Baby boomers are perhaps the largest segment of full-time practicing dentists in the country today. Many are reaching a point where they need to decide how to transition out of their profession. We will briefly discuss some options during this important phase in your decision-making process. The goal is to arm you with 1,000 questions you and your transition team can discuss to create the best plan for your specific needs. Your transition team may vary, depending on the size and complexity of your practice and your needs.
In full disclosure, my opinions are influenced by not only observing my classmates and colleagues since graduating from dental school in 1983, but also as the owner of a dental transition firm for the past 13 years. My firm has given me the opportunity to be part of ADS Transitions, a well-respected national consortium of independently owned dental transition firms across the country. Also, my opinions are not necessarily the opinions of ADS Transitions. Some of the members are specialists in partnerships and incremental sales, while others recently lectured at the ADA meeting on the many pitfalls of partnerships. So, if long-term specialists in the field have such diverse opinions, it’s quite understandable that we dentists can be confused in these matters also.
Current market conditions
We are now in a seller’s market. Due to the economic downturn, many dentists have hung on to their practices longer these past few years. Financing rates are at an all-time low, and money is available for 100% financing in most transitions that exhibit average national standards of pricing and cash flow. When these retiring doctors finally decide to hang it up, most of us transition specialists believe we’ll have more of a buyer’s market as baby boomers will also begin to retire. Most financial specialists believe that interest rates will eventually increase. My guess is that we’re still several years from seeing those forces change the market dynamics.
Many retirement age dentists whose numbers are decreasing feel the need to retire before their practice slips even more. As a dentist first, my advice is to keep working as long as you enjoy your profession. Timing the market to sell your practice is usually not a good idea. The financial benefit from most sales is equivalent to approximately 1.5 to two years of typical take-home pay. Depending on your needs, a reduction of 15% to 20% in your normal collections may mean that you may simply need to work an extra six to 12 months to achieve the same financial result. As I will explain, the other options may not be in the best interests of any of the parties involved.
Dental school graduates are now graduating with more than $300,000 in debt! These young dentists generally cannot afford to slowly transition into a practice. They have great financial burdens immediately out of school. They need a significant piece of the action NOW. Buyers cannot afford to associate in a practice that is not vibrant enough for them to earn a significant wage. This also changes the dynamics of the selling doctor expecting to stay on for an extended period of time to work for the buyer. In most cases, the buyer cannot keep the seller on board as an associate and afford the practice loan payments in addition to his or her personal and educational debt.
Long-term transition model
Doctors have called me after attending a seminar on the long-term transition model, convinced that they want to bring in an associate. Most of these calls come from dentists who do not have a large enough practice to feed another mouth, especially considering the needs of the young dentists mentioned above. Other calls are from dentists who feel overworked and think they need an associate, but they are probably overworked by only about 10%. Making all the changes necessary to bring on an associate in this situation can end up in a disaster.
The reality is that a practice should be collecting more than $1 million annually with at least 2,500 active patients before it should consider this model. When a doctor feels that he or she cannot maintain the current pace, is there really enough work for another dentist? Can the facility and staff accommodate another full- or part-time dentist, keeping in mind the debt requirements of young dentists nowadays? Many times the answer to these questions is “No,” and the doctor just needs to reevaluate his or her management of the practice to reduce stress.
Even if the answer is “Yes,” what is the long-term plan? Is the practice a single-doctor practice, a two-doctor practice, or somewhere in between? The transition model implies that it is a two-doctor practice for the period of the transition. What happens when you retire in a few years? Does it become a single-doctor practice then? Does the young doctor want or need to be an employer and hire associates when you leave? Will it become an eventual partnership arrangement? Adding even a part-time doctor will significantly change the staffing, hours, accounting, and management of the practice.
If you are one of the lucky few busting at the seams in your current environment, you need to decide what direction to take. Your choices may include hiring an associate, as in the associate buy-out model. Covenants not to compete, staffing and legal issues, accounting decisions, and separation issues need to be considered. You will need to determine if your associate is an employee or an independent contractor and how to reimburse him or her. Production? Collections? Salary?
Partnerships are a whole different animal unto themselves. It would take an entire publication to address all the issues concerning partnerships. I believe that partnerships are the most costly and intricate relationships to set up properly and address all the issues. Revenue sharing arrangements, death, disability, retirement, and capital expenditure decisions are just some of the issues that should be put in writing. Exit strategies are more complicated as lenders usually cannot finance one doctor transitioning out of a partnership.
Partnership divorce rates are probably higher than marital divorce rates, and have all the same financial pain and drama. However, successful partnerships can be achieved by hiring a highly experienced specialist. But beware.
There are no “cookie cutter” answers. What should you do?
1) Speak with your accountant and financial planner to form a plan to determine the amount of income you need and for how long. Knowing this number will help determine which path is right for you.
2) A transition specialist can guide you in your particular market and give you an approximate value for your practice. Your financial planner and accountant should be aware that some entities are difficult to get out of and may not be financeable. The best decision for the majority of dentists is to simply sell when they are ready. The transition specialist should be able to help you not only obtain the best price, but also provide more potential buyers for a better fit.
3) Use an attorney who specializes in dental issues and knows the profession well. If your trusted advisors are not experienced in your specific issues, be candid with them and ask to work with another accountant or attorney who is experienced with your specific concerns.
The KISS rule is useful most of the time. Keeping it simple applies to the majority of practices that collect less than $1 million annually. More complex strategies cost more to set up and maintain. Evaluate your options carefully. Unless the practice is relatively large, the returns on time, efforts, and costs may not be worth the complex strategies. Keep in mind that there will always be unintended consequences in any big change.
Transitions are like dental services. Some procedures seem routine until you get into them, and then it is experience that makes the difference between a good or poor outcome. Just as in dentistry, transition experience matters. Putting together the right team to handle these decisions is critical. Your practice is one of your most cherished assets. It deserves personal attention by expert advisors you can trust.
by Timothy G. Giroux, DDS
415 Century Park Drive, Suite B
Yuba City, CA 95991
Toll-Free: (888) 979.7925 ext. 530
Office: (800) 641.4179