It appears to me that serious consideration needs to be given to changing some of the laws regulating the ownership of dental practices in the state of Kansas. The February 19 issue of the Kansas City Star article on the KMOM clinics did not hesitate to point out the fact that one reason these clinics are so successful is that there is so such unmet need. While Kansas ranked better than Missouri, I would not take much comfort in this particular Border War victory. While there may be unmet need in the major population areas due to cost, the access to available care in rural Kansas areas is only going to get worse. Many of the graduates from the big UMKC classes of the 70’s and 80’s chose rural areas in which to set up practice and enjoyed a great career. I will tell you from working in this market every day that the chance of them finding a successor dentist to their practice is probably less than one in five. There may soon come a time when finding a dentist outside of the metro areas is going to be very difficult if not impossible. A quick glance at the distribution of older dentists throughout the state would suggest that there will soon be large blocks of counties with little or no available dental care.

Those that believe that the problem can be solved by some sort of “paradental” provider are delusional. I will tell you exactly where those folks will end up; in the offices of Big City dental practices working to make the owner/dentist more productive and profitable. They will not end up in Jetmore, KS for the same reason that there is not currently a dentist there; they don’t want to live there! Tuition reimbursement programs have not dramatically changed the distribution of dentists either, so why would you believe this will have any different result? The free market always wins.

In my opinion, the first thing that needs to be done is to repeal or make useful modifications to KSA65-1435 (d), known by most practicing dentists as the 50% rule. There are a couple of other burdensome statutes that we will discuss in a few minutes, but this one is the 800-pound gorilla. This statute effectively prevents otherwise perfectly qualified and capable licensed dentists from owning multiple practices “unless such licensee is personally present in the office operating as a dentist or personally overseeing such operations as are performed in the office or each of the offices during a majority of the time the office or each of the offices is being operated”. The real world effect of this statute is illustrated by cases such as Dr. Rick Thacker in Russell. When Rick was diagnosed with stomach cancer, several doctors from the Salina, Hays and Manhattan areas expressed an interest in buying the practice, sending their not-so-busy associate doctors to Russell for two days per week, going there themselves 2-4 days per month, providing care and making a profit. Those plans quickly fell through when it was pointed out that by Kansas law, they would personally have to be on site one half of the days the office was open for patient care. The economics of that did not make sense. Granted, given enough time, a buyer might have been found for the practice but that brings into play another statute we will need to examine shortly. The final outcome was the closing of the office in Russell. Fortunately, in this case there were two other practices in Russell, but were the people of rural Kansas well served by shutting this office down? I think not as access to care was reduced by a third. Let’s hope the other guys stay healthy for a long time because on the current playing field, they will have a hard time ever finding a buyer to take over their practices. If you want other examples, I can give them to you but the fact of the matter is that under the current laws, as older docs continue to retire and/or die off, there is going to be reduced access to care. While the rest of the health care industry is looking for ways to expand their reach, Kansas dentistry is contracting. It seems ridiculous to have discussions about serving the rural area while this statute remains on the books. Even recent attempts at modifying this situation with KSA65-1435(f) (This is the 125 mile, 10,000 county population rule) will have minimal, if any, practical effect.

Last year a carefully worded modification known as KSA65-1424(2) was made to the Dental Practice Act, which at first glance seems to open the door to “franchise” dentistry. This is something of a paradox as the consensus has always been that the reason Kansas law has been so restrictive about ownership was to keep the Big Bad Wolves of corporate dentistry out of the state. Ironically, the only model this new legislation seems to benefit is those very groups. One of them, who even went so far as to claim to me some responsibility for helping to create this change, now finds its parent company in bankruptcy. Some of the remaining players have told me that unless the target practice meets a very, very narrow profile, they are not interested. I will tell you that those guidelines will exclude 99% of the rural offices in the state. Who was being helped here?

Lastly, there is the case of KSA65-1424(b). This law restricts the ownership of practices by the estate or surviving spouse to one year after the licensee’s death. Let me say categorically that I am not promoting ownership of practices by non-dentists in Kansas or any other state. I feel very strongly that dental practices should be owned and operated by dentists. BUT… there needs to be some flexibility in these cases to allow some discretion by the Board about the length of the term allowed. When I take a listing for a practice outside of a metro area, I point out to the seller that although my listing agreement is for one year, they will have to give me at least three years to find a successor. In some cases, it has taken nearly five. This may come as a shock to many of you, but a very high number of recent UMKC graduates define rural as “more than 25 miles away from downtown Kansas City”. Some even think that Wichita is a small rural town in southern Kansas. I don’t mean this disparagingly, but it has been the world we work in for many years. Given their smaller numbers, current grads have the luxury of being able to stay close to the services and lifestyle of the big city. To discuss outstate practices in any of the four states we work in is about as productive as discussing an outpost on the moon. With the incredibly low number of new dentists annually flowing into the state of Kansas, the likelihood of finding a new owner for any rural practice in less than a year is very slim. Under current law, without regard to how effectively those practices are being maintained, the Board will shut them down one year to the day after the owner’s death. Another office that will never be replaced bites the dust and people are left without care. Does this really serve the people of Kansas? Doctors are going to die. Is this what anyone wants?

I believe it is time to act. I have spoken with Lane Hemsley, the new Executive Director of the Kansas Dental Board, and while I find him to be responsive, reasonable and sympathetic, his hands are tied. Legislation must be initiated to change some of these inconsistencies. No one should tolerate a discussion about access to care as long as these restrictive laws stay are in place.

1. Rural practices continue to be great opportunities. In the 70s and 80s, hundreds of newly graduated dentists went out into the marketplace and started practices. Even though there was an expectation that the large number of grads (there were 160 in my 1977 UMKC class) were going to be needed by the huge Baby Boomer portion of the population, it was obvious that we could not all stay within 25 miles of downtown KC. Hundreds of rural offices were built around the Midwest and what those docs found was that they could make a very good living on lower overhead businesses in areas where the cost of living was lower than their big city colleagues. In other words, they were very profitable, they did not have to work as hard and they got to keep or invest a good percentage of their earnings. The time has come for these docs to retire, and in the interest of making sure that their staff and patients are provided for, they tend to be much more flexible about the asking price for their businesses and practice real estate. Do yourself a favor and take a look at some of these opportunities. We find sale prices to be as much as 20% less than their metro counterparts and have seen overhead at less than 50%. If the target office is less than an hour’s drive from a “Big City” you should give it serious consideration. Fresh air, less stress, great family opportunities and a high standard living are hard to argue with.

2. To my knowledge, interest rates for practice acquisition loans have never been lower. While the historic norm of 8-9% always seemed like pretty cheap money to a guy that paid over 18% on his practice loans in the early 80s, we are now seeing fixed rate loans in the low 6s. The difference between the payments of those rates pays for a new car. We have always done our cash flow projections based on a 7 year amortization unless the office was really up to date and the buyer could avoid significant upfront capital improvements. In those cases, we stretched repayment out to 10 years. It seems to me that 10 year financing has now become more of the norm, allowing a lower payment but leaving open the possibility of an earlier payoff. The potential difference in monthly payments on a $500,000 loan could be as much as $2200! Whatever strategy you and your financial advisors decide on, it’s hard to imagine that rates will ever again be this friendly.

3. We’re starting to see a little breaking down of the notion that doctors in their 60s are just going to work until they die. For the first time in the last couple of years, we are getting calls from 1970’s era grads that are ready to hang up the handpiece and retire. While this is great news for a company that stays in business by selling dental practices, the “Good News / Bad News” component of this phenomenon will have to be closely watched. Many have hypothesized that sooner or later there was going to be a glut of practices on the market. Is this the beginning of the selloff by all of the large class grads from the 70s and 80s or is it just a little loosening? Will practice values decline if a true buyer’s market comes to pass or have potential sellers been grooming their practices to keep them attractive to the market? Has the “have your cake and eat it too” mentality (sell and then work for the buyer) finally hit the reality wall and owners are ready to let a new doctor take over? Maybe it’s just the realization that although everything is not hunky-dory, we have survived the Great Recession and older docs don’t want to die at the chair. We’ll see. Whether Buyer or Seller, it might be a good idea to give us a call for a free consultation to see how you could be affected.

Steve Wolff, DDS

A couple of recent meetings with prospective clients raised an issue that I believe needs to be addressed immediately. Both mentioned early in our conversations that they knew “this was not a good time to put their practice on the market.” At first blush I agreed with them. The time between Thanksgiving and the first of the New Year is not one of the hotter times in the market place, but I came to understand that was not their reasoning. They felt that it was a bad time in general because “banks weren’t lending money for practice sales.” I’m not sure where they got this information. Maybe they had heard too many CNBC stories about the banking industry or the final resting place of bailout money to some of the “too big to fail” banks. In any event, I hope to set the record straight.

Money is readily available for practice acquisition funding. Without any help from the SBA, we are able to secure 100% funding, plus operation capital, at what may be historically low fixed rates. Buyers with good credit scores, a couple of years or more of experience, and planning to buy a profitable practice with good cash flow will have lenders competing for their business. Even those without great numbers can be funded if the buyer is well qualified. Granted, not every lender is going to work with a negative net worth client having $150,000 plus in student loan debts and very little cash. Many banks just can’t deal with many of those loans in their portfolios. They want boats, cars, real estate and airplanes that they can go repossess if necessary. They recognize that it is hard to foreclose on an entity whose greatest value is intangible. Those lenders in the industry that understand the nature of these transactions though are eagerly looking for your business. They know that the historical default rate on dental practice loans is among the lowest in the industry. I have heard that it is less than 1%, which I can guarantee you is much less than the restaurant or retail industries.

I will grant that in early 2009 the world was a little different place. We even had a short time when lenders were requiring a small percentage (10-15%) of the funding be carried back by the seller. Deals were harder to do as there was considerable uneasiness in the business climate in general and banking in particular. Now, in late 2011, that is not the case.

Now for even more good news; you don’t have to take my word for any of this! On our website, www.emadentalpracticesales.com, you will see a “Resources” section that will lead you to a list of lenders. At no cost or obligation, you can give them a call to discuss the industry climate, your personal credit ability, or the likelihood of getting a particular practice financed. They are nice, friendly people who will be happy you to help. If that list is not enough names for you, call me and I’ll give you more. Why not get accurate information instead of rumors?

Steve Wolff, DDS

UMKC Class of 1977

In our experience, it is difficult to sell a general practice with revenues (collections) less than $400,000 per year. We can discuss some of the exceptions to that rule later, but I will tell you that more often than not, practices less than this size tend to get closed down, liquidated or merged rather than being sold as an ongoing business. Sellers are frustrated by this because they are running a comfortable practice and taking home a fair return for their efforts. What’s the problem? The “problem” is that they often overlook two major expenses that a new owner will have that they don’t – student loan debt and the debt for the purchase of the practice. Quite often, a practice of this size, shape and color needs some equipment and technology upgrading.

For example:

Collections:                        $400,000.00

Overhead (60%)                 $240,000.00

Student Debt                       $ 20,000.00

Acquisition debt                  $ 30,000.00

Improvement debt              $ 12,000.00

Gross profit                        $  98,000.00

From this gross profit must come the payment of both living expenses and taxes. If the new owner is the sole support for their family, there is just not enough money left to pay the bills. They will have to take a supplemental job just to stay even. Again, from our experience, they will just look elsewhere for a different opportunity. Lenders will say that these opportunities lack adequate cash flow and are reluctant to fund the sale. We have found that if a bank will not provide a check for a closing, most sellers lose interest in the deal.

Sellers will contend that there is great “potential” with their practice that they have not tapped into because they were content with their lifestyle. Unfortunately for the buyer, the clock starts running on their debt service immediately and they may find themselves seriously cash starved before that “potential” can kick in. If you think you have “potential” to sell, tap into it before you go to the market.

There can be exceptions. We occasionally find a well-run practice with less than typical overhead. We have seen rural practices with operating costs of less than 45%. Sometimes (rarely) the buyer has very little student debt. Sometimes the small practice has already upgraded to digital. If you don’t think that is important, keep in mind that the current buyer prospect has been trained on paperless/digital and will expect to practice that way. Sometimes a prospective buyer has a working spouse that can help with living expenses, but remember too that this is the time of life when young doctors are starting and/or expending their families and that their total income may take a hit when one partner loses working time. Rarely, the seller will have a very low expectation on the value of their practice and the acquisition costs are below market.

Obviously, these and other exceptions can change the game, but it’s hard to argue with the facts and sadly, the chance of a sale decreases almost exponentially as revenue fall further. If you are a seller and are near this “tipping point” (sorry Malcolm), I would suggest you work hard to stay above the line, watch overhead carefully, and at least make sure that your curb appeal is from this century. Buyers should do the math carefully to be sure that you are buying a practice large enough to support your lifestyle. We will be happy to provide a free consultation to either party to make sure you are on the right track.

Steve Wolff, DDS

UMKC Class of 1977

1.     “Can I still sell my practice?” My standard answer to that question is “I don’t know” as there are many questions that need to be answered before an accurate answer can be given. I will say this: you are as likely to be able to sell your practice today as you were a year or two ago. Quality practices in good locations with good profitability are marketable. Price, days on market and terms may vary with the economy but the practice will eventually sell.

2.     “Can a buyer still get the money to buy my practice?” The short answer is “yes, but…” Lenders are being more demanding about liquidity requirements which translate to mean that they don’t want buyers to be without any savings or an outside credit source. Credit scores and payment histories have always been very important in this process and probably more so today.

3.     “Have the foreclosures in the real estate market had any effect on lending policies for dental practices?” I think I can say with some authority that the answer is “NO!” According to Joe DeNicola, the CEO of Bank of America’s Practice Solutions division, dental practice loans continue to have a default rate of less than 1% and even those failures are usually attributable to major life issues or substance abuse. Capital lenders who understand the practice acquisition market and who receive well prepared loan packages still consider their money to be relatively safe.

4.     “Have interest rates gone through the roof as a result of all of the bad economic news?” Money seems to still be a bargain at around 8%. Credit scores, buyer liquidity and the profile of the target practice will cause some variation in quoted rates.

5.     “As a buyer, is it risky getting into the market right now?” There is ALWAYS risk. As mentioned earlier, however, there are very few failures of dental practices. There is risk of owning a practice, there are risks of being an associate, there are risks of starting a practice and there are risks of being out of the market altogether.

6.     “Since my portfolio has taken a pretty good hit lately, is now a good time to sell my practice?” I have no way of knowing the answer to that question for any one in particular. The marketability of a practice should always be the subject of careful analysis along with the expectation and post sale needs of the owner. I don’t believe that all of the current economic gyrations have made that any less necessary and common sense would suggest it may be even more critical.

To summarize;

1.     Buyers are going to need some liquidity and an above average credit score.

2.     Increased liquidity requirements may reduce the amount a buyer can borrow. As of this writing, this has not resulted in widespread practice devaluation. Practice sale prices may drop however if buyers’ access to credit is seriously reduced.

3.     On rare occasions, Sellers may have to carry a small percentage of the financing for larger practice sales.

4.     Sellers will need detailed prospectuses to present to Buyers and their lenders as those lenders want to keep their default rates low. Along with that, underwriting will be very thorough.

5.     Practice profitability will be closely examined and smaller practices (revenues less than $350-400K) will be increasingly difficult to sell. Practices with declining revenue trends will also be increasingly difficult to finance and sell. No one wants to jump aboard what appears to be a sinking ship. These practices may make great merger candidates for owners of established practices.

6.     Rural practices continue to be good economic opportunities.

7.     I know this sounds self-serving, but start-ups now represent the highest risk category and in most cases offer the slowest return on investment.

8.     Local lenders are generally not going to be able to help with a practice acquisition. Since these are essentially non-asset based loans, regulators and underwriting guidelines have made it too difficult for them to include many of these specialty loans in their portfolios.

Steve Wolff, DDS
UMKC Class of 1977

Death, Disability, Directives & Your Dental Practice – 
Part Two

As I mentioned in Part One, all of us will eventually die. Hopefully, your death will be long after your dental career has ended and you have had many, many blissful years enjoying your grandchildren and hobbies. But what about the possibility that life doesn’t work out that way? What position would you, your practice and family be in if you were to receive a terminal medical diagnosis today? I recently attended the Dental Reviews at Mayo and one of the clinicians spoke on the subject of pancreatic cancer. It was somewhat discouraging to know that currently there was not much going on in research or treatment that was having any significant effect on the outcome of that disease. The sad fact was that if you received that news today (he was speaking on April 1st), there was an 85% likelihood that you would be gone by the 4th of July. While we would all hope and pray for a full recovery from that or a similar diagnosis, immediate steps need to be taken to get the practice on the market. The sooner the practice can be sold, the better it will retain its value and more importantly, the less of a burden it will be to you and your family.

What too about the tragedy of sudden death? In our office, we have witnessed the agony of families struggling with disposing of practices after doctors have died from strokes, heart attacks, choking, and motorcycle and auto accidents. These doctors were working in the office one day and gone the next. It happens! You owe it to your family, staff and patients to prepare for this very real possibility.
Now that you are motivated to be better prepared for an unplanned and unfortunate end to your career, what do you do? This list, while probably not complete or all-inclusive, should give you a starting point for action.
•    Have a current will, estate plan and appropriate medical directives.
•    Obtain a quality disability insurance policy for your “own occupation” payable to at least age 65.
•    Obtain adequate life insurance that at the very least will cover any practice related debt, including real estate.
•    Tell someone where all of your documents are kept.
•    Meet with a dental practice broker. I know this sounds self-serving, but in spite of the fact that we all have attorneys, accountants and estate executors, I feel no one is better able to quickly get your practice valued and sold. A broker familiar with your practice and market will be in the best position to find a buyer and can even be helpful in finding temporary coverage while the sale is pending.
•    Consider organizing or participating in a dental mutual aid society. John Cahill of Western Practice Sales has written extensively on the subject and has organized groups of doctors who will come to the immediate aid of a fallen comrade. A formal agreement between 6-10 doctors can provide peace of mind in knowing that your practice will immediately be covered in the event of your unexpected loss. We would be happy to get additional information for you about putting together one of these groups. I personally belonged to an aid group in the early 80s and while we never had to put it into motion, it was comforting to know it was there if you needed it.
•    Have a Memo of Direction on file with your estate attorney and the transition specialist/broker to facilitate a quick sale of your practice. This document, executed by the doctor and a couple of witnesses, advises the family who to call and what your plans are for the sale and/or transition of your practice. We would be happy to provide you with a sample of the form we use in our office.
•    On at least an annual basis, organize important information about your practice as if you were preparing for a sale. Financial statements for the last three years along with a current Profit and Loss statement, current lease, any contracts you are party to and a current list of major equipment would be a good starting point. The broker you meet with will be happy to provide a complete list for you.
•    Tell someone where your documents are kept. (This is not a typo – it is often the biggest reason for a delay in moving forward as no one knows where anything is kept.)

The brutal reality of sudden death or a medical crisis is something that none of us want to face. I don’t know that any hard data is available, but it my observation is that as many as half of all doctors or their families may have to make some very hard decisions. A little planning now will go a long way in ensuring the continuation of your legacy.

Steve Wolff, DDS
UMKC Class of 1977

Death, Disability, Directives & Your Dental Practice – Part One
Hang on because this is not going to be pleasant. We’re going to talk about things that are uncomfortable and easy to ignore. Never the less, it is important to have this discussion, and it is even more important that some action be taken. Most of us would like to believe that we are on a smooth, gentle glide path to the end of our practice and that all of the obstacles are in plain sight. I will tell you that was not the case of my career, and I fear it will not be for a good number of you. Perhaps a little informed planning would be helpful to you, your practice and your family. Let’s take a look at some sensible steps that might be taken in the event that your career prematurely ends as a result of disability or death.

Most of us will begrudgingly admit that we are eventually going to die. The plan is that it will happen many years after you have successfully transitioned your practice and that you and your family are well prepared for the inevitable. What about the very real possibility that you are forced to stop practicing as a result of some disability? We have recently had clients leave their practices as a result of degenerative joint disease, back pain, mild strokes and neurological disorders. None planned or expected this to happen to them and most agonized over how to deal with it.

One of the problems with a progressive disability is knowing when to “pull the trigger”. Most affected are in the prime of their careers and sincerely want to get better. Unfortunately as your health declines, your efficiency in the office goes down. Patients and staff notice the difference. Treatment plans may get altered and/or delayed and productivity slips. As revenue goes down, so does your quality of life, and with it, the value of your practice. To top it off, any compromise in your ability to render treatment may increase your risk of some potential liability. At some point you may be forced to deal with some very difficult decisions and those will be even more painful if you have not done any planning for this very real possibility. What to do?

First, make sure that you are the owner of quality disability coverage. I understand that coverage is available on some policies until age 70. If that option is available to you, I would consider it since the age of eligibility for Social Security is creeping upward. Be sure that your policy is specific to your “own occupation” so that benefits are not lost in the event of a future alternate occupation.

The next step is the hardest and that is being realistic about your future and taking action. Almost no one wants to re-career or start a new practice late in life, but if your persistent health issues are eroding the value of what is certainly one of your largest assets, then steps must be taken to sell or transition the practice to a new owner. If competent, informed medical opinion cannot provide an endpoint to your problems or if treatment is expected to give you no better than a 50/50 chance of a full and productive recovery, then now is the time to act. Practices that have been beaten down by declining production, anxious staff and shifting patient bases are difficult to sell for anywhere near their pre-disability value. Don’t make the mistake of hanging on too long.

Steve Wolff, DDS
UMKC Class of 1977

Steve Wolff, DDS
UMKC Class of 1977

Transitioning To Retirement – Part Two
Earl Douglas, DDS, MBA
I always strongly recommend that a contract be in place before the associate starts to practice. Too many times, it isn’t, and after an associate starts working in a practice is not a good time to start negotiating the terms of such an agreement for either party.
In states where a covenant not to compete is enforceable, I strongly recommend including that element. Without a covenant, the production an associate performs belongs to the associate, and not to the practice owner. I will typically give an initial period of ninety days from the start of the agreement until the covenant begins, since an associate is extremely unlikely to be able to harm a practice after such a short term, and if the arrangement doesn’t live up to expectations, then the associate is not punished in the process.

Covenants can also be drawn on a graduated basis over a several year period, starting with a shorter distance and time, and advancing over a three year period as the associate becomes more involved with the patients and the practice.

Another term that should be carefully crafted in the agreement is the right of first refusal to purchase the practice. If the associate is given a traditional right of first refusal, the associate is able to match any offer from any other prospect who ever makes an offer. The problem with this kind of right of first refusal is that few buyer prospects will want to spend the time, money and effort on due diligence and generating an offer if they know that someone else can take their offer and step in front of them. This type of right of first refusal can be a poison pill for a seller.

I propose an approach whereby the practice is appraised before the associate begins to work in the practice. This can help determine the financial outlook for owner profitability and associate income, and it also shows the associate what kind of pricing structure to expect in the future when the owner decides to sell the practice. If the associate doesn’t think that the pricing structure is fair at that point, they may not want to enter into the arrangement to begin with.

At the point when the owner wishes to sell, the associate would be given an updated appraisal price, and is given thirty days to decide if they want to purchase at that price. If they do, the practice sale is completed. If they do not, the owner can then sell to practice to any other party at any other price without the associate having any further right to come before any other purchaser prospect.

I don’t advise giving an associate an option to purchase the practice unless the owner is absolutely sure that at any point in time that he is financially and emotionally ready to instantly step aside. An option to purchase is different from the right of first refusal in that in the right of first refusal, the seller gets to decide when he wants to sell the practice. In the option to purchase, the timing of the sale event can be determined by the associate.

I strongly advise paying associates on a percentage commission. That is the only compensation method that will always be exactly right. A fixed salary will always be the wrong amount, and someone will always be unhappy. A commission gives an incentive for associates and rewards them for going above and beyond. It is helpful to offer an advance draw on the commission to help the associate earn a living during the initial two months of entering the practice.

Termination terms should be carefully considered. Will there be a covenant if the associate terminates with cause, or if the owner terminates without cause? What will a minimum contract term be, and how much termination notice shall be given are issues that should be settled in advance? Issues such as how re-treatment will be handled should also be documented.

Owners should consider an insurance funded buy-sell agreement in the event of their death. A properly crafted buy-sell agreement can instantly solve what could become a very disastrous situation.

Owners can advertise for associates in many venues. Printed media such as this periodical reach a wide circulation and there are also many websites that owners can use to search for associates. Many transition consultants also offer associate searches and can also screen applicants for the owner and can also suggest transition attorneys who can provide effective legal agreements.
If associateships are not researched, structured or documented properly, they can create difficult problems from the outset, and especially when an owner decides to sell. But when they are carefully documented and structured, associateships can provide an owner with freedom, profitability and security that is otherwise unattainable.