Practice Transition Deal Killers – An Article in Five Parts – Part Four

The understandable choice of the wrong bank is another deal killer

Many people assume that 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? Well the fact is, there are many long and tedious steps involved in getting from a listing to a closing, directly involving 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 which will have a direct effect on the value of the transaction and often, the feasibility of a sale. In some cases a little pre-sale planning might have averted disaster but often the problems are inherent to the business. In this series of posts, I’ll take a look at five elements that effectively kill off a practice transition. In it, we’ll examine a few circumstances that bubbled to the surface in the past – but rest assured, there are probably other land mines waiting to be discovered.

Part 4:The understandable choice of the wrong bank is another deal killer.

I say this is understandable because most of us live our entire lives not really understanding the different types of banks and bankers. Personal relationships with very pleasant bankers might seem like a smooth and easy way to do business but the world of dental practice finance is actually a relatively small niche in a specialized area of banking. Going to the wrong teller’s window may not only prove to be a waste of time, it may actually torpedo your deal.

For our purposes, there are two general types of lenders or lender divisions. The most common and the type a dentist has generally done most of their business with deals with hard assets like cars, boats, houses and dental equipment. These are known as Asset Based Lenders and their business model is based primarily on the value of collateral offered by the buyer. Even when referred to as “Small Business Lenders”, they frequently look to cover their loan with additional assets or guarantees such as co-signers or assistance from the Small Business Administration. While these are great folks to visit with when you want to buy a new car or some equipment upgrades, they will not be very helpful with practice acquisition funding. For that type of funding you need the services of a bank whose model is based on Cash Flow and understands that the vast majority of the purchase price of a dental practice is almost always made up of intangible assets. If you are not dealing with the right type of bank, believe me you are headed for disappointment.

The problem comes when Asset Based lenders get involved and really, really, really want to be helpful.  As the process works its way through the various management layers and loan committees, the buyer and seller are left treading water, waiting to see if funds are ever going to be available to consummate their transaction. Weeks turn into months and ultimately the lender reports that they will not be able to do the deal without the personal guarantee of most of the buyers’ family tree. Sensing that something must be wrong, the buyer freaks and withdraws their offer when in fact the right bank could have given them a tentative approval for funding in just a few days. Smaller and/or small town banks are particularly known for this, again because they want to be helpful. On rare occasions they will have some Community Development Funds that they can use for an acquisition but even then the terms will be very restrictive.

Dr. Steve Wolff – UMKC Class of 1977

Practice Transition Deal Killers – Part Three

An Article in Five Parts – 

Many people assume that 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? Well the fact is, there are many long and tedious steps involved in getting from a listing to a closing, directly involving 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 which will have a direct effect on the value of the transaction and often, the feasibility of a sale. In some cases a little pre-sale planning might have averted disaster but often the problems are inherent to the business. In this series of posts, I’ll take a look at five elements that effectively kill off a practice transition. In it, we’ll examine a few circumstances that bubbled to the surface in the past – but rest assured, there are probably other land mines waiting to be discovered.

Part 3: Sometimes You Picked the Wrong Buyer.

One of the observations we have made watching doctors try to sell their own dental practice is their belief that every prospect is the buyer. We know that is not the case much like a realtor knows that not every drive-by is the buyer for their listing. With some vetting of buyer prospects, you may find that;

  1. They are not clinically capable of treating the volume of patients at the target practice.
  2. They do not have adequate credit ability or financial resources to close the deal.
  3. They may have issues with their immigration status.
  4. They may not have a current license in your state.
  5. There may be spousal objection to the practice location.
  6. 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 the dental schools looking for a buyer reflects some lack of knowledge about who the potential buyer for a practice might be as, unlike in the era of Baby Boomer graduation days, less than five 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 my colorful southern friends might say, “this dog ain’t never gonna hunt.”

Dr. Steve Wolff – UMKC Class of 1977

Up next: The understandable choice of the wrong bank is another deal killer.

Practice Transition Deal Killers – Part Two

Many people assume that 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? Well the fact is, there are many long and tedious steps involved in getting from a listing to a closing, directly involving 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 which will have a direct effect on the value of the transaction and often, the feasibility of a sale. In some cases a little pre-sale planning might have averted disaster but often the problems are inherent to the business. In this series of posts, I’ll take a look at five elements that effectively kill off a practice transition. In it, we’ll examine a few circumstances that bubbled to the surface in the past – but rest assured, there are probably other land mines waiting to be discovered.

Part 2: Poor representation kills a lot of deals with improper valuation at the top of the list.

There seems to be no shortage of “experts” on the subject of practice valuation and we find owner’s opinions of their practice value to often 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 that 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 seller is greedy, doesn’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. Some however 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 front them several hundreds of thousands of dollars for the purchase. Doubt arises too about the ethics of the practice and what else may not be properly tracked. Questionable shifting of personal expenses may have saved a few dollars in taxes in prior years but now comes back to haunt the seller. Make sure your accounting and tax preparations are clean and understandable, requiring as little adjustment as possible to determine the true profitability of the practice. The buyer is already losing sleep over this transaction. Don’t give them another reason to worry.

And who can forget our attorney friends? Like the 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 to crash and burn. Just because a son, daughter, brother, wife, nephew, uncle, 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.

Dr. Steve Wolff – UMKC Class of 1977

Practice Transition Deal Killers –  

A Blog Article in Five Parts: Part 1

Many people assume that 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? Well the fact is, there are many long and tedious steps involved in getting from a listing to a closing, directly involving 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 which will have a direct effect on the value of the transaction and often, the feasibility of a sale. In some cases a little pre-sale planning might have averted disaster but often the problems are inherent to the business. In this series of posts, I’ll take a look at five elements that effectively kill off a practice transition. In it, we’ll examine a few circumstances that bubbled to the surface in the past – but rest assured, there are probably other land mines waiting to be discovered.

Part 1: Let’s Start with Lack of Proper Pre-sale 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 a prospective buyer as they become suspicious that the senior doc may somehow try to worm their way back into the practice’s market area. Buyers borrowing hundreds of thousands of dollars in addition to a sizable student loan debt do not want to risk having to compete 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 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 with cause to call off the sale. We occasionally find staff members who for some reason are paid way, 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 their intentions to essentially extort their salary from the new doc.

The last 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 too that 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.

Dr. Steve Wolff – UMKC Class of 1977

Up next: Poor representation kills a lot of deals – with improper valuation being at the top of the list.

Just thinking… another pass at the subject of smaller-market dental practices

Three years ago, I shifted from full time dentistry into the world of dental practice transitions. As a member of the team at ADS MidAmerica Dental Practice Sales, I’ve learned a lot about the opportunities afforded those in our profession who are just starting out, or making a mid-career course correction.

I’ve thoroughly enjoyed the opportunity to sit down with many former students and friends, sharing some of the experiences (and mistakes) I’ve made as a practice owner, while encouraging the next generation of dentists to move into private practice.

Which brings me to the subject of this post: I continue to be amazed at the disparity between dental practices in rural areas, verses those in major metros. And at the risk of appearing overly materialistic, I wanted to share a couple of observations. First, a little background.

As Dr. Wolff has pointed out numerous times, in our day – we both graduated from dental school in 1977 – most graduates had between zero and $15,000 in debt. We enjoyed great careers where we wanted to be. Many of us have been taking home between $100,000 and $200,000 per year, and are now seriously thinking about retirement.

Contrast the new graduate, with $250,000.00 in debt, who needs to generate much more income than the previous generation. In fact, if you do the math, that new dentist has to commit the first $100,000 of production to making his annual student loan payment before taking any money home to pay the mortgage, keep the lights on, or save for kids’ college.

So now, my thoughts on (relatively) smaller-market practices. Our office is consistently seeing practices grossing up to a million dollars, and taking home from $300- $400,000.00. What do these offices have in common? Glad you asked. They are in rural areas, or at least in areas not named Kansas City. In recent months, we listed five practices in the Wichita area, and while Wichita is definitely not a rural environment, the opportunity for income significantly above what I see as a typical Kansas City area practice is undeniable.

(Speaking of Wichita; without checking Siri, what would you venture to be the population of Wichita? Well, it’s 644,610. They’ve got arenas, excellent shopping, universities, and private golf clubs I can’t afford. It’s a great city. Quite the place, actually.)

In smaller communities – the earning potential for a dentist in western Kansas, southern or central Missouri can easily be THREE TIMES what a typical 55-year-old dentist in Overland Park or Lee’s Summit is taking home. Yes. You read that right. Three times. Worth considering?

So what’s the take away? I’m hoping that some small percentage of you who are now in dental school, or who are just beginning your career working at a Federally Qualified Health Center or a corporate dental practice will consider a future you hadn’t thought of before. A future that would give you some life style choices – and potentially a lot more income.

I mentioned before that the real reward for my personal career change has been sitting down with dentists and discussing the opportunities and options, seen from the eyes of a baby boomer who has benefitted greatly from what this profession has to offer. Give me a call. I’ll buy the coffee.

Brad Babcock, DDS

Be Careful What You Say. . .  

There is an interesting paradox in the world of business mergers and acquisitions surrounding the marketing of an individual company. While there is a need to “get the word out”, there is also a proven loss of value often attributed to “the word getting out”. We recognize a further conundrum in that the entire market we serve contains about 3500 dentists, which by any standard would be the population of a small town. We all know that if you live in a small town and buy a new Corvette on Friday, everyone will know about it by Monday. If you are considering self-promoting the sale of your practice, be prepared to accept that in a short time, everyone in town, including us, will know your business.

FSBOPhoto

The very nature of relationships with vendors, students, study club members, dental schools and even organized dentistry is about networking and not confidentiality. For example, the unintended consequences of conversations with dental students (who we have repeatedly said are likely not buyers) who have conversations with other students and “advisors”, who then themselves have other spin-off conversations may well result in your staff finding out through the back door that you are trying to make them someone else’s employees. That may well result in an awkward Monday morning confrontation. Worse yet, staff members have been known to take matters into their own hands and seek other employment. Premature exposure of your intentions to transition your practice can have a significant impact on its marketability and value. To be blunt, it proves to the market that you don’t know what you’re doing.

One of the top five reasons we are retained by clients to market and transition their practice is our control of confidentiality. By way of agreements and vetting of buyer prospects, we control the flow of information and intrusions into the practice so that when the seller makes the announcement of their intentions, everyone is the first to know. While we aren’t naïve enough to believe that no one ever knows something they shouldn’t, we are confident that very few outside the circle of “need to know” ever know.

By the way – we recently produced a small brochure on the hazards of the “For Sale by Owner” option. Give me a call. I’ll be sure you get one.

Steve Wolff, DDS, UMKC Class of ‘77

Practice Sales, Like Baseball, Are About the Legacy

I’m sorry for consecutive blog posts to have a baseball theme but the timing seemed right. I recently used the glove pictured below in the Royal’s “Relay the Way” fundraiser on opening day at the “K.” (Kauffman Stadium – for those who either don’t follow baseball or or not from Kansas City.) This is not just any glove.  If you look carefully you can see where my father burned my name on to the thumb area somewhere close to 55 years ago. I wore this glove when my Little League team won the area championship in Fort Worth, Texas back in the early 60s. I was a weak-hitting second baseman on a team full of kids I never saw again – but I was none the less hooked on baseball.

The glove that has accompanied Dr. Steve Wolff from Little League play in the early 60s to (watching) the 2015 world champion Royals

The glove that has accompanied Dr. Steve Wolff from Little League play in the early 60s to (watching) the 2015 world champion Royals

My grandfather, this glove and I saw a lot of games together at the old Municipal Stadium in Kansas City. And what I wouldn’t give to have another game of catch with my dad, a la Kevin Costner in Field of Dreams. (To me, plowing up a corn field to make a baseball diamond seems perfectly reasonable.) The tradition continues. To me it’s great fun to watch everything from T-ball to playoff games with my kids and grandkids. After catching thousands of balls in its webbing, and after we attended the infamous American League Wild Card game in 2014, Debbie had the glove repaired. She finally understood why I listened to or watched 140-plus Royals games every year.

So what in the world does this have to do with dental practice transitions and sales? Well, the fact is that the same emotion that brings baseball fans together is what motivates many of our retirement-aged clients to ask for our help. Finding someone to continue the legacy of care that they have provided to their patients and staff for decades is their primary charge to us. Our clients “have enough” monetarily, and are not relying on the sale of their practice to be the cornerstone of their retirement account. If they are, we will probably disappoint them as working for a couple more years will almost always result in more money in their pockets than the proceeds of a sale.

On the contrary, our clients are concerned that patients can continue to be treated in a place where they are known and respected. Retaining staff members (sometimes including single moms) and their jobs has kept more than one client working chair-side long after they “had enough.” While no one wants to give away their hard earned practice assets, in our experience, retirement-aged docs cherish the memories and relationships that 35 or 40 years of practice has brought them – more than money. I’ll tell you that helping them carry on their legacy and getting newcomers started on a history of their own is our greatest reward.

Practice sales, like baseball, are indeed about the legacy.

Steve Wolff, DDS, UMKC Class of ‘77

Play Ball!

What could be better than Opening Day at the “K” (Kauffman Stadium), on a beautiful sunny day, with the World Champion Royals off to a great home start versus their 2015 World Series opponent Mets.) To top it off, fourteen members of our family, known as the Wolff Pack (clever huh?), participated in the “Relay the Way” to raise money for the Urban Youth Academy. We tossed the ball from one to another in twenty foot increments for over nine miles, reportedly raising over $100,000 for the cause. Over 2500 folks lined the streets from Union Station to the “K” to wait for their moment in the spotlight. Everyone had a good time and given that it was the first time it had ever been done, it was very well organized. Thanks especially the Kansas City Police Department for making the street a safe place to stand while on that long blue line.

"The Wolff Pack" participating in Opening Day "Relay the Way" - to raise funds for The Urban Youth Academy

“The Wolff Pack” participating in Opening Day “Relay the Way” – to raise funds for The Urban Youth Academy (That’s Dr. Steve Wolff on the far left, back.)

 In what can only be described as a very poor and self-promotional segue way, the MDA Focus Magazine published an article I wrote in the current issue titled: “It’s a Whole New Ballgame”. While there is not a single baseball statistic in the text, I hope it will provide some insight about our Baby Boomer Sellers trying to do business with Millennial Buyers. (The site itself is password protected. Members can take a look by clicking here. PS: That’s me on the far left of the back row.)

Steve Wolff, DDS, UMKC Class of ‘77

Best Day Ever!

 

Dr. Steve Wolff addresses a class of 3rd year dental students at the UNL School of Dentistry

Dr. Steve Wolff addresses a class of 3rd year dental students at the UNL School of Dentistry

I don’t think there is any doubt in my mind that my best business day of the year is spent at the front of the classroom in the University Of Nebraska’s School of Dentistry with the third year (D3s) students. Drs. David Dunning and Brian Lange run a tremendous business and management program that gives their students a great head start, not only in managing their business but also in valuing, acquiring and owning practices. I was asked to write the chapter on practice valuation for their textbook and am honored to be asked to lecture on that subject. I am always impressed about how knowledgeable they are and by what a tremendous advantage they will have in the marketplace.  With the latest edition of their book coming out later this year, I’m hopeful that this annual event will continue. I want to especially thank Dr. Dunning and his students for their attention and hospitality. Lectures about formulas and statistics can get a little tedious at times and I appreciate their tolerance.

Steve Wolff, DDS, UMKC Class of ‘77

Reflections on the Associate Covenant

[Note: A condensed version will appear in Dental Economics magazine - Spring 2016.]

“I’ve interviewed potential associates that don’t want to sign a restrictive covenant when they start.  I guess I can understand their concerns, but I want to protect my practice.  What’s the solution?”

While this seems like a difficult problem with mutually opposing solutions, the fact is that like most problems, the other party’s needs and fears can be dealt with by a little understanding and flexibility. On this issue, each party has legitimate concerns that must be addressed in order to successfully and productively go forward.

Let’s take a look at the host doctor or Employer’s position first. There are two legitimate reasons the host needs a restrictive covenant agreement with their employees; the first being the most obvious concern that the associate might leave the practice, take patients and staff and do measurable harm to the practice. We have all heard stories to this effect and certainly the host does not want to become another anecdote. Often too, they cannot afford the loss of business and revenue. The second, and perhaps less obvious risk is the loss of value to their practice.  Should they have in their employ an associate who does not have a covenant not to compete, (for the purpose of this discussion, a covenant not to compete and a restrictive covenant will be considered one in the same) in place,  this poses a threat to any potential buyer in diminished  revenue and subsequent value of the practice. Buyers assume enough risk as it is and don’t take kindly to having no control over the associate doctor and what they might do after the sale. The uncertainty will cost the host doctor dearly, perhaps even undoing the sale. Clearly, the host doctor needs an agreement in place.

The associate doctor has another set of problems. While not always the case, the associate is likely to be a recent graduate, just getting started in their career. They cannot afford to drastically limit their future by signing large and long covenant agreements on their first day of employment. I will leave to another discussion what time and distance is acceptable or even enforceable in your state. Just suffice it to say that their motives for not signing an initial covenant agreement are much more about their needs than any designs about destroying the host practice.

So what is the solution? Let’s assume that with the above knowledge about each other’s position that a little common sense will prevail. Obviously the associate doctor cannot sign effective their first day of employment. Likewise, the host doctor has every reason to protect their practice and practice value. An initial honeymoon period of 90 days (maybe 180 in some cases?) should pass before the terms become effective. If the host feels that the new doctor could steal their practice away in less time than this, they may have greater problems than this agreement will solve. In fairness, the associate should not expect to be able to work indefinitely without promising their employer this protection. Frankly, if this problem proves to be difficult to maneuver around, one would wonder how this will ultimately end. My guess is, not good.

Steve Wolff, DDS

UMKC Class of ‘77