyer can write off 100 percent of the sale price, and the seller should get long-term capital gains on about 80 to 85 percent of the sale price.

Almost all sales are 100 percent cash to the seller, so lending sources will now complete their approval of the transition.

 

Final Stretch: Transition Elements

We are almost through with our journey. At this stop, I review my Transition Checklist with buyers and sellers. The checklist consists of about 50 items pertaining to the practice administration. These items include buyer’s corporate status (if any), practice and personal insurances, payroll and tax ID numbers, licenses, insurance credentialing, computer software changeover, personnel manual, dental suppliers and labs, web page, social media, patient and referral letters, accounts receivable management and seller work in process after the sale. It helps ensure a smooth administrative handoff to the buyer. In addition, I provide sample Patient and Referral Source Letters of Introduction to assist the seller in writing his or her own letters. The letter is a key part of retaining patients after the sale, along with the staff’s enthusiasm for the transition.

Most of my transitions utilize an escrow service for the actual practice closing when money changes hands. The escrow service makes sure the legal documents are signed, any liens or outstanding loans have been paid, allocations completed and seller funds deposited.

If the seller is planning on working in the practice after the sale, then we complete my Employment Agreement Questionnaire, which an attorney can then formalize. It is very similar to my associate agreement questionnaire.

If the transition involves a partnership or solo/group practice entity, then I work with both seller and buyer to complete my Operating Agreement Questionnaire. Key elements are the partnership entity, management structure (who will be responsible for clinical, administrative, and marketing elements), work time and patient allocation, and finally, the two most important elements: How income will be shared and how the partnership will be dissolved in case of problems. It is much easier, and less traumatic, to address potential dissolution problems ahead of time. Again, an attorney can then put the operating agreement into legal language, if desired.

Complete the Roadmap to Success When Transitioning a Dental Practice

Congratulations – we have completed the journey. Now that you understand the process, the actual transition should be more manageable for you. I feel that 75 percent of my job, though, is dealing with buyer and seller emotions. The journey can be very stressful, so be ready for the hiccups and “out of left field” unknowns that can plague every transition.

 

The Next Exit, Life After Practice

Based on life expectancy, I have calculated that the average dentist retirement lasts about 6,470 days. This could be about 30,000 hours of golf. However, if we are looking for a more exciting last one-third of our life, then more planning is required. The best advice I have heard is that it is best to retire to something in the future, not from the past.

 

 

Gary Schaub, MBA of HELP Appraisals & Sales, Inc. is a proud member of ADS Transitions.

What is the Employee Retention Credit (ERC)?

The Employee Retention Credit (ERC), initially created by the CARES Act in March of 2020, is a refundable payroll tax credit for wages paid and health coverage provided by an eligible employer. This credit is available for qualified wages paid during the period March 13, 2020, through September 30, 2021. The ERC can be used by practice owners to offset federal payroll tax deposits or refunded by amending the applicable quarterly Form 941.

Employee Retention Credit in 2021 vs 2021

The credit available in 2020 vs. 2021 has significant differences related to eligibility requirements and credit maximums. From a high level, your practice likely qualifies for the ERC if:

1. Your practice operations were suspended due to a COVID-19 governmental order in 2020 or 2021.

OR

2. Your practice experienced a significant reduction in quarterly gross receipts. What is a significant reduction? Well, for 2020, significant is defined as a 50 percent decline in gross receipts compared to the same quarter in 2019. For 2021, significant is defined as a 20 percent decline in gross receipts compared to the same quarter in 2019. Note that 2019 is the reference period for both the 2020 and 2021 credit.

Dental Practices are Likely Qualified to Claim the ERC

Most dental practices, even if they didn’t experience the 50 percent decline in revenue in 2020, are still likely to qualify for some ERC during the period of suspension — as most were ordered to close by governmental order for several weeks in 2020. Employer holding Employee Retention Credit form.

As the credit is based on wages paid, we have found that many practices still had paid wages during the period of suspension, whether it was related to the timing of the payment of a normal, pre-shutdown payroll, or pay for staff kept on during the shutdown for emergencies.
 

Employers Who Paid Wages During the Pandemic are Eligible for a Tax Credit

For 2020, eligible employers may claim a 50 percent tax credit of up to $5,000 per employee for the year, based on maximum qualified wages of $10,000 per employee. Note that qualified wages also include the cost to continue providing health benefits to the employee.
For 2021, the credit has been changed to a 70 percent tax credit of up to $7,000 per employee per quarter, based on maximum qualified wages of $10,000 per employee per quarter.
 
 

Consult with a Licensed CPA if You’re Wanting to Claim the Employee Retention Credit

Although this credit may seem straightforward from a high level, it’s important to speak with an experienced CPA or trusted advisor if you think you are eligible. There are many nuances and detailed regulations related to this credit that must be analyzed before claiming. You must ensure that you are not counting wages for this credit that have already been reported for PPP loan forgiveness, which can require some detailed analysis. There are also some exclusions required for wages paid to majority owners and related parties that must be considered.

 

Written by:
Doug Sellan, PMA Practice Transitions

Lauren Holt, CPA, Rea & Associates

 

Doug Sellan and Lauren Holt, CPA are proud members of ADS Transitions.

Dentists are increasingly getting a late start on saving for retirement. This is often because they are paying down school debt, financing a practice purchase, and so many other life/business matters. However, there’s a way to catch up these dental retirement savings, and even help to supplement the proceeds from a future sale of a practice – the Cash Balance Plan (CBP).

Set up a Cash Balance Plan

Different from the well-known 401(k) plan, the CBP is a type of defined benefit retirement plan that allows for significant annual contributions over $100,000 annually for the owner.

As many already know, 401(k) plans are a powerful tool to shelter income, but they do have restrictions on the amount that can be sheltered in any given year. The maximum dollar amount any single participant can receive, in terms of an annual addition to the account, is $61,000 for 2022.

How a Cash Balance Plan Can Help Your Dental Retirement Savings

By utilizing a CBP, the contribution limits that constrain 401(k) contributions are avoided.  Typically, this strategy will be most successful when the owners are highly compensated and generally older (ideally over age 50) and their employees are generally younger and paid less. There is no specific dollar limit for contributions to CBPs.

A CBP provides an annual allocation and interest credit defined in the plan document. CBP accounts are hypothetical accounts and the plan investments are trustee directed in a single pool of plan assets. The actual annual contribution amount is calculated by an actuary and is a range, with a specific maximum and minimum amount allowed by the Internal Revenue Code.

Sample Cash Balance Plan Statement:

Participant A:

Beginning cash balance = $100,000

Interest credit (5.5%) = $5,500

Cash balance allocation = $100,000

Ending cash balance = $205,500

Participant B:

Beginning cash balance = $1,000

Interest credit (5.5%) = $55

Cash balance allocation = $1,000

Ending cash balance = $2,055

 

Maximize CBP Contributions for Your Dental Retirement Savings

Most commonly, Cash Balance Plans are paired with an existing 401(k) plan to maximize the efficiency of the combined plan allocations. A common plan design for eligible staff is at least 5 percent of compensation in a safe harbor 401(k) plan, and 2.5 percent of compensation in the CBP. Vesting schedules can be applied to the profit sharing and CBP contributions.

A cash balance plan must be in place for a minimum of three years. The plan is funded by deferring a portion of the owner’s compensation in the form of tax-deductible contributions to the plan. If you forego a $100,000 bonus and redirect it to a CBP, you receive current income tax savings of $40,000. Put another way, saving $100,000 in a CBP only costs you about $60,000 after taxes. When the plan assets are paid out in retirement (spread out over many years) you will likely be in a lower tax bracket – after you have received the payments from the sale of your practice.

Depending on your age and years of participation in the plan, you could accumulate approximately an additional $2.5 million in retirement wealth, based on current IRS regulations.

Dental professional planning for dental retirement savings.

There are many benefits from setting up a CBP within a dental practice:

  • This significant increase in retirement savings can take the pressure off receiving the perceived full FMV (Fair Market Value) for the sale of your practice. Oftentimes, a dentist feels pressured to work a full schedule through retirement to maximize the practice’s FMV. While working hard right up to the finish line does help to maximize the value of the practice, what if you just can’t?
  • What is often overlooked is the ability to be able to rely on the cash balance plan as an additional retirement income source, rather than just relying on the funds from the practice sale and defined contribution retirement accounts, such as a 401(k) plan. It’s the old adage of not putting all your eggs in one basket, diversification; always be ready for anything.
  • If you do make it to the finish line at full steam, you haven’t lost the value of the practice. In fact, you have gained more tax deferred money to grow in a retirement account.
  • It can also hedge against other unforeseen circumstances, like death or disability. If a dentist cannot work in a practice due to disability, the practice will take time to sell and the value decreases quickly, leaving less for your family and loved ones. The assets in a CBP can add to the security of existing disability and life insurance policies.
  • The use of a CBP can also be used in negotiating a sale to a current associate. By working through a production-based model for compensation, and having a younger associate opt out of the plan, the extra contributions made to the CBP plan can be used toward an ownership transition plan. The services of a qualified healthcare attorney and an experienced dental CPA are essential to doing this correctly, legally, and with no unintended tax consequences for either party. This specific strategy is too complex to cover fully in this article.

 

Cash balance retirement plans offer compelling advantages in the sale of a dental practice and significant income tax savings opportunities for transitioning dentists. They are not the only planning solution, but they certainly offer powerful tax savings potential.

 

Alan C. Hill, CPA and Lauren Holt, CPA are part of Rea & Associates, Inc. PMA Practice Transitions

DSOs are here to stay. They are spreading nationally, and many believe they will be the largest providers of dental services very soon. Why? The obvious reason is that dentistry can be very profitable and provide a steady return to investors.

Why did it take so long for investors to jump into the business of dentistry?

One of the main reasons is that, until recently, most dentists wanted to be their own boss and would not consider working in a corporate setting. Current dental graduates are saddled with up to $500K in debt and are concerned about taking on more debt to own a dental business. The new “millennial” mindset also strives for more “life balance.” Corporate dentistry claims to solve both of those issues and spends a great deal of money promoting that concept to dental students.

In the past, about 90 percent of dental school seniors would say they saw themselves in private practice within a few years of graduation. Now only about 20 percent of dental school seniors see themselves as practice owners. Corporate dentistry now has plenty of young dentists to fill their positions. DSOs are marketing themselves as the solution to everyday practice problems of both buyers and sellers, but are they providing the answers to either group? I say the answer is no.

Large practices that employ associate dentists, do so for the profit potential. Although this is a good business plan for the owner, most dentists don’t understand just how much profit they sacrifice when choosing to be paid a percentage of production and overlooking practice ownership.
Dental Professional
The following example is a true story: After selling to a large group, one dentist I know worked at the practice for the standard two years to collect the total purchase price. What happened is, this owner willfully turned himself into an associate without understanding the profit he left on the table.

His original practice collected about $1,000,000. His true profit, after adding back all the benefits he ran through the office, was 37.5 percent, or $375,000. (I am from California, and that number would be good. In the Southeastern part of this country, that number might be as high as 50 percent, which means a buyer there could look for a practice doing around $750K and achieve the same profit!) His hygiene department contributed the normal 25 percent of the collections to the practice. The large group that purchased his practice stipulated he had to stay on for two years and keep the collections at that same level during that time. They paid 24 percent of collections and agreed to go as high as 28 percent if he hit his goals.

For two years, he worked for 28 percent of collections (based on the same $750,000 level of production he had produced as an owner). Therefore, for the same amount of production, he earned a salary of $210,000 instead of the $375,000 he took home as an owner. It gets even worse! His salary of $210,000 was taxed. His previous profit of $375,000 had many legal tax advantages. His tax bill was actually higher as a $210,000 employee, compared to being an owner with a $375,000 profit! As an owner, he hadn’t realized that he was being paid 50 percent of his production ($375K/$750K).

Conclusion: You can take home about twice as much money for the same amount of production as an owner, compared to being an associate. To all the young dentists being told that corporate dentistry will help pay off your large debts, the reality is that the best way to retire ANY debt is to get paid almost twice as much for your work! I can also assure you that “taking away all the headaches of ownership” is only PARTIALLY true. My acquaintance in the example was still the day-to-day “Go-To” person, handling all the daily “headaches,” even though he wasn’t signing the checks anymore.

Owning your own practice has its benefits.

In the above example, the debt service to buy that practice would be about $26,000 on a 10-year note. So, that means choosing between making $210,000 fully taxed, or a profit of about $349,000 after debt service. The extra $140,000 a year (approximate) would go a long way in paying off debt. Earl Douglas, DDS, MBA, BVAL also addresses this from a different angle in his article, “Your Multi-Million Dollar Decision.” (https://www.adstransitions.com/article/multimillion-dollar-decision/)
We both believe, as past practicing dentists, any way you slice it, your option to own your own practice and be your own boss, results in fewer hours and more income. Income to live on and as an addition to your retirement savings. These are important benefits of ownership.

Misinformation about the dental industry.

So back to “The Million Dollar Question.” There is so much information and “misinformation” available to young dentists on the web and through podcasts that I believe the old phrase “analysis paralysis” is appropriate now more than ever. Young dentists are told they need a “team” of experts to decide on what practice they should purchase (assuming they have already figured out ownership will fulfill their financial and family goals).

When I graduated from dental school in 1983, the average school debt was less than 1/10th of what it is today, but the interest rates on a practice loan were around 15 percent, compared to less than 4 percent today, so the financial strain was not entirely different, compared to now. (Note: Contrary to what DSO’s are telling young dental graduates, 100 percent financing is available to almost every dentist that has been out of school for at least 18 months.) The average 1983 dental school graduate’s attitude was that we were going to make private practice work with a bold and strong attitude. We still did our “due diligence,” but I can assure you, we did not have “analysis paralysis.” The only question that needs to be answered in the due diligence process is “What will I produce/collect once I take over this patient base?”

The Goldilocks Phenomena: Your team is there to help you make a good decision, but you need to take ownership of that decision. Only you can answer the million-dollar question.

“The Goldilocks principle” is named by analogy to the children’s story, The Three Bears, in which a little girl named Goldilocks tastes three different bowls of porridge, and she finds that she prefers porridge which is neither too hot nor too cold, but has just the right temperature.[1] Since the children’s story is well known across cultures, the concept of “just the right amount“” is easily understood and is easily applied to a wide range of disciplines, including developmental psychology, biology,[2] economics and engineering.” (From Wikipedia)

The Dentistry Connection?

This is arguably the most important principle in a practice sale! The prices of dental practices will fall within a 10 percent range of the local multiple of their gross receipts. (The national average is 67 percent of collections.) The value of the practice is in the patient base, in this analogy, the porridge. And we all have a preferred “recipe” for treatment: I can put a patient in the middle of 10 dentists, including myself, and get 10 different treatment plans. This is a stunning phenomenon.

Some of the treatment plans will amount to a few hundred dollars, watching some areas, while others are a comprehensive treatment plan that might cost the patient $5000 or more. If an average practice does 1000 exams per year, just imagine the difference of production in the $5,000 circumstance. However, even if the average practice saw 25 new patients a month, or 300 new patients a year, and the differential between the doctor’s diagnosis was just $1,000, there would be a $300,000 differential in production just from the new patient diagnosis!

It should be self-evident that the due diligence in a dental practice needs to be done by the purchasing dentist themselves. Your accountant, attorney, dental consultant or even another dentist cannot determine if the treatment plans in any practice are “too hot,” “too cold,” or “just right” for you. An accountant should be able to tell you if the practice cash flows enough to meet your needs, but they are assuming that the buying dentist will produce exactly what is shown on the historical tax returns.

It’s all what you make of it.

Two people having a discussion in an office setting..The factor to consider is all dentists have different skill sets. Based on your skill sets, compared to the seller’s, you might double the production with the same patients in the practice, or you might only diagnose half of the treatment that the selling dentist did. Guess what? They will both be priced at market metrics for gross receipts and cash flow for the current doctor’s skill sets.

Don’t get caught up in the “price” of the practice. The price of the practice is secondary when $100,000 on the price tag of the practice translates into about a $1,000 difference in your monthly loan payment (basically one crown a month). Only you can tell if the “porridge” is just right, or if you can heat it up a bit! If it is already way too hot and there is no way you can replicate what the seller does, simply find a practice that matches your skill sets. What you can do with a patient base trumps any Delta Dental fee schedule issue.

The Importance of Knowing Yourself.

Each dentist will be content with a different level of production. This is a relative term and, regardless of the cash coming through the door, everyone has different goals and a different skill set. My advice is to purchase the largest practice you are capable of handling to pay off your school loans as quickly as possible once you hone your skills.

Scratch Starts vs. Practice Purchase.

Building out and equipping a new, two-operatory practice now costs around $500K. There are no patients to start with, only bills! For $500K, you can buy a practice that already throws off several hundred thousand or more as a profit, not just gross receipts! It always makes more sense to buy a practice producing income, even a smaller practice that an “old boomer” is ready to let go of, knowing you will have to upgrade much of the office. Most older docs, ready to retire, have lower-producing offices that are underperforming to a great extent, based on their current patient base. These are usually diamonds in the rough, but again, only your own personal due diligence can determine this.

One of the Biggest Decisions You Will Ever Make.

Buyers have more choices now with the lowest interest rates in the history of the modern economy. Take charge of your decision-making process. Choose wisely, employ good staff and you will pay off your debts, live more comfortably and be able to afford more time away from work, as your staff should be able to help relieve you of the burden of ownership headaches.

Analyze all input from your advisors with the “Million Dollar Question” in mind. If the input does not help with that question, eliminate that “noise” so that you can make your decision with the information that matters.

Timothy G. Giroux, DDS is part of Western Practice Sales and is a member of ADS Transitions

Did you know 63 percent of social media users under the age of 35 feel online ratings are more important than any other endorsement? Even when it comes to word-of-mouth or personal referrals, your online presence can have a strong impact on gaining new patients. Getting the word out about the benefits of choosing your dental practice can help boost business and strengthen your brand.

Find a staff member to help with your company’s social media presence

If you haven’t considered assigning a member of your staff to represent your dental practice on various social media channels, it’s vital you do so. There are important advantages to having a person assigned to oversee social media on your team. Some of these include:

  • Casting a wider net with social media to reach potential patients
  • Creating quality posts with educational content for your patients
  • Share patient testimonials
  • Share valuable information about members of your teams

News travels faster than ever. Assigning social media to someone on your team can help grow your dental practice and keep your finger on the pulse of the wants and needs of customers and prospects shopping for a new experience.Social media activity bubbles.

By choosing a staff member to fill this role, you can take full advantage of the opportunities presented by the evolving trends on social media. It’s an exciting place of new possibilities, so don’t overlook the potential.

Timothy G. Giroux is part of Western Practice Sales and is a member of ADS Transitions

Dental transitions are very much like the PRACTICE of dentistry in that we all know that years of “practice” is usually the key to excellent dentistry. While we were all confident that we received great training in dental school, most of us realized that only years of practicing in one location was truly the yardstick on how ‘great’ we really were.

We learned to make better decisions on what truly would work in the long run, and in the short run for that matter. Dentists are smart people and have earned that “Doctor” in front of their name. However, it does not mean that we would be the best option to set a broken arm or take on that massive remodel at your summer cabin. We would hire a specialist who is trained in their field, knows what to expect and can anticipate and avert any crisis before it occurs.

Expertise is About Making it Look Easy.

Our most satisfied patients are the patients that felt the procedure was quick, painless and almost effortless. This is usually the result of years of honing our dental skills. In fact, when that does happen and the patient questions why the bill is so high, I assume that we all explain that it is our experience that allowed us to complete the procedure in that fashion. We’d never explain all the things that could have gone wrong, or close calls that we were able to avoid.

Practice transitions are the same. While I wish that they were all short and painless, the litigious nature of our society and the financial stresses on the young graduate are making transitions more difficult than ever.

It is important to have an experienced broker on your team who has been in the trenches for years and has had experience in all types of dental transitions. So, hire a reputable dental broker to guide you expertly around the twists and turns that you’ve not anticipated. And, if you choose to hire an attorney, choose one that specializes in dental transitions. And remember – You don’t know what you don’t know!

Please contact ADS Dental Transitions to discuss some of our tremendous opportunities.

Recently, a retiring doctor perused the website of a large and trusted dental insurance company and found information relating to practice sales. Part of that information included letters for sellers to give to their staff to make sure the selling doctor would be in compliance with state labor law upon the close of sale. The seller gave this letter to his staff and the following week, when the buyer arrived for his first day after the purchase of the practice, half the staff did not show up for work!

The buyer was rightfully shocked as a full day of dentistry was scheduled. The letter was incredibly blunt about the reality that the previous business no longer existed, therefore technically they were all fired. The selling doctor swore that he told the staff verbally that they all had jobs with the new buyer, but obviously the letter made it seem as if all their previous years of employment did not matter.

Preserving Goodwill is Critical.

Goodwill is 75 to 80 percent of the value of any existing practice. Once the selling doctor is out of the office, the staff represents much of that goodwill.

While the selling doctor in our above situation might have kept himself from being sued for some sort of labor law infraction, he set himself up to be sued by the buyer for harming the goodwill of the practice with that letter to the staff.

The trusted website also stated, “the buyer is not bound to keep the staff or status quo.” It encouraged the buyer to look at all the current policies and then announce all changes to the staff, stating that all employees should then sign, initial and date these changes in the employee handbook. Doesn’t that sound like a great way to get new staff to love you?

Bad Advice Yields Bad Results. Question Everything.

Of course, the poorly written information from this company carried a disclaimer, but that won’t help the dentists who have followed that bad advice. This is not the best way to sell a dental practice. I strongly recommend to our buyers that they keep the staff salaries and benefits the same for at least 3 to 6 months before making any changes.

After perusing this document and the related website myself, I did find some good pearls of information, but there were several other areas of misinformation that most dental attorneys in the field of transitions would also disagree with.

Don’t believe everything you read on the internet! Ask questions of experienced dental attorneys, dental accountants, dental brokers and dental consultants. If some opinion seems confusing or contrary to what you would think makes more sense, ask them to explain.

Normally there will be a good explanation as to why most of us in this industry give similar advice.

Please contact ADS Dental Transitions to discuss some of our tremendous opportunities.

In the 20 years I have been involved in dental practice transitions, never has there been such a discrepancy in the interest of practices in the big cities as compared to the rural areas.

Practices in small cities like Chico garner almost no attention, even after most of the town of Paradise had to move there after the fire!

In the early 1980’s I remember hearing Jim Pride DDS, founder of Pride Institute, tell us young graduates to leave the city, make more money than our city counterparts and come into the city to take our counterparts out for dinner on the weekends while enjoying whatever entertainment the city provided! Even 35 years ago, many rural areas provided the opportunity to make more money doing the same amount of work. With the current rising prices of everything in the cities, that is even truer today, but the city trend is even stronger.

Why be a country dentist over a city dentist?

I believe the reasons behind the increased trend are the millennial mindset and the staggering student loan debt crisis. I believe millennials are more inclined to stay in the cities and work as associates. Some of that reasoning may come from the fact that their student debt is so much higher than previous dental graduates. However, I do not think they realize that Jim Pride would be even more correct today than he was 35 years ago.

Let’s look at some of the reasons to consider a smaller city.

  • Less competition is one of the most obvious reasons. Many of our “rural” practices have higher collections and higher fees than our city practices because they do not have the competition.
  • Higher take home pay is often the case as rent and staffing is usually cheaper in the “rural” practices.
  • Stronger and more loyal patients is often the case for “rural” practices, especially if you plug into some of the local community and school activities.

 

Buying a dental practice in “rural” areas.

If the normal metric for a practice sale is around 75 percent of collections in the city, the metric for the rural area might be closer to 55 percent. Also, the million-dollar collections practice in the city probably nets around $300K, whereas the rural practice probably nets around $400K. Therefore, you might be able to purchase a practice in a rural area for $200K less, but also take home $100K more per year.

This does not even take into consideration that the cost of living in a large city can sometimes be a factor of double the cost of living in a rural area!

What about cost of living? Oh, it’s a thing, alright.

Utilities, groceries and transportation are generally higher in the city, but the biggest reason is obviously the cost of housing can be up to 4 times higher in the city!

While the rising cost of dental school is frightening, the extra costs to live and work in the city compared to rural areas dwarfs that staggering student loan amount!

Please contact ADS Dental Transitions to discuss some of our tremendous “rural” opportunities!

DSOs are expected to represent nearly 30 percent of all dental practices by the end of 2021The single-most important factor in determining the practice sales price is the collection total of the previous calendar year. Lenders and buyers like to see stability without large variances from year to year. It should be obvious that steady, slight increases in revenues are always better than even the slightest of decreases. Poor performance of one of three years should not affect pricing, unless it is the last calendar year that shows a significant drop. Therefore, try to maintain a stable practice, make sure you finish strong and make all your December deposits for that last year you will be filing! Practices are priced based heavily on gross receipts. All these items can make for a strong valuation.

Understand timing when it comes to investing in your practice.

Let’s work through some scenarios and options. If you plan to practice 2-3 more years before you sell your practice, it is not worth investing extra money in the practice. In this case, I would just advise finishing strong, especially to reflect your last tax return which will be filed.

If you plan to practice approximately 5 years, spending large amounts of money for new technology may not necessarily return the investment unless it helps to increase your production. However, this being said, purchasing new equipment may increase your enjoyment of practicing dentistry and therefore be a worthwhile investment. Two businessmen shaking hands after a dental practice valuation

With 8–10 years remaining to practice, modernizing the practice with the latest and greatest is generally a great idea. Leasehold improvements typically last 5-8 years, so making the investment at this time to spruce up the office with tangible assets will enhance the desirability of the sale. It may also give you greater satisfaction of working in a first-rate environment for the entire duration of the leasehold improvements. Most importantly, since many valuation methods are based on gross receipts, keep up the good work!

Please contact ADS Dental Transitions to discuss some of our tremendous opportunities.

Mergers are unquestionably the best return on investment you can make. The success of EVERY transition or merger assumes the vast majority of patients will stay with the practice and transfer to the new dentist. This is generally true when the transition is handled properly and both parties understand that the “goodwill” portion of the transaction is the most important aspect. The hard assets, such as equipment, supplies and leasehold improvements have a limited life and will always need to be replaced. However, the patient base is what generates the CONTINUOUS revenue stream.

“I’ve heard of chart sales, what are those?”

Chart sales refer to a simple purchase of the physical charts, but not necessarily receiving any additional help in the transfer of the goodwill. A chart sale might not even include the transfer of the phone number from the previous dentist. In addition, true “chart sales” are done at extreme discounts compared to what the price might be in a traditional practice sale.

Mergers, on the other hand, assume that the transfer of the goodwill and patient base will be as successful as in a normal practice transition. With a successful merger, the return on investment is normally double the return on investment from a traditional practice transition because the overlapping expenses such as rent, phone, electricity and roughly half of the staff salaries will be eliminated. Therefore, if a normal dental practice profit is approximately 35 percent of collections, the profit from a merger can be as much as 70 percent of the collections.

Think about it: If you can add 1,000 patients to your existing practice, the only overhead will come in supplies, lab costs and some staff. This revenue is ongoing year after year and that is the reason a merger is like having your own ATM cash machine!

Two businessmen shaking handsHow Much Should You Pay for a Merger?

If the return on investment for a merger is twice that of a typical practice transition, shouldn’t the price for a merger be twice as much? That would make sense from a business perspective, but the reality is that most buyers feel that they should get a large discount on a merger verses an outright practice purchase. The argument is they don’t need the equipment or the space. My advice to young buyers or doctors that want to expand their practices is to unquestionably pay the market price or more if you have an opportunity for a merger. This is about return on investment, not equipment. Even if you took every piece of equipment to the junk yard, it would still be worth paying over the market price for a merger opportunity. Again, there needs to be cooperation to ensure that the vast majority of patients make the transfer to your location, and when they do, it will be the best return on investment you can make!

Please contact ADS Dental Transitions to discuss some of our tremendous opportunities.

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