Transitions Roundtable: We ask two experts the same question on a complex issue.
A merger with a nearby practice is almost always a winning situation.
I want to absorb a local practice. What is the average length of time that I should continue to employ the selling dentist?
Gretchen O. Lovelace, MS, CFP, CPM
A merger with a nearby practice is almost always a winning situation. The buyer's fixed overhead of rent, phones, electricity, insurance, and more will not increase, but the profit will definitely increase. This means that even if some patients are lost in the transfer, it is still a profitable venture.
Patients will tend to follow their dentist when he or she moves a short distance. The best way to accomplish a merger is to have the selling dentist send a letter to all of his or her active patients stating that he or she will be moving to a new location and joining the practice of Dr. Buyer. Except for the new location and the date of the move, the entire one-page letter should include the virtues of the buying dentist, the location, and the staff.
Since many patients see their dentist every six months, virtually all of the patients in the practice will visit the new location and meet the new staff if the seller is employed six to nine months. However, employing the seller after a merger is not always possible. The new location may be too small for two dentists, or there might not be enough required dentistry to keep both the buyer and seller busy on a full-time basis.
The seller does not have to be present in the office every day. In fact, keeping the seller full-time after the transition when there's not enough work for two dentists will discourage patient transfer to the buyer. If there is not enough dentistry for the seller after the merger, the buyer should consider retaining the seller for one day a week for three to nine months or even one to two days a month for one year.
Maria G. Melone, CPA, CVA
Absorbing another practice into your existing location is often referred to as a roll-in or a tuck-in. If you have time in your schedule or excess physical capacity in your practice, a roll-in acquisition can have a significant and immediate impact to both your revenue and profitability.
The biggest challenge a buyer faces in this situation is paying the right price for the revenue stream acquired. If the buyer simply agrees to pay a flat fee for each record the seller has, the buyer might be paying for something that never materializes because the patient has no obligation to seek care with the buyer. On the flip side, the buyer might place such a nominal value on each record that the seller does not get the appropriate value if all the patients do transfer their care to the buyer.
One solution to protect the buyer and provide the seller with a fair value is for the buyer to employ the selling doctor for a period of time in the new location. I believe the minimum time frame to consider employing a selling doctor in the buyer's practice is six months. This generally allows the seller to see every active patient at least once in the new surroundings. However, if the seller is able to work in the buyer's office for one year, this provides an ideal amount of time to ensure every active patient has been seen by the selling doctor as many as two times in the buyer's practice. This time frame also ensures that the seller is able to provide a warm handoff of the patient to the buyer without feeling rushed.
The last thing to consider when employing the selling doctor is the flexibility it affords the buyer in structuring the payment for the acquisition of the patient records. Under this scenario, I recommend buyers make a nominal down payment for the practice and then employ the selling doctor, paying the doctor 50% or more of the total collections generated from patients of record. Using this structure, the seller is going to get the fair value for the patient base that actually transfers to the buyer, and the buyer is going to pay fair value for the revenue stream actually acquired-with some tax benefit.
Gretchen O. Lovelace, MS, CFP, CPM, is the founder of ADS Lovelace and Associates Inc., based in Louisiana. She has certifications in financial planning and practice management. Gretchen has 35 years of practice management experience and has been a guest lecturer at the Louisiana State University Dental School for most of that time. She has been evaluating and transitioning dental practices for 25 years. She often speaks at national, state, and local dental meetings. Gretchen is the past national president of ADS. Contact her at (225) 892-5135 or firstname.lastname@example.org.
Maria G. Melone, CPA, CVA, began her accounting career at KPMG. She then spent 10 years working for one of the largest dental support organizations, handling all aspects of the buying side of dental transactions. She has helped facilitate hundreds of transactions and has valued even more. She is a founder of MORR Dental Solutions LLC, and dentaldealmate.com.