Minimizing Your Risk when Selling a Dental Practice
As you give thought to stepping away from your professional legacy, don’t place yourself in harm’s way. Selling a practice is serious business wrought with issues that require special attention.
If you hope to slip away without being dogged by an unhappy successor, this page offers some advice you’ll want to take seriously.
As you survey your practice, understand its greatest value is an intangible. It isn’t what you see that attracts someone to your opportunity but the anticipation that current patronage and trends shall continue and get better in the hands of someone else.
Understand that you are not guaranteeing any levels of success to your successor. Their success hinges on their understanding the nature of successfully transitioning into an existing practice culture and creating healthy relations with staff and patients. As important as their clinical skills are to you, this is not a critical feature in their retaining your patients.
Your buyer’s quotient for success is dependent upon variables out of your control. Thus, it is critical that you insulate yourself from that buyer who does not conduct a proper “due diligence” review of your practice, exercises poor judgment and fails to establish proper relationships, and then finds fault in you for their travails.
Today’s practitioner has far more challenges to succeed than did you when you commenced your practice. In the past it was commonplace for buyers to out-produce sellers in their first 12-months of ownership compared to the seller’s last 12-months. This is no longer the rule. Yet, do not misinterpret this comment. Most buyers are doing well.
But it has come from humility, patience, winning the trust of staff and patients, “staying-the-course”, being realistic and engaging top-notch consultants. There are buyers who have made bad purchase decisions, implemented poor judgment and refuse to accept responsibility for their actions. The result is unhappiness and economic hardships which is prompting some buyers to bring legal actions against their sellers. This is not how you wish to remember your sale.
As you approach this change, you need to implement appropriate risk management so you are properly protected. You need to price the practice appropriately, prepare a thoroughly statistical, objective and informative offering summary (keep the financials and stats current) and devise a plan on how to market the practice effectively while keeping its intended sale somewhat discrete from the community.
Pricing is crucial as you want to hit that sweet spot wherein you can realize the practice’s greatest value while still attracting a wide audience of candidates. If you aggressively price the practice, you will have created a barrier. By hitting that sweet spot, you will truly understand what the interest is if you have implemented an effective marketing plan.
If you are a GP, an Orthodontist, a Pedodontist or a Prosthodontist; and if your relationship with Delta is that of a Premier-only provider; the economic model you enjoy will no longer continue once the practice transfers.
In April 2011, California Delta changed their position regarding Premier-only providers. Going forward, new network providers shall be both Premier and PPO providers if they choose to be in network with Delta. As such, Delta shall be paying their contractual benefits to the provider based upon each patient’s policy. This change was implemented by California Delta per their intent to eliminate Premier-only providers. (A practice’s Premier-only status can continue if a nearby Premier-only provider acquires your practice with the two practices integrated together under one roof.)
Knowing this and going back to the crucial aspect of pricing, Premier-only practices need to be properly analyzed before being placed “For Sale.” For illustration purposes, a Delta Premier practice generates $1 Million in collections per year. $600,000 of this revenue stream is determined to be from Delta-insured patients. The acquisition of the practice dictates that the successor shall become a Delta Premier / PPO provider.
In analyzing the Delta component, it is determined that the practice’s $600,000 Premier revenue stream translates to $396,000 in PPO revenue after performing an assessment comparing the practice’s Premier fees to Delta PPO fees per that practice’s service mix. As such, in a sales scenario, this is not a $1 Million-year practice. This is now a $796,000-year practice with its profitability greatly reduced. If this practice was priced based upon its $1 Million-year revenue stream, the seller needs to tread very carefully as he /she is traversing a mine field and is placing themselves in harm’s way.
This Delta policy has a huge influence on pricing Premier-only practices. Additionally, it shall have a huge impact upon the culture of the practice as it is thrust into a new economic model as it goes forward with new efficiencies having to be created.
At this time, Delta does allow new network providers who are Endodontists, Oral Surgeons and Periodontists to be Premier-only providers.
Second, staff perception. If you practice in an urban marketplace, recall “The Great Recession.” As your practice experienced topline revenue erosion, your faithful staff still anticipated performance reviews and raises. This became a tough balancing act as your bottom line was also shrinking. And providing a competitive benefit package has become an ever-growing expense.
You survived The Great Recession and things are again better from top line and bottom line perspectives. But as outlined, Delta is going to move your successor into a different economic model. This shall dictate your successor making changes in the staffing model. Some team members may not be retained, and the benefit package shall change. Existing pension plans shall not continue.
The practice shall now be realizing referrals from Delta which your practice has not seen as Delta does not refer policy holders to Premier-only providers. These Delta referrals shall be patients with PPO plans. The practice shall see an increase in patient volume. And the hygiene schedules shall be tightened up so more prophies can be realized in a day.
From the staff’s point of view, they shall be working harder, and their compensation package has changed. This is a tough pill to swallow. Without fully understanding the economic picture, the staff may villainize the successor as this would never have happened if you still owned the practice.
This is the situation facing you (and your successor) if you are a Delta Premier-only provider. If you choose to ignore this impending change in your practice when it is priced; expect resistance, offers that do not sustain a buyer’s due diligence scrutiny and banks declining loan requests. If a sale does happen to close at a premium price, the seller needs to hope their sale was paper in such a manner that they are not vulnerable to post-sale repercussions.
Once a price has been set, confer with your tax advisor. Come to terms with the tax bite. Some sellers confer with their advisor after they are under contract to sell the practice and then go into shock when confronted with this tax bite. Get over this shock before placing the practice for sale. Further, timing issues and some well-thought out strategies can minimize this sting. This is extremely important in your planning. If you can’t sell now for tax reasons, sell later when you are psychologically ready for this hit.
Ideally you would like to discuss this succession with a good cross section of buyer-candidates within the same time frame so that you can gauge who is best suited for your opportunity. Comparison shopping is very important.
The preparation of the offering summary needs to be thorough. Describe the many aspects of the practice such as how long established, the date you acquired it, how long at the current address, why you are selling, and the days and hours the office is opened and professionally staffed.
Document monthly patient flow concerning new patients, patients seen and daily patient flow, and ideally broken out by provider.
State the nature of the recall system and its effectiveness, i.e. if 80-patients on average are recalled each month, what percent schedule/keep appointments? State the number of active patients. This is a huge hot button. Be conservative and offer a short timeline definition. Stating a 12-month timeline is safer than a 36-month timeline.
The hygiene schedule is an excellent window in establishing patient activity. If the practice has 2-days of hygiene/week, do not state there are 1,500 active patients when the hygiene schedule is cycling some 400 patients within each 6-month window. State how far in advance the various schedules are booked. Profile the percentage of income realized from the various procedures. State payer mix percentages in relationship to total income.
Profile patient demographics by age. Buyers want to know if this is a geriatric practice. Further, if there is anything peculiar to your patients, state such. An example is where a large percentage of patients are from a church affiliation. Remember, this drill is about covering your assets. Make full disclosure so you minimize post-sale issues. You want your successor to avoid the “surprised post-purchase buyer” syndrome.
Describe the management systems. Is there an office policy manual and if so, how current? State if the practice is OSHA and HIPAA compliant. Describe the physical plant; the nature of the flooring; if nitrous is used and how; the nature of the delivery systems; the technology employed, the age of the leasehold improvements and the total capital invested in your practice.
Prepare an inventory by room of the items which shall be included in the sale along with a separate list of items you plan on retaining. Describe the building and its parking arrangements. State whether or not the building and the dental suite are ADA compliant. State the leasing arrangements regarding rent, common area expenses, rent adjustments, current lease term and options. Are any utilities and janitorial included? Some dentists who have lapsed into periodic rental arrangements by not renewing their leases are shocked when they learn that their landlord has other non-dental designs on the suite. Maintain leasing arrangements on the suite.
Describe your staff by position (not name), date of hire, current compensation, when the last reviews were performed and the date of the next reviews, and the benefits for each employee. State if there may be any staff departures and identify key staff members.
If you have a problem employee, terminate and replace. Do not dump a problem employee on your successor. If your spouse is employed in a critical position, secure and train a replacement prior to placing the practice for sale. If you don’t and if it is your spouse’s desire to leave shortly after the sale, you have created an additional issue for your successor.
If you can take your key employee into your confidence, this is recommended as they shall be an ally as they can also critique candidates, offer their thoughts on possible successors and help ease the shock to other staff members when the successor is introduced.
Assemble copies of your practice tax returns and year-end financial statements for the last 3-years and a year-to-date Income Statement for the current year. Strip your social security and employer ID numbers. Do not assume that prospects will understand the real profits generated by the practice.
Prepare a spreadsheet summarizing these financial documents. Then prepare another spreadsheet clearly identifying items which comprise the real profits such as depreciation; amortization; interest; CE; travel; auto; your pension contribution; personal insurance premiums such as disability, life and health; compensation paid to family members whose services do not require replacement employees; the net profits; your salary if a corporation; the payroll taxes paid on said salary; and the Franchise Tax payments per your operation as a corporation.
Prepare a monthly summary of the production and collections for the last two years and year-to-date. Have a current accounts receivable aging summary available.
Even though you may not be selling the AR, it is important that prospects have a current summary so they understand the payment habits of the patients along with the cash flow management implemented at the front desk.
Prepare two separate sets of summary packages. There is the offering summary which will include all of the outlined information with the exception of tax returns, financial statements, computer reports, information concerning Delta Premier revenues if a Premier-only practice, premise lease and the Delta fee schedule. The second package shall then contain these items.
With your assembled packages and your sweet spot price, implement the marketing plan so that you can create an interested market of buyers. Be careful not to identify yourself in the marketing plan and create a contact point that maintains requisite confidences.
As you arrange after-hour meetings, request prospects to bring their CV along with a photo that you can attach. Have a list of important questions to ask. Such questions would be what they are seeking in an acquisition, what attracts them to your opportunity, their intentions regarding retention of staff and maintaining existing compensation packages, what they believe they need in transition assistance, how they shall approach “first patient” encounters with long-standing patients of the practice and how they shall handle rework issues. Have them explain their clinical skills and their current monthly performance skills in terms of dollar production.
Learn if they are diagnosing what they are delivering or simply delivering what was diagnosed by someone else. Successors who are clinically superb but have little experience in diagnosis and closing treatments are buyers who have a learning curve when they encounter this new dynamic.
It is again stated that you strive to meet a good cross section of candidates within a short period of time. This affords the luxury of comparison. Then focus on preferred candidates and have a second round of meetings. If in this second round the feelings are mutual with a preferred prospect, deliver the second package.
Insist that they engage the services of a knowledgeable dental accountant in the analysis. If they do not engage such expertise, do not pursue their interest. One of your risk management positions mandates that your prospects engage expert advisors in the dental field. Remember, you are covering your assets!
When a preferred prospect is ready to go forward, instruct them to engage one of the expert dental transactional attorneys to draft an Offer/Letter of Intent and who shall handle subsequent paperwork on behalf of this party if the two of you strike an agreement.
You also need to align yourself with such an attorney as no one counselor can represent both parties. Do not use your stand-by attorney unless he/she is one of the dental legal superstars. Sellers who use ill-prepared counsel for papering their sale may later regret this decision.
There are a multitude of industry and risk management issues that need to be addressed and which are only possible by advisors who understand your profession and those areas requiring specific attention.
Insist that your intended buyer performs a chart audit with the buyer’s warrantees and representations article in the contract stating that they have performed such an audit and they accept the activity status of the charts.
Insist that the buyer engages a dental rep to inspect the equipment. You then need to make the noted repairs on your dime. Have the buyer then inspect the repairs and acknowledge their satisfaction. This needs to be done prior to the close.
Transact the transfer through a neutral stakeholder. Engage an escrow company knowledgeable in the sale of dental practices. This is not a bulk sale, nor is any sales tax paid to the State Board of Equalization. Further, it is extremely important that the appropriate releases and clearances be obtained for everyone’s protection which is an additional service provided by the escrow company.
Post-sale, spend time with your successor so an orderly transition occurs. Keep relations and communication channels open. Check in to see how things are going. Many post-sale problems occur because sellers do not respond quickly and wisely to concerned buyers. Your successor is simply trying to come to terms with your practice and its culture. Listen and work with them. Remember, you sold the practice to this party because they were your preferred buyer. Do not abandon them.
In summary, the diligent sale of a practice requires proper planning and preparation, appropriate pricing, full disclosure, securing the appropriate successor and assisting in an orderly transition. By taking the appropriate steps, you can look back and feel good about leaving your patients and staff in the hands of a very capable successor. And on the flip side, your successor shall be pleased in the manner by which you transacted this change in ownership.
As you have never gone down this path before coupled with the fact that you are busy managing and operating your practice, engage the services of an experienced transactional specialist wherein such a focused application is second nature and simply part of the skill set they bring to the table. And take solace in knowing that the commission paid is your insurance policy that your sale was handled properly. It is your guarantee that you pursued the efficient path with your assets fully covered.
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“I have dealt with 99% of the brokers and agents in California as publisher of The Dental Trader. And I get constant feedback from dentists, dental attorneys, dental lenders and consultants. I know who is credible and who isn’t. There are parties I refuse to do business with because of their reputations. Ray Irving’s reputation is among the best. Has been for the 35-years we have done business together. He is direct, honest and trusted. Many of his peers’ pale in comparison. Most people highly respect and love the man. I am one of them.”
—Bruce Carter, Publisher of The Dental Trader, Dana Point
“I initially worked with a broker from the East Coast that I met attending a seminar on practice transitions. Although quite experienced in practice sales, his company didn’t know how special it is to live and work in Sonoma County. I chose to list with Ray because of his experience in the Bay Area and equally important his transition philosophy.
Ray believed that the practice transition should result in a win-win for both buyer and seller. After practicing as the only dentist in a small West Sonoma County town, I wanted to find a buyer with a similar practice philosophy that would appreciate the uniqueness of my situation and could carry on my legacy spanning 35 years.
As a result of Ray’s efforts, I had three signed full priced Offers. The Multiple Offers provided me the opportunity to choose that person who I thought would best fit into our community, staff and patient base. Since my wife and I continue to live in our community, we have had the pleasure of getting to know the buyers and have become good friends.
The post-sale comments from friends and former patients have also been extremely positive. My transition truly has resulted in a win-win outcome and I continue to be grateful to Ray for playing such a big part in my successful transition into retirement.”
—Steven McNeal, DDS, Occidental