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Monday, August 10th, 2020 | by Gary Schaub

Avoiding Practice Transition Problems

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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

I 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 w

hat can go wrong with the transition process?

Two men having a meeting at a table

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.

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.

Empty dental office with dentist chair

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

I 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.


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