Top 10 Questions Dentists Ask when Buying or Selling (Updated)
(as printed in Dentaltown Magazine – September 2013)
In this feature, practice transitions specialist Greg Auerbach presents the top 10
questions he and his team at ADS (formerly American Dental Sales) address when
dentists are buying or selling a dental practice.
1. What is the current state of the transitions market?
In general, we are finding the market to be very strong. Quality practices are beginning to come back on to the market. With new lenders entering the industry, financing packages are becoming more competitive. Bank of America Practice Solutions and Wells Fargo Practice Finance are still the major players with East-West Bank stepping in with an experienced practice acquisition team. More regional and local banks are also coming on the scene, helping to keep pressure on the bigger national players. With the availability of money and purchasers, value remains strong and we are completing successful transactions on a regular basis. Demand is certainly still outpacing supply and, for the foreseeable future, particularly in metro areas, that trend will continue.
2. What is the value of a dental practice?
The value of a properly appraised practice is a function of two factors: risk and net income. The lesser the risk-to-success, the more interest in the opportunity. Lower risk and higher interest translate to higher value. A proper evaluation involves the review of three years of financial documentation (primarily tax returns) and other practice reports. While value is heavily influenced by the most current year of cash flow, to properly assess risk, a look at the full picture and history must be conducted. Value simply cannot be based on limited data, rules of thumb or be determined “on the spot.” Percent of gross is an example of a rule of thumb.
3. What can increase or decrease value?
Fewer specialty services (in a general practice), less discounted fees or insurance (especially HMO/capitation), higher gross and higher net income yields more possible (and interested) purchasers, therefore higher value. Aesthetically speaking, the more visibly appealing a practice is, the more a practice is likely to sell for. While the appraised value probably will not go up, the sale price might increase due to increased desirability. Importantly, some procedural and nearly all financial modifications to increase value require longer range planning (three to five years) to provide a return. Major equipment or aesthetic changes will almost never yield a justifiable return within a year or two.
4. What is a covenant not to compete/restrictive covenant and is it enforceable?
The restrictive covenant establishes a time and geographic area within which the selling doctor agrees to not practice or participate in another practice after a sale. The seller is also usually restricted from soliciting patients or staff. Occasionally, the seller agrees to a “non-treat” clause but that is rare. The distance is unique to each practice and location, and is usually correlated to the service area of the practice (where most of the patients live/work) taking into account local and regional factors. Time limits are often established by state law or jurisdictional court rulings and can be months (if at all) to a number of years.
When properly developed and reasonable in its terms (distance and/or time), covenants are definitely enforceable in most areas. The specifics of the covenant are very important and defined by local laws. Since a restrictive covenant is vital to almost every transition, it is important to consult with a local transitions expert and legal counsel to verify the statutes and ensure legality of a covenant. That said, in all states but Alabama (others do not allow them for employees), restrictive covenant contracts are enforceable and care should be exercised when drafting them.
5. How much should I pay to acquire patient charts/goodwill from another practice?
The reality is that in nearly all merger sales, the acquiring practice can pay well over 100 percent of the annual collections of the acquired practice and still come out ahead. This is a cash-for-cash deal – how much would you pay to earn an extra “X” amount of dollars? Remember, you pay once and the collections increase as an annuity. This increase also comes at a significantly lesser overhead rate than your current production.
6. What if the landlord isn’t cooperative?
Unfortunately, this is the prerogative of the landlord and the transition will be held up until the person cooperates. It goes without saying that it helps to have a good record with the landlord. That said, a good relationship does not mean that negotiations will go any easier. We have seen repeatedly where a landlord will request payment for the remainder of a lease or, sometimes, even a portion of the practice sale (citing the location is an integral part of the sale so the landlord is entitled to payment). Be sure to review your lease very carefully and be aware of these potential clauses if renegotiating.
7. How long does a seller stay post-sale?
In most transactions, the amount of time the seller remains in the practice on a daily basis after a sale should be minimal – one to two weeks. The seller should be simply finishing up work and “handing off ” patients. Since the seller is not starting new treatment, the seller has little else to do and so can become a distraction to the staff and patients. The seller should be reasonably available for an extended period of time for the purpose of consultation but it is not necessary for the person to be in the office for a significant period of time.
8. How is goodwill preserved/transferred from the seller?
We see a lot of negotiations damage goodwill and, ultimately, that is what a purchaser is
purchasing as the drive for the future production/collections stream. Negotiations can be damaged by either party (or advisors) but the first pitfall for a purchaser is trying to save “pennies on the dollar” when in the end, the potential savings is minor when looking at annual net income.
Other issues include overzealous advisors making either semantic or inconsequential
changes to documents or making unnecessary or unreasonable request or demands of a seller using “protecting the client” as justification. While its important not to “give away the farm,” it is also important to understand that giving now may pay off exponentially after the sale and year after year.
9. Do I need legal or financial advisors?
Absolutely. Some transition specialists/brokers will encourage you to not retain advisors (legal, financial or other transition specialists) or require you to use their “in-house” or “referred resource.” This is wrong. You should always have a competent team looking out for you – preferably professionals who are at least familiar with dentistry but even better, familiar with dental practice transitions. There are reputable resources available throughout the country but be sure that whomever you choose is well versed in the local statutes, taxes and even community needs, to provide you the best level of service. This person should be a team player and “deal-maker” (not breaker) while protecting your personal interests.
10. What is dual representation and transactional brokerage?
Dual representation is the practice of representing both the seller and purchaser in a brokered transaction and being paid by both. In many states, this practice is illegal. Not only is it illegal, it is unethical. Transactional brokerage is the practice of representing neither party, but rather, the transaction itself. This usually provides shelter for a broker whereby the person minimizes responsibility for accuracy and disclosure. Ask if the specialist is a dual representative or transactional broker – both are roles the person should disclose.
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