When the owner stays on ...

Oct. 1, 1997
It is generally agreed that there is some advantage to an owner staying on in a practice sale in order to effect as smooth a transition as possible. But what happens if the seller wants to stay and continue to produce dentistry over a prolonged period of time?

Robert J. Mallin, DDS, CFP

It is generally agreed that there is some advantage to an owner staying on in a practice sale in order to effect as smooth a transition as possible. But what happens if the seller wants to stay and continue to produce dentistry over a prolonged period of time?

If we use the latest ADA statistics, the average G.P. gross in 1994 was $345,510. So, for simplicity`s sake, let`s say $350,000. Average overhead is 60 percent, leaving $140,000 before taxes.

That number speaks for itself. How can $140,000 before-tax dollars sustain the buyer, sustain the seller and pay off the practice?

In fact, it can`t be done.

So, while it`s "nice" for a seller to want to stay and work, the reality is that in most cases, there are not enough dollars available for this luxury.

So what can you do?

First, it becomes obvious that early planning is important. Don`t wait until you`re ready to sell to find out that there isn`t enough "cash flow" to support the debt and the living expenses of two families. If you sense that you need to grow the practice, it might be advisable to seek out the services of a knowledgeable consultant.

The consultant could do a study to see if it`s possible to implement certain management procedures that would increase the cash flow to acceptable levels. I feel it`s important to see if this is possible. In most cases, it probably won`t be possible to sufficiently increase the cash flow, in spite of your good intentions and management techniques.

But now you know! And your expectations can conform with your realities.

What happens if the consultant feels it is possible to increase the cash flow by instituting certain procedures? Then you need to decide:

Is the monetary investment acceptable?

Is the return on investment worthwhile?

In what time frame will the changes occur? And is this acceptable?

Are you willing to do what`s needed? Is your staff ready?

Certainly, no one can guarantee any specific result. You can only rely on your past experience and advise and project accordingly.

One of the most frustrating aspects of consulting is when the consultant identifies certain deficiencies, discusses them and offers solutions, and the client and/or his/her staff doesn`t follow through. All change occurs on a "feeling" level, and if the owner is not committed - body and soul - to change, it won`t occur. Good intentions are not enough. Good advice is not enough. What is needed is a paradigm shift in the thinking and commitment of the doctor.

The doctor is the leader. Whether he/she likes it or not, all responsibility for change rests on the shoulders of the doctor. And this change must occur on the feeling level - not on the logical, thinking level. As L. D. Pankey used to say, "You`ve got to feel it in your tissue."

What happens if the consultant says he/she feels it`s not possible to substantially increase cash flow to a level that will sustain two families and a debt service?

Now you need to think long and hard about what to do. Do you have sufficient savings to retire from gainful employment? That`s really the key issue, isn`t it? If you have sufficient funds, you can feel free to plan as you like. It`s possible to sell and leave - after a short transition. But if you lack sufficient savings, this decreases your options. You may have to work to sustain your family and their needs.

Admittedly, this is a terrible time to discover that you`re financially unable to sell your practice and retire. But for many dentists, this is the tragic reality. Better that you know it and deal with it on a logical, businesslike basis than try to escape the reality.

One of the biggest misconceptions - and the cause of much consternation and dispute - is the thinking that by bringing another person aboard, somehow - magically and mysteriously - your practice will increase to sustain the new person.

Well, it may happen, but I wouldn`t want to be part of that ill-thought-out scenario. If you decide to proceed in this manner, be warned and be prepared. It is fiscal foolishness to rely on the success of such a venture.

Now let`s look at a practice doing $650,000. It`s netting about $260,000 before taxes. Now we have sufficient dollars for the seller to stay and work (probably at a reduced schedule) and for the buyer to earn a living and pay off the debt of the purchase. The key issue here is that enough dollars are being generated to accomplish what needs to be done.

It seems that financial success during active practice years also leads to financial success during the transition years, and certainly the reverse is true (i.e., mediocre practice success during the active years leads to less than desirable results during transition).

Should the seller hang around?

The seller staying on can become either a panacea or a problem, depending entirely upon the cash flow of the practice.

This is another reason why cash flow is considered to be the benchmark against which all other analyses are measured in dental practice appraisals. Of course, other factors need to be considered, but these are subjective considerations, subject to individual interpretation (e.g., location, age and condition of equipment, physical plant, staff, recare programs, managed care, etc.).

When a cash-flow evaluation is done, it is possible to create a spreadsheet scenario which can offer significant insights into what might occur if the seller stays.

You could project various production levels for the seller and see what effect they have on the buyer`s financial status.

In an ideal world, it would seem most advantageous for the seller to stay and participate in the transition and the workings of the practice.

In the real world, however, cash flow dictates whether this advantageous situation can be considered or whether it should be dismissed as fiscally irresponsible.

The issue of whether or not a seller stays on and continues to work is one which requires careful scrutiny by qualified professionals in order to assure success for the buyer.

Robert J. Mallin, DDS, CFP is both a dentist and a Certified Financial Planner. He has authored many articles and lectured extensively on financial and practice-transition matters. He owns PPC of NJ, Inc., a dental practice broker/financial-planning firm. Dr. Mallin is a member of American Dental Sales (ADS).

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