• David P. Walters, D.D.S., PC to Sarah Stratton, D.D.S.
– Princeton, IN
  • Randall Jones, D.D.S., LLC to Mathew Draper, D.D.S., LLC – Kansas City, KS
  • Donald Wilton, D.D.S. to Bradley Dykstra, D.D.S. – Grand Haven, MI
  • Jack Klure, D.D.S., PLLC to Jonathan Scott, D.M.D.
– Meridian, ID
  • Jess Legg, D.D.S. to Michael Gerlach, D.D.S. – Conroe, TX
  • Jess C. Hopkin, D.D.S. to Peak Dental – Morgan, UT
  • Estate of Anshutz, Frank to Elite Dental – Terre Haute, IN
  • Paul Dabney, D.D.S. to
MB2 Dental – San Antonio, TX
  • Robert Howard, D.D.S. to Jason Mantey, D.D.S.
– Traverse City, MI
  • James P. Weeks, D.D.S., LTD. to Meredith Gantos, D.D.S.
– Naperville, IL
  • Nicholas E. Smith, D.D.S., Inc. to John V. Unger, D.D.S.
– Cincinnati, OH
  • Albert Castellan, D.D.S. to Theodore Dimoulis, D.M.D. – Melrose, IL
  • Edward A. Striker, D.D.S. to Garland & Johnson Dental – Cincinnati, OH
  • Jennifer Jenkins, D.D.S. to Nathan Brown, D.D.S.
– Oklahoma City, OK

Just The Facts Please

Buying on Emotion: A Mistake That Can Last a Lifetime

Buying a practice is one of the most important decisions you will make in your professional life. The importance of having a true understanding of the value of the practice in which you are considering making a lifetime investment cannot be overstated. Unfortunately, in today’s market, professional performance standards for this process are not followed often. It is not uncommon for a broker or his or her representative to tell the owner of a practice what the owner wants to hear in order to obtain the listing. If a buyer can then be enticed to pay an inflated price for the practice, the buyer may struggle for years to come in order to achieve adequate cash flow. Often in the excitement of finally realizing the dream of practice ownership, buyers make decisions on feelings rather than facts. Accordingly, practice transition failures are a reality today to an extent we rarely saw in the past.

Overhead, Schmoverhead

An example of what often occurs in the industry can be illustrated by a Dental town message board post that detailed a conversation between a prospective purchaser and a representative from a well-known brokerage company. When responding to a question from the prospective purchaser about why a practice had a significantly higher asking price than another broker’s practice (with similar collections and lower overhead), the representative is quoted as stating that their company “doesn’t take into account overhead in its algorithm when determining practice value.” When the prospective purchaser responded, “So, according to you, a practice doing a million dollars with 90% overhead and a practice doing a million dollars with 60% overhead have the same value?”there was only silence from the representative.

Look at the Cash Flow, Not the Furnishings

Keep in mind that as a purchaser, you are primarily buying a stream of revenue, or in other words, cash flow. Sometimes as dentists, we are wooed by the newness of the equipment or the office décor. Of course, these are factors in the value of the practice; however, these tangible assets can be replaced at a small percentage of the total practice value and do not in themselves solely justify a price not supported by cash flow. In the end, value is most often a function of net income.

If you are considering purchasing a practice, we can help you avoid a lifetime mistake by providing a true valuation/appraisal or consulting on your purchase, particularly for those practices listed with no, or with another, transitions firm. We’ll help sort through the “feelings” and provide the facts.

The ’s of Good Transition Planning

Transition planning is not just for someone who wants to retire soon. The best planning should begin years in advance of your proposed career’s end. Time can be your best ally or your worst enemy, so the sooner you get your plan started, the better it will be. Here are some basic points you need to consider in preparing your transition plan.

1Financial Planning

Ask yourself, “Can I afford to retire, and what type of lifestyle will I want after retirement?” This is a question you may not want to risk answering without some professional assistance. So, we urge you to enlist the services of a fee-based financial planner. Together, carefully examine your current assets and net worth to determine if you are financially ready to sell your practice. More importantly, determine if you will need the proceeds of your practice sale to be an important component of your retirement income or a supplement to what you have already saved.

2Practice Valuation

Regardless of whether you intend to retain a financial planner or not, having an updated understanding of your practice’s value on the market is a must. This is important when considering a sale, or any type of transition (buy-in/partnership), for retirement planning, and for proper estate planning purposes (in the case of disability or death). You and your spouse should know what your business is worth, particularly if something were to happen to you. In this, your current age is somewhat irrelevant in determining when you should have your practice valued. The correct answer is NOW.

3Take an Honest Look at Your Facility

1. Condition of Physical Plant

New practitioners are now being trained in high-tech, modern clinics. If your practice has not had a “facelift” for a number of years, it is time to consider enhancements to your facility and possible updates to your dental equipment. If you intend to practice five years or more, this is imperative. If your timeline is less than five years, you may consider some cosmetic updates but expenditures should be made in consultation with a transitions specialist. In any case, you should confer with your accountant about making major equipment purchases so as to evaluate any possible tax consequences. Prospective buyers usually give newer, better equipped offices stronger consideration, while offices with older equipment are often likely to see severely discounted offers.

2. Technology

Do you have current practice management software? Are you planning to go paperless? Do you have digital radiography, intraoral cameras, patient education software, CAD-CAM and/or laser technology? If “no”, should you make the investment? Similar to new dental equipment, the question is how long you will continue to practice? That answer should be the driver of your decision.

4Real Estate

There is no singular answer to real estate in transition except that it is always our preference to see a doctor own the facility in which a dental practice resides. As such, you may decide, as the owner of real estate, to sell or rent your facility at the time of transition. Some purchasers want real estate, others want to wait to purchase, few will never want to be real estate owners, though. This is important to note with respect to your financial plan – will you receive a stream of rental income from your building to supplement your retirement income or will a lump sum be more desirable... or can you be flexible to either?

In any case, you should have (and keep updated) an MAI certified appraisal of your building. This allows everyone to know and understand the present value.

If you are looking at selling both practice and real estate at the same time, there are important things to keep in mind. Some professional dental lenders will assist the purchaser in obtaining funds for the down payment as well as the practice acquisition loan. But this strategy can only work when the practice value is substantially greater than the value of the building. If the opposite is true, the cash flow is not there for the borrower to obtain funds for the down payment and so the source of funds for the real estate down payment must come from personal or family resources. A lot of deals fall through because a purchaser does not have ample cash on hand.

In the event that you are going to be serving as a landlord for a period of time, you must charge geographically specific market rent. The lease terms also need to be a minimum of five years with a five-year renewal – primarily due to the requirements of the lenders who need some comfort level in terms of lending money for an acquisition. The bank wants to ensure that the tenant, its borrower, has a practice location for the duration of the loan repayment timeline.

Getting ready for your practice’s transition is one of the most important tasks you will undertake in your career. Careful financial and practice planning is a must to ensure success. These are vital but yet just a few of the steps that need to be taken well in advance of an actual sale date. Everyone’s plans for retirement are different so start planning early, clarify your goals, and weigh your options.

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