by Amy Morgan
At my recent seminars for practicing dentists and dental school seniors, the question causing a lot of angst was: “Who can I trust to give me good advice on practice transitions?” Because dentists lack a thorough understanding of legal and financial issues, they can feel as if they are being held hostage by accountants, lawyers, consultants, or other advisors.
For example, a dentist asked my opinion of a practice purchase agreement he was seriously considering. He had no idea whether it was a good or bad deal. In reviewing the agreement, I noticed that the practice he was about to purchase was in a town with two traffic lights, one gas station, and several cacti. The experts whom he consulted claimed that the area was an up-and-coming bedroom community of an adjacent city. The proposal indicated there were 1,900 active patients in the practice, but only one hygiene day per week. There was a tremendous increase in revenue from 2005 to 2006, with no plausible explanation for it. The purchase price was based on 80 percent of the 2006 gross revenue, which was 120 percent of the 2005 figure.
I asked the dentist why he found the practice appealing. Did he want to live in the town? “No way,” he answered. “I figured I’d practice there and live someplace else.” I asked, “Where?” He had no clue. He was at a crossroads, with a decision pending that would significantly affect his personal and professional life, yet he faced it without proper preparation to know whether it was a good or bad pathway for him.
You may be shaking your head, thinking this could not be typical. However, if you followed me and my consultants around for a week, you’d see how very common it is for dentists to enter a transition without proper forethought and knowledge.
How can you avoid making transition blunders affecting your cash flow, balance of life, quality of dentistry, and ultimate exit strategy? Here are some guidelines to help you develop filters to separate great counsel from poor:
1Develop your vision. Before seeking experts’ advice, do some soul-searching. Decide what you want your future to be. Your vision for your practice and life is the yardstick you need to measure advice as good or bad. It’s good if it helps you achieve your ultimate vision, bad if it doesn’t, and even worse if it takes you in the opposite direction. For example, a senior dentist who has practiced solo her entire career may not be best suited to accept a long-term associateship. To understand and evaluate professional advice, ask yourself: “Does the advice suit me and bring me closer toward my goals?” If the answer is no, then run away.
2 Become educated on financial matters. Although you needn’t become a legal or financial expert, you are responsible for obtaining sufficient education in these matters to be able to distinguish what is workable from what is not. To know whether a deal is in the ballpark or completely out of line, it’s helpful to know how dental practices are commonly priced. Median practice values today range from 65 to 75 percent of the prior year’s gross revenue, with some practices selling for 110 percent and others unable to be given away. Start at the average; then ask lots of questions. If you choose advisors inexperienced in dentistry (for example, you hire your neighbor, a residential real-estate lawyer, to handle your practice purchase), be prepared to spend what could be substantial additional money on their learning curve.
3 Trust your intuition. If something sounds too good to be true, it probably is. If you’re really getting in on the ground floor of a fabulous up-and-coming bedroom community, is there any evidence other than the seller’s word? If you feel uneasy about something, there may be good reason. Intuition isn’t your only tool, and it certainly isn’t fail-safe; however, it is wise to note your gut reactions and hold them up for scrutiny. You may be on to something!
4 Be prepared for give and take. For example, depending on how the agreement is structured, it may result in tax or other advantages for one party over the other. Overall, the deal should be a win-win for both the seller and the buyer. If you are a senior doctor transitioning a practice that isn’t viable for the junior doctor, be prepared to take the business back or watch the practice you spent your life building go bankrupt.
5 Be sure to do due diligence. Too many purchasers enter an agreement without having done due diligence, and too many sellers haven’t interviewed sufficiently to find the right buyer. The IRS’s definition of fair market value is: “[T]he price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.” You obtain reasonable knowledge of relevant facts through due diligence.
In our earlier example, there is an assumption of 1,900 patients of record. The buyer must not accept this premise on face value, but examine numerous patient charts to determine the quality of these 1,900 patients. Are they compliant in continuing care? The agreement indicates that the practice has only one hygiene day per week, which is woefully inadequate to serve 1,900 patients. Are the patients fully diagnosed and has recommended treatment been completed? Are the patients on insurance plans and is the dentist accepting reduced fees? How many of the 1,900 patients have been in the office at least once in the last 18 months?
This is only a fraction of the fact-finding the buyer must do. The seller, in turn, is responsible for finding a buyer who represents the practice vision and values and can continue its success into the future. Even if the seller and buyer are friends, due diligence must still be done. It does not imply a suspicion of any wrongdoing. There could simply be honest mistakes. For example, if a dentist also runs an Amway business, and the proceeds from it are counted in the practice revenues, the buyer should know about this. (Don’t laugh. This has happened.)
6 Get a second opinion. It can’t hurt to get another opinion from a trusted colleague or mentor. Seeking one does not question the integrity of the other party; it’s simply good business. Doctors often wait until the last minute to enter a transition, thereby limiting the time to obtain information required for a sound decision.
When you properly prepare for your transition, know what you want for your future and follow these guidelines. You’ll be able to separate the wheat from the chaff - and get what you truly want and deserve.
Amy Morgan is CEO and lead trainer of Pride Institute, the firm helping dentists master the business side of their practices. For information on Pride’s acclaimed management program, educational products, and Amy’s flagship courses on management (“Numbers, Staff and Systems”), and leadership (“The Dentist’s Voice”), call (800) 925-2600 or visit www.prideinstitute.com. If you need help appraising and/or transitioning a practice, inquire about the Pride Institute’s services.