What Does Your Future Look Like?

Some say that tomorrow's dental industry will become more polarized, with the more successful practices working, acting, and looking radically different from the less successful ones. This is pretty important in light of a 2004 CNN study that found that only 43% of American workers were happy with their employer.

Leadership is often the quality that separates the great practices from the good ones, where are your going with yours? To advance into the future with confidence create a business vision by involving your entire team in the process. Please note that ultimately, handling stress, teamwork, working in a professional manor towards patient satisfaction and service is our goal, the higher purpose to which we serve. Yet, we have to arrive in the future financially sound and to provide dentistry of the highest quality, the dentists themselves have to be financially fit. What to do?

Did you know that in 2010, demographically speaking, there will be more baby boomer dentists selling there practices than is any time in history before or sense. It will be a peak year in supply; it will be a buyers demand market placing downward pressure on the value of dental offices. What else do we know? We know some good news and we know some bad news. Let’s take a look at some good news first. According to a study on ‘The Economics of Dental Practice – Present and Future’ by H. Barry Waldman and Steven P. Pealman released late last year in CDA Journal, the good news is “The combination of increased practitioner income, increases in proportion of the population reporting visits for dental services, decreases in the number of dental school graduates, decreases in the dentist-to-population ratio, and increases in the numbers of female students and practitioners (many of whom report significantly fewer work hours than their male counterparts), portends favorable economics for the dental practice.”

The bad news is that “the cost of dental care is “felt” in a greater extent than for other health services. Current and future funding arrangements for dental services could be vulnerable to economic downturns, efforts to control business overhead costs and continued minimal government support… Compared to other health services the reliance on 1) out-of-pocket funding for a major share of dental expenditures, and 2) limited government support of dental services raise questions regarding the infrastructure of dental economics.” The details of these findings are in the report, November 2006, Vol. 34. No. 11, CDA, Journal.

What Is the Lifecycle of a Dental Career?

By analyzing the life cycle of a dental career we know that the first 10 years make up a period known as the rapid growth phase. At the end of this phase most of the practice’s assets will have been depreciated down significently. The next 15 years will be the peak earning years. Around the 25th year in practice a dentist will experience a slow but steady decline due to his or her desire to work less. According to the past president of the CDA, only 6% of dentists will be able to retire at the age of 65 in a manner and standard to which they are accustomed.

Don't miss out on the most missed opportunity in dentistry, that of capturing the goodwill value of your practice more than once in your career. This is accomplished by selling your practice more than once. For example, by years 10 -15 you have substantially built-up most of your practice's goodwill value and you have depreciated down most of the value of your assets. Think about it, this is the time when your practice is at its optimum value to sell, not thirty years later when you have reduced your schedule and are generally slowing the practice down.

This does not mean that you would have to move from your community, as you could consider selling 1/2 of your practice or all of your practice and commuting to a different area outside of any restrictive geographic covenant.

What Are Some Of The Problems Associated With A Practice Sale?

There are all kinds of problems or issues that go hand in hand with the sale of a Practice; usually all of them can be solved.

Consider the following:

Taking "positions" in the negotiation of a practice sale could be detrimental to the outcome. Try focusing on mutual interests. The buyer and seller have a mutual interest in that they are both investors, when all is said and done.

Make sure you agree on some fair standards of negotiation, ahead of time. Try to separate the "people" from the "problem", i.e. try not to let personalities get in the way. Focus on the common interests of buyer and seller and use objective criteria during the negotiation process.

Of course, this is the ideal scenario and not easy when it comes to the selling of a practice that you’ve put your heart and soul into and it is equally difficult for the buyer who is about to invest a substantial amount of money into a practice. For this reason, the use of a practice broker is key towards a successful sales agreement. The practice broker frequently demonstrates a "hand-holding" approach. However, it is important to note that the practice broker’s job is to get the very best price for the party he of she represents and to negotiate a successful sales agreement.

Staff Issues

Some of the problems to consider in regards to staff that may arise after the sale of a practice are: What if a staff person is let go following a practice sale? Who is legally responsible for compensation? What if key staff leave? What if the key staff are members of the seller’s family?

Group Practice Issues

Group Practices can potentially pose some specific problems. For example, what can you do to prevent the slippage of patients you purchased as part of the goodwill of the practice, to the other partners? The answer is to have a separate telephone number for each "partner" in the group in order to maintain separate identities. This should preserve the goodwill value of everyone involved in the group. Another thing the buyer has to be aware of is any rights of 1st refusal in a business agreement between the "partners". The potential buyer is an a vulnerable position after having possibly invested money into investigative and due diligence fees, and then finding out that the purchase opportunity could be sold out from underneath him or her to a partner in the practice.

What happens when the seller stays on as an associate?

Other issues to consider revolve around "authority", i.e. who’s in control of the practice if the seller stays on as an associate? Where will the old staff’s loyalties be? What about the transfer of patients to the buyer when the seller stays on in the practice? Part of the answer to these issues could be best addressed if the seller takes a 3-6 month holiday, switches office hours and agrees to reduce services.

Restrictive Covenants

Another concern can be if Dr. A, the seller, has a restrictive covenant with Dr. B, the associate, that says that Dr. B. cannot leave the practice and compete with Dr. A. during a specified time period and within a certain distance to the practice. If Dr. A. sells the practice to an outside purchaser, will the restrictive covenant with Dr. B be transferable to the new purchaser? This should be food for thought.

Seller’s Aged Receivables

How is the collection of the seller’s accounts receivables handled? The seller can deal with this problem alone OR the buyer could purchase the A/R’s for a discount considering the buyer’s time and trouble to collect the seller’s A/R’s and the fact that as the A/R’s age, they are less likely to be collected.

Re-Treatment of Seller’s Work

Sometimes, after the sale of a practice, the buyer has to re-treat "work" that the seller has done. When this happens, the seller should be responsible for all of the expenses needed to repair failed workmanship. To protect the buyer, an agreement should be signed to this effect between the seller and the buyer.

Why Would A Seller Use An Investment Perspective To Value His Or Her Practice For An Eventual Sale?

In reality, both the seller and the buyer are investors. The seller is hoping to realize a good return on his or her investment into the practice and will likely invest the proceeds of the sale into some other investment vehicle. The purchaser is counting on the practice allowing for a good salary and a healthy return on the investment, as well.

Therefore, analyzing a practice from an investment perspective should align the interests of both parties, the seller and the buyer, towards a common value.The process to establish this value involves a combination of different valuation techniques to establish a range of values. From this range of values the seller selects a market price that can be justified to the buyer.

The key point to reinforce is that what both the seller and the buyer have in common is that they are investors. The "numbers" have to make sense to both of them and once that has been achieved, a sale price can be established that is satisfactory to both parties.

What Are Some Of The Things You Should Look For When Considering Buying A Specific Practice?

The Balance Sheet should be clean. You shouldn’t buy the seller’s debt.Cash Flow should cover dividends, if any (if incorporated), in addition to your salary, and capital expenditures. If it doesn’t, a practice would have to "dip-in" to an operating line of credit, which is not a sign of good health.Operating Profit Margin or "overhead", is calculated by dividing earnings before interest, taxes and depreciation, (EBITDA), by Gross Revenues, and should not be greater than 60 - 65% in a non-incorporated practice, (one that does not include the Dentist ‘s Salary) or 85 – 90% in an incorporated practice, (where dentist’s salary is included at 25% of Gross Revenues).

If a practice stands out from competing practices by being different, i.e. it has carved a niche market for itself, such as a focus on prevention, restorative, cosmetic, walk-in emergency treatment, extended hours, esthetics etc., then that practice is potentially more attractive than others. A practice that has something special or unique that sets it apart from the crowd should make it more valuable than another.

How do you know if you will have enough cash flow to service your needs when you buy a practice?

With respect to Cash Flow, it is wise to know what the Cash Flow is from Operations (CFO), how many days does it take for the Accounts Receivable to be collected and what percentage of the accounts are aged 0-30 days, 30-60 days and 60-90 days.

It may also be valuable for you to have your accountant do a Projected Income Statement (Profit and Loss Statement) and a Projected Cash Flow Statement, (Pro Forma), of the practiceyou're considering buying, before you commit to the purchase. Remember, though, that anything that is "projected" is subject to the accuracy of the information going into the analysis. Often it is somewhat biased therefore it is used to "guess" at best-case and worst-case scenarios.

In order to know whether you will have enough cash to run the practice and make a profit, you should "run" the numbers, taking into account that they may be biased to some degree.

What do you need to know about the Practice Sale Agreement?

If the practice were a proprietorship or partnership, then the purchaser would be buying the assets and goodwill of the practice. In Canada, it is important to know that if the buyer were purchasing an incorporated practice, then the sale should be structured so that he or she would be buying the seller's shares of the practice (which is an advantage to the seller as the tax implications are less).The purchaser and the seller have to be aware of the pros and cons of how the practice sale agreement is structured. It is always advantageous to seek professional help in these matters.

In fact, there are three methods to the valuation of a dental practice:

• The Market Approach
• The Asset Approach
• The Income Approach

The truth is that all three of these approaches contribute useful perspectives to value. Most of you are already familiar with the Market and Asset Approaches, with their Rules of Thumb, and commonly used by practice brokers and written about in the dental literature.

If not, then, we can discuss this further when you post your questions.

What exactly are you "buying" when you buy a Practice?

When you buy a Practice, you are buying the Net Income and Cash Flow of the Practice, autonomy and job security, as well as any subjective attributes that have attracted you to the Practice in the first place. Of course Goodwill always plays a key role and the hope for the buyer is that the Practice is a going-concern with lots of ongoing patient treatment plan momentum.

Ultimately both buyer and seller are investors and to arrive at investment value one needs to use the Capitalization of Earning Method within the Income Approach to valuation. Comparing this value to the market price value of recently sold comparable practices in your geographic area is the only way for you to know if the return your were hoping to get from your investment into your practice was realistic and for the buyer, whether or not the asking price represents a good deal when seen from an investment perspective.

The income approach to valuation is the best way to understand you practice from an investment perspective.