Transitions Roundtable

We ask two experts the same question to give you two different answers on a complex issue

QUESTION

"I plan to hire an associate in July. My intention is to sell him or her the practice after two years. When shall I value my practice?"

Peter Ackerman

This method of transition can work well. It is, however, rarely successful without proper planning and documentation.

The seller must first review his or her financial position with an advisor to determine if he or she is in a position to commit to sell as promised. This important step is skipped too often.

The next step is to determine the value and structure. Structure tends to be less controversial, however no less important to have memorialized in a document. Typically the purchasing dentist expects to acquire at the value when he or she joined the practice. The selling dentist usually wants to sell at the then fair market value, believing the practice will grow not because the associate develops a patient base but due to the reputation of the practice and the seller as well as advertising dollars that will be expended by the seller to get the associate producing.

Neither party is right or wrong. These transitions often fall apart due to a failure to plan and set expectations. The practice should be valued before the associate joins the practice. There should be an agreement to purchase at a later date that defines a formula to account for what hopefully will be an increase in value. I find a fair and rational formula is to value the practice at the time the associate enters, value again at the time of sale, and the increase in value of the goodwill is divided equally. Adjustments should be made for significant changes in equipment. This creates a relationship in which the associate is a fairly paid producer for the two-year period, however, from an equity perspective is treated as a partner.

If both dentists are able to agree on the date of purchase, value and structure, and penalties for failure to meet obligations, this method of transitioning can be mutually rewarding. A lack of clear agreement on any of the three essential steps before the associate begins is a recipe for disaster.

Peter Ackerman is a principal of The Dental Marketplace and past president of American Dental Sales

Tom Snyder, DMD, MBA

Since your associate is joining you in mid-year, we recommend that you prepare a valuation for the year-end of 2012 to give your candidate an estimate of what the fair market value will be. However, this is not the final value for your sale. To arrive at a value for your sale, the valuation is updated at the end of 2013. The reasons why the value should be updated are:

1) You will be practicing alone for the first six months of 2013.

2) You probably will be paying your associate a guaranteed salary for the first three to six months. We recommend this approach since you have no idea of the capabilities of your new doctor, especially if he or she is a recent grad. You should monitor his or her clinical performance more frequently at the beginning of employment to ensure his or her capabilities. There is no need to apply pressure to produce in the first three to six months (why a guaranteed salary makes sense).

An associate should yield a 30 to 35% profit margin, so if your associate wants to work hard, why not let him or her increase his or her income in the few years that he or she will be your employee? For example, if your practice were to grow an average of $300,000 per year and you had a profit margin of 30% annually on your associate's effort, that would yield $90,000 per year or $180,000 over the two-year period! Your practice's value will never increase by that amount, so why not lock in your value?

Finally, when it is time to set the final price, if you have purchased any new equipment after the baseline value was established, you would adjust that value for those items purchased.

Establishing a value for a future purchase in a short time frame after the associate has joined the practice is a win-win scenario for both parties.

Tom Snyder, DMD, MBA, is the director of transition services for The Snyder Group, a division of Henry Schein. He can be reached at (800) 988-5674 or [email protected].