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.
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.
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.