CUTTING BACK

Are you looking for a better way to transition out of practice? Here`s a proven method for phasing out at your own pace and staying financially secure from a dentist who`s done it.

Are you looking for a better way to transition out of practice? Here`s a proven method for phasing out at your own pace and staying financially secure from a dentist who`s done it.

Norman C. Culver, DDS

Sooner or later, one way or another, you`ve got to make the transition from practice. It`s not a question of if, but when and how. Here`s a way you can do it at your own pace and still profit from it. In fact, you can gain approximately $775,000! That`s $775,000 more than you could otherwise sell the practice for. Furthermore, you can cut back to even 90 workdays a year - without a decrease in income.

Sound impossible? That`s exactly what I did and you can do the same thing. There`s no magic. It`s just a common-sense way of using the practice you`ve built to maximize your gains.

The plan

The plan works by taking in a junior dentist, who will gradually buy you out while you gradually retire. While you`re phasing out, you`ll have a guaranteed buyer, for a guaranteed price, at the time of your choice. It`s not a conventional partnership - which may not sound appealing - but a temporary arrangement with a highly beneficial means to an end.

Your large financial gain develops because, while you`re in the process of phasing out, the temporary addition of the other dentist adds growth to the practice. Because you`re part of that growth, you gain from it. Basically, you`re converting your practice into a business, where you don`t always have to be present to make money - much like the restaurant that sells food while the owner is gone. You`re creating growth from what you originally had. You`re leveraging the practice.

This means that, even though you`re cutting back on work, your overall income will not decrease. Why not? The additional profits from the arrangement will make up for that cutback. This also means you can go into the transition whenever you`re ready. In fact, the sooner the better - and you can go through the transition itself as slowly or as rapidly as you want.

This plan works so well because it has the one essential element that makes it work: The true backing off from work by the senior dentist. Once that occurs, everything else falls into place. The senior not only gets more time off, but that cutback creates the excess workload that will attract a better junior - and that kind of a junior will create the growth it takes to make the profit, because he or she also will gain from it.

Therefore, you don`t have to begin the process with a big practice. Not only does the junior make it grow but, when you cut back, it`s not the same as going from one dentist to two as in a straight associateship, so it doesn`t take a large patient base. By the dentist cutting back, he or she fuels the whole arrangement. It provides a better practice for the junior dentist and, at the same time, a more profitable exit for the senior. And, the more you cut back, the more of that patient load goes to the junior and the more you profit. In other words, you`re turning your own cutback into a profit!

The arrangement is not one-sided, since the junior gains from it as well. He or she obtains an ongoing, busier practice along with its increased income. The junior who bought my practice agrees with this. He won too. Furthermore, the staff and the patients gain as well. The gradual transition is easier on everyone. The patients particularly gain because, compared to a straight sale, the continuity of their care is not interrupted.

The route

Typically, there are three stages to this kind of a transition. However, I see dentists do many successful variations of this. Any of the stages could be shortened or bypassed and the sale could happen at any point. Usually the transition starts with an associateship stage, where the junior dentist would be working basically as an associate. The second stage is where the junior would join as a temporary partner, and the third stage would happen at some future point when you, the senior, are sure you`re ready for the junior to buy you out completely. Following the buyout, you would still have the option of continuing to work if you wanted to. In that case, you would probably reverse roles and work as somewhat of an associate yourself.

The monetary gains of the arrangement come from the combination of additional profits and the higher sales price created during the transition. The first portion of this money comes from associateship profits during that period. The second portion comes from the senior`s share of the practice profits during the temporary partnership period. The final portion is a result of the greater sales price of the larger practice.

Associateship profits

Suppose you, as the senior dentist, took in a junior in an arrangement as mentioned above. With the junior working as an associate at first, you`d probably pay him or her on a commission basis. Commissions vary according to the particular practice and the area, but the national average is 35 percent of the associate`s collections. In addition to the commission, you`d probably also pay the associate`s separate expenses, but these would not be as much as your basic overhead, since things like rent and utilities don`t greatly increase with the additional dentist. After these additional expenses and the commission, all of the junior`s remaining collections would go to you as profit.

That profit, based on my example of a three-year associateship, would average approximately $7,000 per month; and the total, for the three-year period, would then end up at about $250,000.

Partnership profits

This is the period where the junior would buy into the practice as a temporary partner. If the senior wanted to proceed with a more rapid transition, this period could be bypassed. However, it provides three big advantages: 1) more time to phase out from practice, 2) more time to keep control, and 3) more income.

The senior`s profits during this period come from his or her share of the overall profits of the practice. Both parties would first receive a commission - probably about the same 35 percent as the junior received during the associateship - and, after these commissions and the regular office expenses, the remaining office income would be divided between the two of you as profit.

As the senior, what might your share of these profits be? Obviously, each case is different, but if the partnership period was five years long, then - based on my experience with the average matured practice - that share would be about $55,000 per year. It does take time for this profit to build, just as it does during the associateship, but here`s where the savings of two dentists sharing one office pays off. The total, then, for this five-year period would be roughly $275,000.

A five-year period may seem long for this stage of the transition, but, as it turns out, there`s no rush on ending it, even if you wanted to quit sooner. In other words, within some limits, you could quit and still stay on as an owner and you could keep collecting these profits. This is fair because it bases each party`s compensation mainly on his or her own productivity as a commission, but leaves this smaller profit portion to be based on ownership of the business.

What about the possibility of more than one buyer, perhaps coming in at different times, especially for the larger practices? That depends on the senior`s objectives, but this gets complicated. Based on my consulting experience, if your primary objective is to phase out, the additional complications of more buyers usually are not worth the effort.

Income

Aside from the profits of the transition, what happens to your overall income? It would be composed of the above profits, plus your own income from working. By working less, working income also would be less, but your overall income (including the profits) probably would stay about the same as it was before. Mine remained almost constant for the six years I was in the program. Why? Whatever amounts of work you cut back on would be transferred to the junior as additional patient load, and that`s where the profits come from. The bottom line is that whatever is lost by the cutback should be gained in profits.

In fact, by watching overhead better than I did, you actually should see an increase in income. Regardless of how much you personally cut back on work, as long as you`re the owner of an overall growing practice, you should see a profit from that expansion. When a business grows, so too should its profits.

Sales price

The sales price in such a transition usually comes in two stages: where the junior buys into the practice at the partnership level, and where the junior buys the final portion of the practice at the sell-out. The formula for this can get a little complicated, but, based on my experience, the total sales price should end up about $250,000 more than what an equivalent straight sale price would have been. That comparison is a hard one to make, but, in the straight sale, with one dentist working and at a semi-retirement age, the practice probably would not be growing much, if any.

Some of the growth of a practice like this would, however, come from what the junior had contributed to it. It wouldn`t be fair to make him or her turn around and buy that back; therefore, some of that growth should be credited back to the junior. On the other hand, the growth happened largely because of what the senior`s practice was originally. In a way, anybody could have been plugged into this opportunity and seen that growth. Therefore, the amount of credit for this growth is usually compromised at 50 percent.

To the junior, this credit is one of the main incentives for growing the practice and that, in turn, increases the practice value. In fact, the value of practices like this can end up greater than what the combined values of the party`s separate practices would otherwise have been. Together, you`re building what you may not have been able to do individually. It`s a team effort and both parties gain from it.

Part of the sales price is determined by an appraisal. Practice appraisals vary a lot, but they usually come down to a simple percentage of the practice`s prior year`s collections. The national average is 60 to 65 percent. In other words, the basic value of a practice is 60 to 65 percent of its prior year`s collections. However, phase-out practices, like this transition, are worth more because the practice`s patients are retained better than in a straight sale, where they tend to drift off to another office.

What about the fairness to the junior of the bigger purchase price? And why would a junior pay more for this kind of a practice, when he or she could buy one outright for less?

Because a younger junior like this may not be ready to take over a practice on his or her own. This way, the junior is being mentored to manage a much larger practice than he or she would otherwise be capable of doing. The junior is gaining income, equity, security, and a much bigger practice for his or her money.

How should the purchase price be paid? Should the seller insist on getting "cashed out?" No. In an arrangement like this, you can finance the junior with one or more promissory notes, which are as secure as any loans you can get. If the junior were to default, he or she would not only lose everything, but you`d have an even bigger practice to turn around and sell again.

As the seller, you should try to get a 20 percent down payment with each of these notes. That obligates the buyer, especially for the final half, in case you opted to leave the practice early. For the junior`s benefit, however, it`s just as important to extend the terms of these notes out - five to 10 years depending on the amount - so that he or she can afford the payments and still profit from the deal.

Overall gains

To see how much the senior would gain from such an arrangement, three figures must be combined: the above $250,000 in added sales price, along with the $250,000 profits from the associateship period, and the $275,000 profits from the partnership period. Those numbers comprise the $775,000 figure used earlier in the article.

What if you took in a straight associate and tried to accomplish the same thing? The first problem with this route is that associates going into these arrangements usually aren`t the lasting kind - and turnover throws everything off. Also, associates like that usually aren`t the buying kind. Would they offer you as much for the practice after they`ve been there awhile and learned how to run it? How much would you risk cutting back without a firm buyer?

Even if you could accomplish everything with a straight associate, the best you`d have is about the same as a phase-out plan anyway. So why not make up your mind from the beginning? Then you get the many other features of a phase-out as well, like a guaranteed buyer.

Not long ago, I had a very personal experience with this need. I was in a serious skiing accident that resulted in a spinal cord injury. I have not been able to practice since. Thankfully, I had a guaranteed buyer, for a predetermined price, with my option of returning to work if I could have - all because I was already in this very program.

How does the junior come out financially in the arrangement? With all the senior`s gains, how much is coming out of his or her pocket? None. Your gains are because of the bigger practice - that`s no loss to the junior - and the higher sales price is because he or she is getting a bigger practice. It`s truly a win-win arrangement.

The unfortunate part about such transitions is that they are not easy to set up. In fact, transition is usually the most confusing and uncertain thing in a dentist`s career - and for good reason. A transition can either be very successful or a nightmare, depending on how it`s handled.

I know because I had one failure before my successful transition. Dentists are thorough people, but this is one place where I see lots of big mistakes. Transition takes time, planning, and some good advice.

For the legal side of the arrangement, it`s important to use a good attorney who is not only experienced, but specifically experienced in transitions for dentists. Ordinary and/or physician buy-sells don`t count. Both are too different.

For the business side of the arrangement, the use of the right adviser is just as important. For this, you need a broker or consultant who can not only provide the full service of putting the whole transition together, but one who also can provide consultation, on an individualized basis, for only what services you may really want.

With personalized consultation like this - and some kind of a written guide for how to do it - the average dentist can sit down and put together much of his or her own arrangement, and even write up some of the contract. Altogether, this can save many thousands of dollars in this process.

For more information about this article, contact the author at (888) 278-7772. A biography of the author appears on page 12.

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