Dental News - Roadblocks to successful practice transitions

The Clemens Group

Sun. 26 November 2017

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Many people think the sale and transition of a dental practice is a small and simple process. After all, how difficult can it be for a Mom and Pop-sized business to transfer to new ownership? The fact is, there are many long and tedious steps involved in getting from a listing to a closing, and the process directly involves the lives of the sellers, buyers, office staff and often thousands of patients.

While most issues can be resolved by negotiation in good faith, there are a few things that can pop up that will have a direct effect on the value of the transaction and, often, the feasibility of a sale.

Lets examine a few circumstances that have bubbled to the surface in the past and see how you can avoid these potential deal killers in your practice transition.

Proper planning

Certainly one of the first questions we ask potential clients is something along the lines of, “What are you going to do with the rest of your life after we sell your practice?” We have found that if the owner does not have a good answer to this question, along with some assurance that they have a sound financial base and can afford a retirement lifestyle, they make poor clients who often prove to be uncooperative and unattractive to prospective buyers.

This is not intentional, of course, but rather an indication that they just don't know what they are going to do with themselves. Vague exit plans are a real turn-off to prospective buyers as they become suspicious that the senior doctor may somehow try to worm his or her way back into the practice’s market area.

Buyers borrowing hundreds of thousands of dollars in addition to having sizeable student loan debt do not want to risk competing with the former owner of the practice. Any talk of working after the sale will sometimes cause the buyer to walk away.

Another area of poor planning may involve current associates or staff people. In an effort to secure that “Associate to Owner” prospect, agreements made with associate doctors are often amateurish and incomplete. When a practice is subsequently placed on the market, only to find that the associate doctor does not have an enforceable covenant not to compete, the value and marketability of the practice can take a huge hit.

Buying their cooperation after the fact can be expensive and again may provide the buyer cause to call off the sale. We occasionally find staff members who, for some reason, are paid way outside of the normal pay scale and the buyer is justifiably concerned about continuing that rate or (gulp) having to dismiss a key person. I have seen a deal killed when that staff member stated intentions to essentially extort the current salary from the new doctor.

Another important thing I'll mention in this area is the lack of adequate curb appeal and equipment/technology upgrades. You can take for granted that all buyers expect digital radiography and a pathway to paperless charting. While some sellers may have no interest in a digital conversion, we have found that the “I'll just discount the price and let them get what they want” is a poor strategy.

We have found marketing techniques around this, but given a choice between a digital and non-digital practice, most buyers will take the path of least resistance. We often say it is amazing what $10,000 can do to the appearance of a dental office, but buyers show little interest in having to remodel the office before they can get to work. Maybe it's time to give up the walnut paneling and shag carpet.

The wrong accountant

There seems to be no shortage of “experts” on the subject of practice valuation, and we often find owners’ opinions of their practice value to be way off base. Their logic seems to be based on some magic formula that failed to take into account, among other things, cash flow and market data.

I can assure you there is very little “Stupid Money” in the marketplace that will come to closing without some justification of value. We find buyers and their bankers to generally be more knowledgeable than sellers about practice valuation, and overpricing an office gives the impression that the sellers are greedy, don’t know what they are doing or both. You are cruising for a crash if you do not have a thorough, current, accurate and justifiable valuation of your practice.

Most accountants are terrific people and do tremendous work for their clients, but there are some who are sloppy. Since dentists are the trusting souls that they are, they abdicate this part of their practice's management, and the recordkeeping proves to be difficult to understand. Ultimately this interferes with the buyer’s ability to convince a lender to fund.

With some vetting of buyer prospects, you may find the following:

They are not clinically capable of treating the volume of patients at the target practice.
They do not have adequate credit ability or financial resources to close the deal.
There may be spousal objection to the practice location.
The buyer may have personal problems, such as addiction issues, dental board scrutiny or a pending divorce that will ultimately get in the way of closing a deal.

Watching doctors cruise dental schools looking for a buyer reflects some lack of knowledge about who the potential buyer for a practice might be because, unlike in the era of Baby Boomer graduation days, less than 5 percent of the current graduating classes go directly into practice ownership. Grandma would say you are barking up the wrong tree, or as one of colorful southern friends might say, “This dog ain't never gonna hunt."

The wrong attorney

Who can forget our attorney friends? Like accountants, most are terrific folks, working in the best interest of their clients. We refuse to come to closing without all parties being appropriately represented by counsel. That being said, some have no idea what they are doing and may be responsible for a good deal of crash and burn. Just because a son, daughter, brother, wife, nephew, uncle or aunt is an attorney does not make them qualified to represent a dental practice buyer or seller any more than we would place multiple implants on a patient just because we’re dentists.

Dental practice transitions are high-trust transactions that involve a considerable amount of intangible value and cooperation. An attorney bent on “winning all the wins” and making sure the other party “loses all the losses” is a recipe for failure. Find an attorney with experience in dental practice sales and a reputation for getting deals done. The few dollars you save by having a friend or relative represent you could prove to be very painful.