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.