Our thoughts . . . 05-11-10
COMMON MYTHS ABOUT DENTAL PRACTICE TRANSITIONS
This article was recently featured in the April edition of the Midwestern Dentist
Spending as much time in the practice marketplace as I do, I often hear statements from potential sellers and their advisors that don't always coincide with current market trends. I have chosen my current top five for this discussion.
The first is the notion that graduating senior dental school students are potential buyers for a dental practice. I will tell you that this not going to be the case. I am privileged to interview a fair number of students every year and will tell you that their career path goes from graduation to an associateship for two to five years before searching for a practice to own. Students have done about one week's worth of production by the time they graduate and by their own observation, they need additional chair time to improve their clinical skills. Our last sale to a new grad was in 2007, and he was a Finance major from Notre Dame whose family had a history of small business ownership. The vast majority are not ready to take on the challenge of business ownership.
As an aside, the notion that a retiring doctor will find a new grad to join his practice as an associate, accept his mentoring, and buy the practice at a later date seems to happen just often enough to perpetuate the myth of this unlikely exit strategy. Anecdotal evidence seems to put the success rate of those scenarios at around 5%. The reasons for failure are too numerous for this conversation, but common sense would suggest a different strategy.
"Banks are not lending to practice buyers." Granted, the poor start in 2009 for the capital markets clouded the picture a bit, but I can assure you that money is available for acquisitions to buyers with good credit. Lenders are more cautious and, after years of 100% plus financing, sellers are sometimes asked to carry back a small percentage of the sales price. We find that hometown local lenders continue to be poor sources of acquisition dollars, but we have lenders in this industry who visit us regularly in search of our loan business. Quality practices with good cash flow are easily financable to qualified buyers.
"This practice has unlimited potential." While I'm sure it may, I can tell you that buyers rarely purchase a practice solely on potential. Buyers need to be able to move in and take over the seller's cash flow immediately. Our buyers have student loan debt in the $175-200K range, and that debt becomes due and payable shortly after graduation. The seller's practice needs to have enough revenue for the buyer to pay the overhead, taxes, debt service, and still have money left over for living expenses. Practices that consistently have gross revenues less than $400K make that tough to accomplish, and we find them difficult to sell.
"I'd like to keep working for the buyer of my practice for a few years after the closing." Since over 90% of EMA sales are "walk aways", I can tell you that staying on after the sale is seldom going to work. This is even less likely if you have fewer than six operatories and $800K in annual revenue. Careful analysis needs to be done to determine how feasible this plan might be. Statistics show that 85-90% of your patient base will see the new doctor at least once. The staff will stay in place and the new owner will have no trouble meeting the area specialists, laboratories, and supply vendors. In other words, the buyer doesn't need you, and in many cases, you might actually make it more difficult for them to succeed. Bottom line, if you can't afford to walk away, don't sell your practice.
"I'm sure the buyer will have no trouble getting a new lease from my landlord." You may be surprised to find that the landlord now transforms into a local version of Donald Trump and that you have a new player in the deal. This issue frequently becomes a major problem in a transition. If space costs go up, cash flow goes down and your sales price may need to be adjusted accordingly. While you are a proven tenant, the buyer is not and there is no value to removing you from the lease. Expect to remain as a guarantor until the current term expires.
Let me add a couple of bonus points:
No one would they take golf lessons from someone who has never been on a golf course, and yet I am surprised sometimes by who dentists will take advice from regarding their practice transition. Make sure you ask the right people as these are certainly not all of the landmines that can show up during the sale process. Other issues such as PPO contracts, associate doctor agreements, equipment breakdowns, lender requirements, and even bridge closings can all serve to make things interesting. The Boy Scouts said it best with; "Be Prepared".
Steve Wolff, DDS
UMKC Class of 1977