Earl Douglas DDS, What Now?This article by ADS member Earl Douglas will be featured in the October issue of Dental Entrepreneur.

Boy, talk about being dealt a bad hand, and that’s definitely an understatement. Who could imagine that just as I’m finishing an eight year journey to becoming a licensed dentist that the country would experience the most dire pandemic it has seen in over a hundred years and a recession as severe as this country has ever seen. We now find ourselves battered by this perfect storm of adversity.

As we seek guidance from our best experts, we discover that they are no more clairvoyant than anyone else. Our search for medical, political and economic insights results in more confusion than clarity. Then there are the friendly and helpful advisors that have great confidence in their predictions and how they can help you avoid failure and help you to achieve success. Be careful with this group as they are probably trying to engage you for their profit at your cost. However convincing they may be, they are no more accurate in their predictions than the next person.

I realize that up to this point, I have not said anything that would give you any optimism. But, we need this reality check to build some hypotheses to help create the best road map for survival and ultimate success. I do not have a crystal ball though, and anything I say, other than relaying actual observation of things that I have actually seen, may be absolutely wrong.

What am I seeing? First, I’m seeing a little uptick in the number of practices going on the market. I’ve been told by many buyers that the market will soon be flooded with many practices that sellers will practically give away. I understand the wishful thinking behind this prophesy but have yet to see any evidence of that happening. Sellers still want to get as much for their practices as they can.

Many dentists have had substantial losses in their retirement funds due to the recession. I don’t expect them to sell their practices, but rather expect that they will keep on practicing in order to earn and save money and restore their savings. That is what I saw happen in the 2008 recession. The takeaway is don’t expect to see huge numbers of practices for sale at bargain basement prices.

Young dentist smilingAnother observation that I am seeing is an increasing number of associate dentists deciding to buy and own their own practices. They have discovered in the past months that their positions are quite vulnerable. One dentist I spoke with told me of the layoff of dentists in the clinic where she works. Associate dentists are concerned that they will lose their jobs and they are beginning to realize that the solution to that danger is to own their own practice. That way they will be the last man or woman standing, and not the first to fall. They realize that owning a practice that even drops in productivity and profitability is still a better alternative than being fired from a job and having no income at all.

A third observation is how practice acquisition lenders are dealing with this dilemma. The dental-specific lenders I work with have all drawn back somewhat since they are unsure of the immediate future of dental practice economics. While you might think it’s risky on your part to buy a practice now, consider that it is the lenders who are actually putting up 110% of the money for a purchase and you will realize where the risk really lies.

Different dental lenders have a widely varying approach to current approval and funding. Each lender is grappling with deciding what additional information they need and what to do with that information in order to come up with good credit decisions. Currently they want to see how the first quarter of 2020 compares to the first quarter of 2019. They realize that many states had virtually closed practice operations during March and April and now they are looking at production and collection reports for May and June of 2020 to see how practices are recovering from the shut down. Obviously, this puts a lot of strain on sellers and their accountants to prepare more statements and reports and this will consequently slow down the borrowing process. At the present time several lenders are suspending their lending operations while others are still approving and funding loans for purchasers.

Dentist looking at a chart in a dental officeMost lenders are now offering interest-only payments for the first six months of the payback, making buyers’ initial practice cash flow much better. When the pandemic started turning the profession upside down, lenders were quick to abate payments in order to lower cash flow pressure for new buyers. This was not only generous on their part, but also a measure of self preservation. Dental acquisition loans are based on the buyer’s cash flow ability to pay their overhead, pay their loan payments (debt service) and pay themselves a good living wage and the lenders did not want to be the reason for a buyer’s, and subsequently their own, failure.

Dental practice loans are not collateralized anywhere near the value of the loan since the greatest part of the practice price is for goodwill which is intangible. It is impossible for lenders to collateralize the goodwill of the practice, HIPAA regulations being what they are. The bottom line is that lenders are depending on the success of the borrower to be repaid and they will go to any length to prevent a foreclosure which would preclude that repayment. Lenders have done whatever it takes to help buyers survive and be successful rather than take a loss on a loan. The takeaway here is don’t be afraid of your lender because your lender is dependent on your success for their survival and will do whatever they can to help get you through this and any other crisis.

Now you might ask me, “What would you do if you were in my shoes?”. Well, here’s the process that I would follow, as much as reality allows.

1. I would immediately start lining up a job, even if I hadn’t taken my boards yet. I would avoid signing an employment contract that cannot be terminated with thirty or sixty days notice if possible, and particularly avoid signing a covenant not to compete, particularly if the job were in an area where I would like to practice in the future. You would be wise to seek the aid of a qualified consultant in reviewing such contracts.

2. I would immediately start a search for a practice to purchase, even if I hadn’t yet taken my boards.

3. I would get to know the practice brokers who handled sales in my preferred area and literally beg them to notify me first of any and all opportunities.

4. I would pull my credit report and if there were any issues pulling my score down, I would get help in getting my score as high as possible.

5. I would pray for a miracle that a practice would come available when and where I wanted it.

6. If that ideal practice were to come available I would instantly do whatever it took to tie it down. Finding what you want, where you want it and when you want it is exceedingly difficult and it’s doubtful that you’ll see many such opportunities. Brokers remember prospects who don’t follow through when offered the perfect practice and those buyers may slip in priority when new listings appear.

This is the same advice I gave myself and followed when I got out of the US Army Dental Corps, so I consider this advice to be as sincere and valuable as any you will ever receive. I have shared some trade secrets in this article and in these times you will need all of the critical facts that you can get. Now I just wish you good luck, health, and success.

I would like to share some stories with you concerning a few of the transition disasters I have witnessed. Whether you are a potential seller or buyer, learning from them might help you avoid the same mistakes that some of your colleagues have made.

We will start with my first dental practice sale. Almost 30 years ago, I sold my first general dental practice. What I learned from another seller’s mistake is still relevant today.

Case #1

Dental hygienist walking out a doorI had a practice whose long-time receptionist had to move out of state before my closing on the practice was completed. Down the hall, in the same building, a dentist had just purchased a practice and had fired all of the long-term staff he inherited. Why? Because he wanted younger employees. The “fired” receptionist moved to my client’s practice, and dozens of patients followed her. My buyer’s practice grew so fast that he later started a satellite office.

About two years later the buyer down the hall who had fired his staff asked me to try to sell his practice. He was leaving private practice and going to become an employee in a large corporate practice. Why? As he told me, the biggest mistake of his career was to fire his staff when he originally bought the practice. So many patients left with the receptionist (and the hygienist) that he never recovered financially.

Lesson Learned

I tell my buyers to never make any changes in the practice for at least 90 days unless critically needed. The only change for staff and patients should be the new dentist. This strategy pays off — in over 475 transitions, I’ve only had one instance that didn’t pay off and my maximum patient loss after a sale is less than 2%.

The transition process can be smooth and uneventful. As I tell my new seller clients, “Hopefully you will only meet with me four times. The first meeting will be the practice appraisal; the second meeting will be my introducing you to the perfect buyer; the third meeting will be to review my Transition Checklist with you and the buyer and the fourth meeting will be a dinner with you and your partner/spouse celebrating your successful practice sale.” But what can go wrong with the transition process?

Case #2

Everything was going very smoothly with this transition. Due to health reasons, my seller was anxious to move ahead. I had found an excellent buyer who shared my seller’s practice philosophy, and our first meeting went very well. Then some unexpected events entered the picture.

Since my original appraisal, the seller’s production had decreased a little. The practice had a higher than average overhead that impacted net income. The buyer’s CPA wanted to reduce the price by a nominal amount, which was appropriate. My seller agreed, and I reviewed that with the CPA. However, the next morning my seller wanted to back out of the price change, but after I reviewed all of the facts with him, he again agreed to the revised price. The buyer also wanted to buy the building. The seller agreed to an option to purchase after two years. I reviewed that with the CPA, and then the next morning the seller instead wanted to give an option of only after five years. In addition, the same thing happened with the amount of previously agreed on building rent.

Finally, I sat down with the seller and explained that all of the “morning-after” changes in our agreed-on negotiations were negatively impacting the sale. It turns out that the seller’s spouse was adamantly opposed to almost all of the seller’s decisions, which explained the morning after problems. The seller finally realized how his actions were hurting the process and the practice transition proceeded uneventfully.

Lesson Learned

When agreed-to factors keep getting changed; find out the hidden reason for the apparent lack of commitment. This can save a lot of time and frustration.

Two men having a meeting at a table

Case #3

In another example, a practice transition was going very smoothly, and the practice closing was scheduled to happen while I was on vacation. I got an early morning phone call from the seller’s attorney that the sale was off, and the two attorneys weren’t talking with each other anymore. Apparently, the buyer would not agree with the triple net lease for the seller’s building. It was non-negotiable, per the buyer’s attorney. I knew the buyer very well, due to working with him in the past. He had agreed to the lease, and he had an option to purchase the building in five years.

I called the buyer and figured out that he did not understand exactly what a “Triple Net Lease” meant. After I explained to him that since the practice expenses already included the property taxes, insurance, and utilities, he would not be paying more in expenses than he had already agreed to pay. Problem solved – he was ready to sign the Sale Agreements and the closing could continue. However, the attorneys still were not talking to each other, so I had to call the buyer back and tell him to instruct his attorney to contact the seller’s attorney and tell him the Sale Agreements were acceptable.

Lesson Learned

Legal and financial advisers are usually critical to the success of a transition. However, sometimes they lose sight of the goal of a “win-win” result for everyone. It may necessary for both buyers and sellers to think for themselves and not be held captive to their advisers.

Case #4

My seller had purchased his practice about two years earlier from a retiring dentist that owned the office building. However, changes in family plans were going to result in an unexpected move out of state for my seller. My client had grown the practice and improved the clinical and physical attractiveness of the practice. It did not take long to find a qualified buyer and a closing was scheduled.

Usually, it is easy to get a new lease for a buyer when the landlord wants a good long-term tenant. That is why most leases have an assignment clause that the landlord will not unreasonably withhold its consent to assignment to a new qualified tenant. Wrong! My seller’s lease stated that the landlord could “Unreasonably Withhold Consent” to an assignment. After over two months of back and forth negotiations between attorneys, a new lease was finally obtained for the buyer. Apparently, the landlord was upset that my client was leaving his patients after only two years, and he was unwilling to grant a new lease to punish my client.

Lesson Learned

It is important to read all documents before you sign them. For some reason, my client’s attorney that handled the lease when my client bought the practice must have missed this important wording change. It cost my client two months of unexpected moving problems, since he had sold his house, arranged new living quarters at the new location, but then had to find temporary family housing in the meantime before moving.

Case #5

My oral surgery client was ready to retire. I did an appraisal, recruited an out-of-state buyer, and negotiated a Letter of Intent to purchase the practice. Only one thing needed to be done before closing the sale. My seller client met with his CPA to finalize his retirement financial picture. The adviser told my client he did not have enough money to retire and should work for another year or two to build up his retirement account. Luckily the buyer had not quit his job and relocated yet.

Lesson Learned

My recommendation to my clients is to start their retirement transition planning about two years before they are ready to retire. This includes having an appraisal done so that the future practice value can be included in retirement funding. A comprehensive appraisal can also point out aspects of the practice that can be changed to enhance salability and potentially the future sale price.

Case #6

I helped with the sale of an excellent practice in a city with a high livability index. Unfortunately, we had well-qualified buyers who individually dropped out at the last moment before closing. My seller client had found the first excellent buyer. However, during negotiations for a Letter of Intent, the buyer insisted that my seller purchase a $100,000 Cone Beam x-ray as part of the sale – without changing the sale price – so that didn’t happen. I then recruited a buyer who dropped out two weeks before closing due to a sudden disability; another well-qualified out-of-state buyer couldn’t get out of his partnership at the last minute because of his partner’s financial difficulties. Fortunately, the next recruited buyer allowed the transition to move ahead quickly.

Lesson Learned

This is what my seller client said: “A great part of our success was due to Gary’s patience and due diligence through the multiple progressions and setbacks we experienced during the sale process. In the end, it turned out to be the most perfect fit!” Actually, my client’s timing flexibility was more critical to success. So, hope for a quick transition but be prepared for the long term.

Case #7

An attorney that handles many of my transitions told me this story: The buyer was working on the East Coast and was buying a practice in the Northwest. He quit his associateship, sold his house, and moved his furniture to a temporary location. Then the seller said he was not ready to retire, backed out of the deal, and the buyer had to live with in-laws in the Southwest until a new practice could be found.

Lesson Learned

Never make any final commitments until the legal Sale Agreements have been signed. If a buyer (or seller) backs out at the last moment, you have legal means of enforcing the transition. I tell my seller clients to not make any changes in patient scheduling or send out patient/referral source letters until the Sale Agreements are signed.

Case #8

Empty dental office with dentist chairI had a seller who was ready to retire. He had an excellent practice, with a great location and a high net income. The well-qualified buyer I recruited was anxious to take over the practice. However, my seller always seemed to have a “last-minute problem” with the timing of the sale. The projected closing date was postponed three times and after six months my buyer gave up and looked elsewhere. Finally, I was able to schedule a firm transition date with a new buyer. As part of a transition, I help my sellers with their transition announcement letter to patients and referral sources. As we were looking through some of my patient letter examples, my seller adamantly stated “I will never use the word retirement in my letter and with my patients.”

Lesson Learned

Obviously, my client was struggling with the concept of retirement. An attorney I work with told me that he didn’t know anyone who “held the hands of his clients” as much as I do. I feel that over 75% of my job is dealing with the emotions of my sellers and buyers. The other 25% is handling the nuts and bolts of practice transitions. Dealing with “Life after Practice” can be difficult. In addition to financial considerations, there can be a great deal of emotional and psychological barriers to take into account.

Today, even after more than 2,100 appraisals and 475 transitions, I still learn something new. Most importantly, the role of a dedicated and experienced transition consultant cannot be overlooked when it comes to helping ensure a successful transition.

Dentist working on a laptopAs an entrepreneur, a successful dentist, a respected part of the community and a business owner, you will at some point have to make the decision to exit. Do you have an associate willing, able and financially capable to buy a portion or all of your practice? Some, unfortunately, make a terrible, and most likely very costly, mistake of trying to do it alone. They may ask their accountant or attorney to help or share with their colleagues their desire to sell.

The truth is, the initial planning to sell should have started before the decision was made to sell. In the back of your mind, you probably said, “I can see myself doing this forever. Someday I will scale back my hours, take a day or two off during the week, travel the world and practice as much and whenever I want.” This is a common plan for a lot of professionals. In more recent decades, the decision to sell has come sooner than later while the demand and value is at or near its best mark.

Business-person with laptop and papers

Reasons for selling

But why sell? Is it due to age, your number of years in practice, health, wealth, death, disability, attitude or burn out? Could it be the results of business issues, the economy, life or personal situation or a social development like the pandemic? neighborhood, competition, There are all kinds of reasons for wanting to sell a practice. But it’s important to remember that if there is an urgent or pressing issue to sell, the value might be impacted.

The value of the business is based on a number of variables, but consistent revenue, stable cash flow, condition of the facility and location are the main drivers. A general dental practice in a metropolitan or suburban community will most likely sell quicker and for more profit than a practice located in a rural location. The same is to be said for a specialty practice and its location.

Two people shaking handsWhen it comes to selling a practice, a scheduled exit is ultimately the most ideal way to do it. Giving yourself three to five years to plan is a good start for preparing your business. First, meet with a dental industry expert to determine the current value of your practice and reconnect each year thereafter to update the value. The next step is to do some housekeeping, maintenance, repairs and reasonable updating. Flooring, paint, ceiling tiles and lighting are relatively inexpensive. Declutter and enhance the appearance of your office. Clean up and maintain the outside as well. It isn’t wise to overly invest a significant amount of capital into new equipment and technology if you are planning to exit in less than 24 months. Clean up the financials, accounts receivables, insurance plans and fee schedules. Clean up your overhead. This includes staff, supplies, lab, subscriptions, meetings, meals, travel and office lease if possible. Consider having your consultant speak with you and your financial and tax advisors to prepare for the cash injection that you will be receiving when the practice is sold.

Three to Five Years

Giving yourself this three to five-year window gives you the ability to enjoy what you have created, and potentially increase the value of your practice. By exiting on your terms, you’ll be able to better adjust to the industry and the economy. The demand and market conditions will change over time from a seller’s market to a buyer’s market and vice versa. The insurance companies will continue to adjust as they have for years. The lending institutions will adjust to industry trends impacting or improving a buyer’s ability to secure financing.

18 to 24 months out

At 18 to 24 months, it’s time to put the wheels in motion. Is the business ready to be sold? Did you complete and maintain the housekeeping? Are you ready? If the answer is “yes,” contact your consultant to take the practice to market.

Infographic - When to start planning to see your practiceWhile your practice in being confidentially marketed by a qualified and reputable transition specialist, it is critical to maintain business as usual. It’s important that you do not disclose or discuss your plans to sell. A professionally prepared offer should be packaged and presented to the buyer and their advisors after a non-disclosure document is signed. After they have reviewed the materials, they may seek to see the office. This should be done after hours and your consultant should be present. Don’t be discouraged if the first person to see your practice doesn’t make an offer. These things take time.

Once your plan is put into motion, relax and trust the process. With an experienced team by your side, you can take comfort in knowing that regardless of what lies ahead, you are better prepared for what life has in store for you.

Empty dentist chairWhether you’re looking to transition and sell your practice or you are interested in buying a practice, the pandemic has put the brakes on a lot of dental professionals’ efforts. The current concern and hesitancy is understandable, but is it justified?

Our latest white paper analyzes the current situation by looking at the marketplace pre COVID-19 and the factors that impact the value of a practice today. From post pandemic considerations for valuing a practice to preparations to keep in mind when getting ready for a transition in today’s environment, we’ve put together some solid observations and advice to help you in this uncertain time.

Download our white paper today and learn how to more effectively deal with the impact from the current COVID-19 crisis, protecting practice value and moving forward in a way that best serves your interests and those of your patients.

Download Now!

Close up of two people working on documentsBuying or selling a dental practice is a significant undertaking. It can be overwhelming for most doctors because they only buy or sell a practice once in their career. As a seller, your experience from when you purchased your practice will be significantly different from what a buyer experiences today, whether you purchased your practice five, 10, or 30 years ago. Conversely, buyers today face a myriad of challenges in the post-COVID 19 market. This article will look at what an ADS Transitions consultant brings to the table during a dental transition from the perspective of a seller looking to retire and a buyer purchasing their first practice.

When the time comes to sell your practice, you will want to ensure that you have a team in place to support you through every step of the process. Ideally, you will have consulted a financial planner a few years prior to ensure that you are financially prepared to retire, and you have prepared mentally to step away from owning a practice. You should also have a plan to remain productive and busy in retirement. Once you have reached this point, you should be looking to expand your team. This is where an ADS Transitions consultant can assist you.

Polygon with lines pointing out to different kinds of informationThe ADS consultant can be considered the quarterback of your team throughout the sale of your practice. When you begin the process, the consultant will review all the steps involved. Your team should include an accountant and lawyer who ideally will have prior experience in the dental industry. Your ADS consultant can provide recommendations as well, and will also let you know at what stages to get other team members involved.

As you work through the process, the ADS consultant will initially collect a significant amount of information about your practice and ask many clarifying questions. He or she will recast your financials to determine your practice profitability, and then work with you to determine an appropriate selling price, factoring in several variables relevant to your local market. The next step is to market the practice on the ADS Transitions website, as well as the consultant’s local channels and network. As prospective buyers express interest, the consultant will arrange appointments for the buyer to meet with you and tour your practice, with the goal of eventually negotiating an offer. Once an offer has been agreed upon by the seller and buyer, the consultant will work with the seller’s counsel to review the Agreement of Sale and help keep the process moving efficiently toward a closing.

Other Ways a Consultant Helps You

An ADS Transitions consultant can help a buyer in various ways. If a prospective buyer is interested in an ADS listing, the listing consultant can provide additional information, arrange an office visit, and answer additional questions the buyer might have. Alternatively, if the buyer is interested in a practice listed by a non-ADS consultant, they can act in the role of a consultant for the buyer, reviewing information about the practice and offering guidance. Also, ADS consultants can provide financing options and contacts to lenders that specialize in dental industry financing.

Document with Contract written on itOnce an offer is made and accepted, contracts are drawn up for the practice and real estate (if involved), and as closing approaches. There are many final steps that the consultant can assist with. Patients will need to be informed after the closing takes place, and letter templates can be provided that can be customized specifically for the buyer and seller. Effectively communicating with staff is another critical area that the consultant can assist with later in the process. And, from the buyer’s side, the consultant can provide resources to help with credentialing, which can be a very time-consuming process.

There are many valuable services that an ADS Transitions consultant can bring to a transaction for both a seller and a buyer. To find out more, visit our dental broker directory to locate your local consultant and schedule an appointment to discuss your situation further.

Kevin Cooper, MBA, is a practice broker at American Practice Consultants and a member of ADS Transitions.

Information on Facebook Live event on June 25th, 2020

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Dentist wearing a medical mask and glovesI’m sure we have all read a great deal of expert speculation about the future outcomes of the COVID-19 pandemic. While a variety of informed opinions have been presented, I think it’s unlikely that anyone knows what will happen as this year unfolds, so I’ll spare you any further conjecture.

I will, however, share the hard facts of what is going to evolve from this crisis and explain the opportunities and the failures that will occur. This is not conjecture, but rather the inevitable consequences that are coming our way, and each of us will be able to identify ourselves in an outcome category. I will also provide a successful strategy to implement for each category, to help emerge from this crisis in the best possible condition.

Here is what is going to happen. There will be three major financial outcomes from the pandemic and every dentist will fall into one of them. A great way to illustrate the three outcomes is to think back to the M*A*S*H TV show. When multiple patients arrived at the M*A*S*H hospital, the first thing they did was to triage the casualties. In dentistry, the three triage groups that will be emerging from this crisis are as follows:

A. Practices that are likely to survive, regardless of what support they receive

B. Practices that are unlikely to survive, regardless of what support they receive

C. Practices in need of immediate help that may make a positive difference in outcome

Infographic on the 3 types of post COVID-19 dental practicesGroup A practices will survive the pandemic with little or no damage, and they will continue to operate pretty much as they had before the pandemic. No special help is indicated for this group, as it will only need some normal management skills to continue to prosper. If your post-pandemic practice revenues are within 10% of pre-pandemic levels, you would be in Group A. Just work smart and stay on top of the business element and you will be in good shape.

Group B practices are seriously wounded and are not expected to recover, meaning they will not be able to return to a pre-pandemic cash flow. Their practice cash flow will be insufficient to provide any net income and may not be sufficient to even cover overhead expenses. In a medical situation, these patients would receive morphine to relieve their pain, but medical treatment would not be given to them because it would not help. Giving treatment to Group B victims would only result in the loss of more Group C victims that would have been saved had they received that treatment.

If your practice revenues have dropped to the point that you are not able to take a salary of at least 35% of your production, you may be in Group B. If you are unable to cover overhead expenses, you are definitely in Group B. Keep on reading through to understand a simple but innovative approach for selling your Group B practice that could not be accomplished any other way.

Empty dental office with dental chairGroup C practices represent the wounded practices that could be cured with an appropriate intervention. These practices are the up-to-date, technologically equipped offices that need no capital expenditures to move forward. They are modern, attractive offices with an excellent well-trained, in-place support staff and are skilled in the business and financial side of their practices. They have everything they need to be quite successful with the sole exception of enough patients. If your practice revenues have decreased by 20% to 60%, and your practice meets the above criteria for equipment, staff, and technology, and you are still able to cover overhead expenses and pay yourself some amount of salary, your practice is probably recoverable.

Now, to be certain, there is only one intervention that I can recommend to revive Group C practices. Just as epinephrine is the only recommended treatment for anaphylactic shock, the merger purchase is the pathognomonic cure for Group C practices. Of course, there are other treatments for Group C practices, such as marketing, but that takes too long and the patient could die before the benefits of marketing could work.

So, why am I so high on mergers? Besides being the best singular cure for Group C practice weaknesses, they also provide a means for Group B practices to recover some value for the owner, rather than just closing the doors.

Group B practices only have value if properly packaged and marketed to the appropriate buyer, which is the Group C practice owner. There is no other feasible buyer. It is also possible for the merger purchaser to allow the seller to stay and work while earning income after the sale, and still allow the purchaser to make a fair profit after paying all of the extra expenses and debt service.

How does this merger purchase achieve the results we need? The process is quite simple. The Group C practices simply buy Group B practices and absorb the patients of the acquired practice into the purchaser’s existing location. The key to the success of this is bringing the patients into the purchaser’s office and closing the seller’s location. The acquisition of satellite offices is not recommended since that strategy will incur extra fixed and variable expenses and additional stress of running two offices. The merger is the only simple, safe and effective solution.

The merger purchase is an instant solution for the Group C buyers, adding income from the first day. There is no lag in increasing revenues as there is in marketing, and the results are much more profitable, certain and predictable.

Close up of paperwork being done by two peopleMergers are incredibly powerful cash flow generators, even with the lowest producing practices, because the only extra expenses incurred by the purchaser are the debt service for the acquisition loan and the acquired practice variable expenses, primarily lab, supplies and a slight, if any, salary increase. The extra expenses are no more than 30% of the gross and the debt service is about 10% or less of the gross, so the merger purchaser will realize a net of ~60% of the acquired practice revenues.

The merger results I’ve observed have been quite surprising. It’s not uncommon for a merger buyer to double the revenues of the acquired practice. Adding endo and implants alone will significantly increase the practice.

One of the most impressive traits of the merger purchase is the low risk. If not one single, or even married, patient were to come to the merger buyer’s practice, the only expense to the purchaser would be the monthly note payment, which is about 10% of the seller’s revenues. Therefore, if the merger buyer lost 90% of the seller’s income, he would still break even. I’ve yet to see this happen in 38 years of observing mergers. I tell merger purchasers that this purchase is safer than their drive home.

Another huge advantage of the merger purchase is that the seller’s hygienist will pay the payments for you. The seller’s hygiene profit, that is hygiene income minus the hygiene salaries, will invariably, more than pay the monthly debt service. Another donor to the loan payment is Uncle Sam. He will allow you to deduct and depreciate the entire price of the acquired practice, resulting in real dollar tax savings that amount to taking one third off of the price.

If you’re in the triage Group C, give some strong consideration to the very best strategy to restore your practice’s lost revenues. It’s instant, effective and safe.

If you’re in Group B and don’t see how your practice can recover, call us at ADS Transitions to enlist our expert support in salvaging a fair value for your practice. We know how to analyze, value, package and market your practice for the best results. With ADS Transitions on your side, you can survive this time in history in the best way possible.

Earl Douglas with information on Facebook Live event on June 25th, 2020Earl M. Douglas, DDS, MBA, BVAL, began his transition career in 1982 after selling his own dental practice. Currently, Dr. Douglas’ company, ADS South, LLC, provides consulting services in the Southeast, from Louisiana to Washington, D.C. Dr. Douglas founded ADS Transitions in 1996 and served as the organization’s founding president. Dr. Douglas is also a contributing author for Dental Economics and he has presented numerous seminars for Dental Economics and state dental associations.

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One thing for certain in our industry, nobody could have foreseen the impact and chaos that COVID-19 caused all of us. But, with that said, and as the dust of the pandemic’s initial assault settles, a lot of practice owners are coming out of their quarantines with questions about what the market is for those looking to buy or sell a dental practice.

To help, all of us at ADS® Dental Transitions™ have put together five common questions a lot of dentists have on their minds about practice value. From valuation to financing to questions about selling a practice at this time, you may be surprised by what the market is doing and how you can take advantage of the current situation.

Exterior view of a closed dental office

Q: How does this pandemic or any other major societal crisis affect the value of my practice, especially if I’m looking to sell?

A: There is one indisputable fact to remember: people will always have teeth and need dental care. I graduated from dental school in 1983. More dentists graduated that year than any previous year. Interest rates were 17% at the time and our instructors felt we were graduating during one of the worst times ever. Many instructors feared that most of us would go bankrupt within the next five years. I set up practice anyway in 1986 with an incredible low interest loan of 12%. I suffered the stock market crash of 1987, the AIDS crisis and OSHA freak-out of 1990 and the last stock market crash of 2008. Hindsight is great, but the actual results of the past 35 years are:

1. I believe my classmates and I practiced through some of the best times ever to be a dentist.
2. Dentistry proved, as always, to be one of the best recession-proof businesses to be in, as most downturns normally result in a 5% or so percentage drop.
3. While the debt of newer graduates is truly greater than my debt was after adjusting for inflation, the current interest rates at less than 4% help make up for that in comparison to my era.

With that said, I believe that dentistry will still remain a profession that, while not totally recession-proof, will persevere and remain one of the better health care professions to aspire to. In the long run, the current crisis will not be any different than the major three events mentioned above. In the immediate short run, of course, there will be some temporary “turmoil” as uncertainty always creates havoc in any market. I have experienced several calls from clients that enjoyed their “temporary retirement” the past eight weeks, and requested me to lower their asking prices to help facilitate that. I don’t believe that this will cause any long-term negative valuation pressures, as this will wash itself out in 45 days or so. As stated above, while this crisis might precipitate something similar to the past three crises, people will always have teeth and need dental care. Obviously, the sooner a practice can show that it is viable and even “close” to producing the same numbers as pre-COVID, the better.

Q: What’s the market for dental practices look like? Are buyers out there right now?

A: Yes, many associates have now realized that job security might be best secured with ownership. My last white paper went over all the reasons that a reasonably producing associate will always make more money as an owner than as an associate. Large practices and corporate dentistry will always be with us, and they exist as they are making a profit off their associates. The best way to retire student debt is to buy a practice once your skill sets and hand speed get developed, usually at least 12 to 24 months after you graduate from dental school. Experienced buyers that were around during the last crisis of 2008 know that whatever recession may occur now, if any, since the government seems willing to invest in the economy, will be temporary. Of course, they are going to ask for a “COVID discount” or some sort of “earn out” perhaps, but a profitable practice ALWAYS has value.

Dentist working on a patient while looking through magnifying device

Q: Has my absence from being open and practicing hurt my value? And, if so, how long will it take for my full value to recover?

A: Of course, 2020 will look awful for EVERY practice. While everybody understands that this is a temporary setback of the previous three crises, there is obvious uncertainty in the short run. Therefore, as stated above, the sooner a practice can show three or four months of near “pre-COVID” production, the better. Practices that throw off more profit will have fewer problems than those that don’t.

Q: Are banks willing to provide financing to buyers right now?

A: Yes, but as always, they do it on a case-by-case basis and take into account the practice profitability and the buyer’s skill sets, both clinical and managerial, and the buyer’s financial strength. Most do want to see at least several weeks of proof that the patients are returning.

Empty dentist chair in dentist office

Q: I’ve been thinking about selling my practice. Is now a good time to do it?

A: I do think that we are seeing more associates considering practice ownership after this crisis. No one knows just how long it will take for small businesses to rebound from the financial destruction of this lock-down. Many states are allowing their citizens to make informed choices on how to go about their lives. Some states believe that they should dictate those choices for the good of all. Depending on where you are and once routine dentistry is finally restored to your area, I believe you can put your practice on the market and make an “all-out” effort to get your production numbers close, or surpass the pre-COVID numbers. I believe that just a few months will suffice to be able to value a practice at its previous 2019 performance. I don’t think some trailing 12-month period starting in July will be necessary to show that once again, dentistry will prevail!

It is definitely a frantic and frustrating period we’re living through right now. But, as the old saying goes, “cooler heads will prevail.” I believe recovery from the COVID-19 crisis is not only possible for practices, but will occur quickly because, like I said before, people will always have teeth and need dental care.

If you have any additional questions about buying or selling a practice, the experts at ADS are ready to help.

Hand with glove disinfecting a dental officeThese are unprecedented times with dental offices closed for weeks and social distancing. Sadly, until 2020, social distancing was not a mainstream term. But here we are and social distancing is an everyday reality that permeates the news and our lives. What does this mean for your dental practice value going forward?

The reality is, very few practices are changing hands at this time. Who wants to take over a dental practice that cannot be open? Or, in the case of an endodontic office, even one that is open is most likely limited to emergencies. Surprisingly, there is a very small percentage of transitions that does make sense at this time. If you are interested in making aesthetic changes to your new practice purchase, this is a great time to do it. Or, perhaps you are adding a satellite and want to integrate the two offices together; the doctor and staff are available to work on the non-clinical aspects while social distancing, and this gives you an opportunity to have everything ready to go when your market opens up. Fortunately, for some of you, the COVID-19 closure time may already be passed and your practice has returned to normal. For the rest of you, hopefully this issue is coming to an end. So, what happens to the value of your practice?

Prior to COVID-19, the economy was thriving and sound. It was a time of economic boom and robust markets. While we cannot assume that while coming out of COVID-19, the economy will be as strong, the good news is that your practice value should not have decreased much, if at all. Yes, you will have a dip in collections during your closed period, but that should not reflect poorly, nor affect the value of your practice. Rather, we will refer to this closed time, and thus reduced collections, as an outlier to your practice.

The main consideration for practice value should be based on the cash flow of the practice. While your collections, and thus your cash flow, will obviously be affected during the COVID-19 closures, the anticipation is that the closures will be short term and your practice will be back to business as usual. The short-term practice closures associated with COVID-19 and the following outlier months should not reduce the value of your practice. Banks are aware of and understand that social distancing and short-term closures are the reason for decreased collections, and that it has nothing to do with your practice being less desirable than it was.

Sign that says social distancingIf COVID-19 does have a further negative impact on the economy, will your practice be worth less? What if we enter a recession? Is your practice worth less then? George Santayana said, “Those who cannot remember the past are condemned to repeat it.” With that in mind, let’s look at what happened to practice values during the 2009 recession. Back then, practices with healthy cash flows were actually more in demand than they were during times of economic prosperity. Due to the demand to find a quality practice to purchase in 2009-2010, practice values did not decrease during the 2009 recession. Associate jobs were hard to obtain during this recession, and many associates were let go as the practices simply didn’t have enough work for two or more dentists. Plus, dentists were more willing to consider practice opportunities outside of metropolitan areas, and practices in more remote areas were in demand. These additional factors kept practice values from decreasing, as many associates made the choice during this economic recession to purchase a practice and be in control of their own futures.

So, how should your practice value be calculated? A purchase price based heavily on cash flow should represent a fair number to both seller and purchaser. This should be the main consideration when calculating practice values. If you have an endodontic practice, there are additional items worth considering, including the age of your referrals. There are obviously other factors for an endodontic practice, general practices and, of course, other specialty practices, but cash flow should be the main consideration. During these COVID-19 months, cash flow will be disrupted, but the reality is that much dental work that is not being done at this time still needs to be performed. The expectation is that once the social distancing guidelines are relaxed and dentistry can open again, there will be an increased need for dental services.

Your practice value moving forward. Today: Office Closed, Cash Flow Down, Demand High. Near Future: Office Open, Cash Flow Up, Demand High.Many dentists throw around a percentage of collections to determine value. Yes, it’s a much easier calculation and anyone can do it, but it most likely doesn’t represent the value of your practice. If you are using an arbitrary percentage of collections, you are assuming that all practices are equal, or that your practice is average, which is likely not the case. This is a typical technique for practices that aren’t being managed properly, because the resulting price is likely higher than what the practice is worth. It is also a typical action for those unwilling to take the time to consult a specialist in practice valuations to figure out the true value of the practice.

As a purchaser, it would seem the important number to know is how much will be deposited in my bank account after purchasing the practice and paying the expenses. That number should be of much greater value and importance than a percentage rule of thumb that is arbitrarily calculated. The amount of money taken home after all expenses is the important figure. Does it matter what the percentage of collections is? Certainly, that number is not important in comparison to the money that will be profit.

Fortunately, the expectation is that during these uncertain times, dental practice values should not be impacted by COVID-19. And if our economy cannot recover as quickly as everyone would like, that should not have a negative impact on your dental practice either.

Hand with floating question marksCOVID-19 has all of us questioning how we move forward. Unfortunately, many will retreat into their safe zones when it comes to making a career choice or financial decision. From a strictly financial standing during times of economic prosperity or downturn, it is always better to own a practice than to be an associate in a practice. There are some small exceptions to this rule, and we will discuss those once we show why it’s “almost” always better to own a practice compared to being an associate.

First, it’s important to remember that we will get through this virus crisis. The expectation is that eventually everybody will get back to work. There will be government funding to bring manufacturing back to this country, so that we do not experience supply chain issues as we did during this crisis. We had the best economy with the lowest unemployment OF ALL TIME prior to this virus. With that in mind, there is no reason to believe that the economic pain will be long or protracted as with past economic crises. Even in those downturns, dentistry normally retracts less than most other sectors as EVERYBODY has teeth! This should not be a normal economic downturn as we had strong underlying fundamentals and we will bring back some manufacturing. Therefore, the seemingly “safe” course to not become an owner just assures less income at any stage of the economy. Associates will take home less than owners for the same amount of production, whether the economy is strong or week.

Large practices that employ associate dentists, do so for the profit potential. There is nothing wrong with this, but I don’t think that dentists who own dental practices understand just how much profit they make, compared to being paid a percentage of production. The following example is a true story of a friend of mine who sold to a large group and then worked for the practice for the standard two years to collect the total purchase price. It is a great example of why every associate should want to be an owner, because as you will see, this owner willfully turned himself into an associate without understanding the profit he left on the table.

Person working on finances with a calculatorMy friend’s practice collected about $1,000,000. The doctor’s true profit after adding back all the benefits he ran through the office was 37.5%, 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%, which means a buyer there could look for a practice doing around $750K and achieve the same profit!) The doctor’s hygiene department contributed the normal 25% of the collections to the practice. The large group that bought him out stipulated that the doctor had to stay on for two years and keep the numbers the same for those two years. They paid 24% of collections and agreed to go as high as 28% if the doctor hit his goals.

So, for two years my friend worked for 28% of collections – of his own production of the normal $750,000 he had always produced. Therefore, he earned a salary of $210,000 for the same work he did when he took home $375,000. It gets even worse as his salary of $210,000 was completely taxed. His previous profit of $375,000 had many legal tax advantages. His tax bill would actually be higher as a $210,000 employee, compared to being an owner with a $375,000 profit! He did not realize that he was actually being paid 50% of his own production as an owner ($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.

“But I’m already $400K in debt from dental school and can’t afford to buy a practice until I’m in a better financial position.”

I hear this every week from young dentists. The reality is that I do not believe dental students understood the magnitude of their debts before attending graduate school. Complete a debt service analysis, and it is frightening what it takes to pay off undergraduate and graduate school debt in a timely manner. While I can certainly understand the fear of adding to that debt with a practice purchase, the reality is, the best way to retire all this debt is to get paid almost twice as much for the same amount of work as you would be paid for being an associate.

In the above example, the debt service to buy that practice at the average national percentage of collections to purchase a practice of about 70%, 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, that is not fully taxed. That extra $140,000 a year (approximate) would go a long way in paying off school loans.

“Ok, I get it. But I want to buy a smaller, less expensive practice to get started.”

Dentist chair in a dentist officeI also hear this comment every week. But, if you do the math, a less expensive practice does not work unless you can guarantee an extremely high growth trajectory. If you were to buy a practice doing only $500,000 a year, you could not expect the same percentage of profit, due to the fixed expenses of rent, utilities, some staff, insurance, dues, and other expenses. So, the percentage of profit in this smaller $500K practice might only be 30%, or $150K. While the debt service is only $13K, your profit after debt service of about $137K is about the same as you could make as an associate somewhere else. Technically, you would still be taking home more as a percentage of the dentistry performed, but it would be more difficult to pay off your debt with that income. Plus, the extra cost of the debt service to own the practice that profits an extra $210,000 is only an additional $13K per year. So, if you can handle the workload, an extra $13K a year in debt services results in $210,000 net profit. How many years and marketing dollars would it take to bring the $500K practice to $1,000,000? It is a real obvious choice.

“Ok, so clarify ’almost always.’”

As a buyer, you need to do your own due diligence for any practice to determine if YOU can duplicate the production the selling doctor makes to get to the numbers presented. As mentioned, the $1,000,000 practice consists of $750K of dentistry from the doctor’s two hands. Assuming you are willing to work 49 weeks a year, you would need to produce an average of $3,000 a day in dentistry. Obviously, a crown fee of $800 compared to $1,200 makes a big difference, so you need to compare what you can produce on THE FEE SCHEDULE OF THE PRACTICE YOU ARE PURCHASING. You need to verify that the treatment plans presented to the patients are consistent with what you would personally diagnose. Many times, a retiring dentist refers out a great deal of dentistry that you might be able to do. This factor is normally a much greater benefit to you than any other perceived issue with the practice, or a possible reduction in fees, due to a possible Delta insurance issue.

Know yourself.

Some of you may never be “big producers.” That is a relative term and there is nothing to be ashamed of if you fit into that category. If you do, you might be best suited for an associate position that pays a healthy per diem salary or a government type of position. I personally worked for corporate dentistry, just out of school. It was a great training ground to learn how to triage a busy schedule and hone my skills and hand speed. If you can produce $3,000 a day, you are ready for the practice mentioned above. (Again, that level of production will be different, depending on the fee schedule.) My first practice loan had an interest rate of 12%. While your school loans are greater than mine, record low interest rates now of 3.5% to 4.0% enable you to take on this additional practice debt. For these reasons, 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. Eventually merging two smaller practices into one is also an option I will discuss in a future article.

Whether you are a first time practice owner or someone looking to expand, relocate or add an additional location, the options for financing today have never been more extensive.

When it comes to the types of financing available for the purchase of a dental practice, the most common options are conventional banks, small business loans and seller financing.

Conventional banks who specialize in financing dental practices may provide up to 100% financing. This means a lender may provide the buyer a loan for the full purchase price. Buyers will usually borrow additional money for operating capital or to acquire the seller’s accounts receivable. Some lenders offer this as a term loan or a line of credit or a combination of both.

Throughout the country, small business loans are made available through local lending partners who can offer traditional term loan options. Borrowers are typically required to cover a percentage of the borrowed amount. Depending on the lenders’ expertise the process can be very fluid. Trust your advisors when choosing a small business lender.

Seller financing is where the borrower has a financial obligation to the seller for the amount borrowed. This was quite common many years ago when bank financing wasn’t readily available like it is today for most borrowers. This option is more commonly used today for space sharing situations as a first lien position is difficult to obtain for traditional lenders.

Borrowers too often associate the best deal with the lowest interest rate. Interest rate is important, but it isn’t the only factor that a borrower and their advisors should be focused on. Remember, once the contract is signed, you are the one responsible for making the payments, not your advisor.

Terms offered vary from lenders but 10, 15 and 20 year terms are among the most popular selected by borrowers. With student loan debt being what it is these days, a longer term might provide better cash flow for the new owner. Before selecting the term, be sure to know what the principal reduction policy and the prepayment penalty policy is with the loan.

Principal reduction is where a lender provides the borrower the opportunity to reduce the outstanding principal balance by making a payment above and beyond the required monthly contract amount. Know what the lenders policy and limitations are prior to signing their documents. Some lenders have no limits, some limit the amount each year and some do not permit any principal reduction.

Prepayment penalties are quite common. A prepayment fee may be applicable if the loan is being prepaid in full during a restrictive period stated in the contract. The most common prepayment fee is 5% of the borrowed amount in year one and declines by 1% each year with no prepayment penalty after the fifth year. This varies by lender and should be discussed and disclosed prior to executing any loan documents. Prepayment penalties present less concern today for most borrowers and their advisors as today’s interest rates are quite low compared to previous years.

Collateral for most lenders is a first lien position on the business. A personal guarantee of the borrower is also required.

Some non-specialized lenders might limit the loan amount to a percentage of the requested amount. This would require the borrower to inject a percentage of the loan amount from their own personal savings. An additional household guarantor and the possibility of lien position on the personal residence may also be required. Fees could be a flat amount or a percentage of the approved amount. This varies by lender and their expertise in dental lending.

Create a realistic business plan. There are many resources available to provide templates and direction. Some lenders require them and may have their own templates.

No two practices and no two buyers are alike. A buyer’s experience, historical income, savings, credit score, student loan debt, installment debt, credit card debt, household obligations and household income all play critical parts in the underwriting process, decision and what collateral might be necessary to secure a loan.

The practice of your dreams could be right around the corner. Before that day arrives, connect with an expert and be prepared.