Wednesday, November 11th, 2020 | by Steve and Tom Wolff
Expecting the Unexpected: Plans for protecting your practice
It seems that many businesses and organizations are asking members to focus on what factors may influence the long-term survivability of their organizations and to make plans and recommendations to deal with those factors. The intent is not so much about organizational goals and mission statements as much as it is about the ability to physically survive into the future. Maybe the recent pain of the pandemic is the stimulus. Topics of discussion might include changing demographics, staff retention, physical property needs and cash management. This should be an ongoing process for any dentist hoping to ultimately transition the practice to another owner.
I see two phases of sustainability in dental practices, the first centering on the career of its current owner and the second, the focus of this article, having to do with the ability of the business to be transitioned to the next generation. Surprisingly, successful management of a practice for the benefit of the current doctor may not always ensure a successful change of ownership. While revenue levels (which we will discuss in detail) might be the most obvious, there are a number of other potential deal-breakers.
Real Estate – A prospective buyer must be able to get a market-rate lease on the practice space. If the landlord will not offer the buyer a suitable lease, your practice value may be seriously reduced. Further complications may arise if the practice owner owns the real estate.
Patient Base and New Patients – Practices that do not have an adequate number of patients along with an ongoing stream of new patients to replace those lost to attrition will have a hard time being transitioned to a new owner. Since turnover in many areas is as high as 20%, the 1,500 patient practice would need to attract about 25 new patients a month just to stay even.
Physical Facility – Tired-looking and dirty practices with outdated equipment will have a hard time attracting a successor. Most potential buyers have been trained on and have always practiced with digital radiography. If you don’t have it in place it is almost a direct deduct. Likewise, curb appeal matters as today’s buyers have little desire for taking on rehab projects.
Staff – On the first day the new owner shows up at the office, they will be relying on your staff to introduce them to patients, run the schedule and operate the business and treatment systems, etc. Cultivate them as a valuable asset, but be careful about letting them become an unreasonable percentage of your overhead. If your total staff costs are over 30% of your revenues, there may be problems for a new owner.
Location – This is a tough one that you can’t do much about. If you have an otherwise marketable practice in a rural area, there is a good chance no buyer will come along before you decide to lock the door and leave.
Revenue – Of all the factors we have discussed in this article, this is the big one. In the Midwest, if you are a solo practice, general dentist and your collections are less than $600,000 annually, your practice as you know it may not be sustainable into the next generation. Below this level of revenue there may not be enough money in the mix to pay the overhead, taxes, student loans, any acquisition debt and still have money for the buyer to take out for living expenses. If there are enough other positives about the practice, it can be sold but perhaps as a satellite location or a merger candidate.
You should begin now to maximize the positives of your practice and minimize the shortcomings in order to move closer to the day when you want to successfully trade the practice in for cash. One of the most important things you can do to ensure the transition of your practice is to create a directive in the event of incapacitation or sudden death.
Hopefully, your death will be long after your dental career has ended and you have had many, many blissful years enjoying your grandchildren and hobbies. But what about the possibility that life doesn’t work out that way? What position would you, your practice and family be in if you were to receive a terminal medical diagnosis today? Obviously, the sooner the practice can be sold, the better in order to retain its value. More importantly, the less of a burden it will be to you and your family.
And what about the tragedy of sudden death? In our office, we have witnessed families struggling with disposing of practices after doctors have suddenly died. You owe it to your family, staff and patients to prepare for this very real possibility. With no instructions in place, I have seen the family make some tragic mistakes that had a profound effect on the practice and its value. For starters, we suggest:
Have a current will, trust, estate plan and appropriate Power of Attorney and Medical Directive. This seems obvious but it is incredible how often these things are incomplete.
If available to you, obtain a quality disability insurance policy for your “own occupation” payable to at least age 65.
Obtain adequate life insurance which, at the very least, will cover any practice-related debt, including real estate and six months of operating expenses.
Tell someone where your documents are kept.
Meet with a dental practice broker. I know this sounds self-serving, but while we all have attorneys, accountants and executors, no one is better able to quickly get your practice valued and sold. A broker familiar with your practice and market will be in the best position to find a buyer.
Consider organizing or participating in a dental mutual aid society that will come to the immediate aid of a fallen comrade. A formal agreement between 5-7 doctors can provide peace of mind in knowing that your practice will temporarily be covered in the event of your unexpected demise.
Have a Memo of Direction on file with your family, accountant, attorney and the transition broker. This will facilitate quick access to information about your practice and improve the odds of a quick sale.
On at least an annual basis, organize important information about your practice as if you were preparing for a practice sale. Financial statements for the last three years along with a current Profit and Loss statement, current lease, any contracts you are party to and a current list of major equipment would be a good starting point.
Tell someone where your documents are kept. Tell someone where your documents are kept. I repeat this as it is often the biggest reason for a delay in moving forward. No one knows where anything is kept.
The brutal reality of sudden death or a medical crisis is something that none of us want to face but it seems to me that as many as 80% of all doctors have no plan in place. Does that include you? A little planning now will go a long way in ensuring the continuation of your legacy.
This entry was posted on Wednesday, November 11th, 2020 by Steve and Tom Wolff and is filed under
In most life situations, people use specialists to help them obtain the help they need. People go to their dentists to obtain dental care. They go to a medical doctor to obtain medical care. They seek the services of insurance agents to help design an insurance program to meet their needs. They seek the help […]
“I’m sorry, but we are not comfortable making the loan due to poor credit history!” Unfortunately, this is a comment I hear all too often from lending institutions when attempting to secure a loan for a practice transition. For the past 30 years, I have been preparing financing packages for dentists wanting to purchase a […]