4 Common Dental Practice Transition Mistakes and How to Avoid Them

Nov 11, 2016 | Deciding to Buy a Practice

We’ve worked with a lot of clients to help them successfully transition to dental practice ownership. We’re proud of our track record with our clients, and the results of the good work we’ve done to ensure that both the buyer and seller are happy with the transition. We’ve seen, from time to time, a few common dental practice transition mistakes. If you, or someone you know, will ever buy a practice in the future, read through these four common dental practice transition mistakes and learn how to avoid them.

1. Selling the Cow and Trying to Keep the Milk

An owner of a practice in Utah thought she was ready to sell. She was the third-generation owner of a practice where she was the main source of production, and her father (the previous owner) was the associate now working two days a week. The practice grossed over $1.3 Million in annual collections, and they were asking top dollar for the practice. Our client looked at the numbers with our help, and concluded that the price, while steep, was doable. The problem came when negotiations started. The seller wanted an 8-year guarantee that she would remain employed by the practice with a minimum guaranteed salary, and wanted her father to be contractually guaranteed his current job as associate. The deal never materialized. Clearly, the owner and her family wanted to cash out of the practice, while still being guaranteed an income stream from the business, whether or not the new owner could afford it.

Another orthodontist thought she was ready to sell. His practice grossed just under $1 Million in collections a year with good profitability. This seller asked to be kept on the practice, under contract, for 10 years at a per diem of $1,750 a day for a minimum 120 days per year. Clearly the owner wasn’t ready to retire or let go. We never could figure out how the seller thought that others would think this was a good idea.

Interestingly, both doctors were “financially set” and could have afforded to sell and walk away. Emotionally, however, neither were ready to let go. Both made unreasonable demands that sank the deal. It’s not unreasonable for the seller to stick around for a little while after a practice sale. In most cases, it’s actually preferable to help smooth the transition. The problem comes when “a little while” goes longer than a few months post-transition. Make sure the seller has something to retire “to” and not just retire “from.”

Questions a buyer can ask the seller to avoid a similar situation:

  • What are your plans after the sale? Do you want to continue to practice dentistry, and if yes, in what capacity?
  • Why do you want to retire?

2. Seller Not Actually Ready to Sell

A seller in Washington State wanted to sell his practice, but had not reviewed his finances to see if he could afford to walk away from dentistry yet. The seller retained a broker, listed the practice, and our client became interested and engaged us. We helped the buyer perform due diligence on the practice, and the buyer flew out to the practice to look things over. The buyer put together an offer with our help and submitted it to the seller’s broker. After the broker and seller received the offer, the seller talked with his accountant and learned that even if he sold at that price, he would need to be on a “rice and beans” diet for the rest of his life if he wanted to retire right then. The seller backed out to considerable annoyance, wasted time and money of everyone else involved.

Questions a buyer can ask the seller to avoid a similar situation:

  • Have you talked with your financial advisor or CPA about whether or not you can afford to retire?

3. Getting married without even having met – The partnership to bet against

Some sellers are savvy enough to know that they need a second set of hands to grow the practice, and finding a good associate is tougher than they imagined. They then think that they will sell half (or some other percentage) of the practice to a younger dentist, who will then become the partner and eventually buy them all the way out of the business. They then engage a broker and try and sell half the business to a doctor they’ve never met and worked with.

This is like an arranged marriage – getting married, never having dated. The results are predictable in a dental office.

One doctor, after having two associates come and go, decided that he needed to sell part of his practice currently grossing $1.5 Million. He wasn’t ready to retire, and was proud of the business he’d built. He thought he be a great mentor to a new dentist. Having had two “bad” associate experiences (“bad” in this case being defined as, “They didn’t want to work the rest of their career at 35% of production and make me rich.”) wasn’t willing to try and work with another associate on an arrangement that would allow them to buy in at a later date. He wanted someone to buy in now. He met our client. They hit it off. They compared skills, and everything looked good. They discussed treatment philosophy, and couldn’t have been happier with the discussions. They talked about the future plans for the business, and thought they must have been identical twins separated at birth. So, they did the deal. Within 12 months, both doctors realized that they weren’t a “good fit.” The partnership ended in a bitter dispute. Patients left the practice. Employees left to find a more stable environment. The legal bills were huge.

The moral of the story? Never enter into a long-term partnership without an acceptable associate term, which allow both parties the chance to work together, judge each other’s clinical and managerial abilities, as well as personality “fit.” There are myriad ways to work with attorneys to make sure both parties have skin in the game, as well as an “out” if an associate-to- own deal doesn’t work.

Questions a buyer can ask the seller to avoid a similar situation:

  • Have you had associates or partners in the past? Why haven’t they stayed?
  • If there were a way to have us both have incentives to make the deal work, would you be willing to delay the partnership sale slightly to ensure that our works styles and skills are a good fit?

4. Saving a dime to pay a dollar later

A doctor was working with a potential associate to whom he intended to eventually sell the practice. The associate engaged us, and we recommended valuing the practice up front and working with legal counsel to draft an employment agreement so that everyone’s interests were protected. The seller worked hard to convince the buyer, our client, that “his word was his bond” and that they didn’t need to “waste” money on paying other people as long as they were both upfront, honest and open in their communications. Against our advice, the buyer agreed and began working as an associate without any formal agreement on buy out timing or price. A year later, when the buyer was ready to purchase, the seller starting having a few “changes of heart.” Conversations that the buyer was sure they’d had, were remembered differently by both parties. The seller suddenly wanted more money than they had originally agreed to. The buyer ultimately walked away, and bought another practice. Both the seller and buyer lost a year of their time, money and effort with nothing to show. All to save a few bucks on formalizing an agreement. Don’t save a dime now, to pay a dollar later.

Questions a buyer can ask the seller to avoid a similar situation:

  • Which firms have you engaged to help with this transition? How are they paid?
  • How can we be sure to protect ourselves and our interests, and ensure a smooth transition for patients and staff?
  • Will you have any issues if I engage my own CPA and lawyer to advise me through this deal?

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