by Steve Wolff, DDS
While recently moving toward the closing of a large general practice, the buyer’s attorney reminded me that the "devil was in the details." When it comes to dental practice transitions, no truer words have ever been spoken! While price, covenant, and possession date may be the most obvious issues, I would like to discuss some of the finer points which have derailed any number of proposed purchases and sales.
Fees
Buyer discovers (or finally realizes during the due diligence process) that the practice’s fees are considerably below the local market. While the retiring doctor who had no debt and a fully funded retirement plan could manage by charging $650 for a particular procedure, market rates might be closer to $900. Although substantially increasing fees would improve cash flow, the buyer takes a considerable risk of alienating the patient base. If the new owner decides to charge premium fees, what expertise does he or she bring to the table to justify these fees? Will the practice cash flow be reduced? The buyer may decide not to deal with those confrontations and may opt out of the deal.
Long-term staff members
The presence of a trained and available work force is an asset to the practice. Special kudos may be given to practices where the staff members have been together for a long time. However, there are potential negatives to consider. Some staff members may be near retirement age and would not plan to stay long after the sale. Team members who have received periodic pay increases for a number of years may be at the very top of the pay and benefits range. That may have serious consequences for the buyer’s cash flow. Lastly, if the seller’s spouse is employed by the practice, the buyer may expect to lose a key employee almost immediately after closing. These issues (sorry, there are others) may make for more turnover than the buyer can manage early in the transition.
Right-handed or left-handed?
An office designed many years ago for a right-handed dentist is almost unusable for a left-handed dentist, and vice versa. Contemporary, ambidextrous equipment design has made this less of an issue in newer offices, but a substantial discount in the sale price may have to be negotiated if extensive remodeling will be necessary to accommodate the new "other-handed" doctor.
Leases
Obtaining a new lease for the practice is a critical issue for the buyer, since most lenders will insist that the practice have the ability to stay in its current location for the duration of the loan. Landlords are now including clauses in leases that allow them considerable control — even financial participation in transitions and lease assignments. Watch for rent escalation clauses that may impact the potential buyer’s profitability and ability to take out a loan. Potential sellers should seek professional assistance in lease negotiations to make sure that assignment and continuation of the lease doesn’t end up holding them hostage.
Last minute incorporations
Quite often, the buyer’s advisors will suggest the formation of an LLC or S-Corporation as the entity to buy the practice.This suggestion is usally made between the signing of an offer to purchase and the proposed closing date. While I don’t necessarily disagree with the concept, the closing will almost always be delayed by the paperwork. Articles of incorporation, operating agreements, and even required state dental board approval can quickly create weeks of delay. We always advise the buyer to start the process immediately after the acceptance of an offer, and we caution the seller that closing may be delayed two to four weeks until the issue is resolved.
Proper licensing
Oops! This may seem obvious, but I can assure you that more than one closing has been delayed because the prospective buyer did not have a current license for the state in which the practice was located. The appropriate drug licenses, malpractice insurance policies, and provider agreements with insurance companies may also keep the buyer from becoming the owner.
These examples certainly should not be seen as all of the details that need to be addressed during the finalization of a practice sale. Buyers and sellers need to realize that careful planning, knowledge of the market, and professional assistance will go a long way toward ensuring a successful transition.
Dr. Steve Wolff is an associate mentor member of ADS (American Dental Sales, Inc.) and the broker/partner in EMA Dental Practice Sales (formerly Evan Myers and Associates) in Kansas City, Mo. He can be contacted by phone at (800) 311-2039, or visit the company’s Web site at www.evanmyers.com.
