For appropriate practices, the co-ownership arrangement is a very successful transition plan. It commonly involves bringing in an "heir apparent" associate and selling 50% of the practice (either immediately or on a deferred arrangement). The two doctors will then work together as co-owners until the original owner decides to sell his or her remaining ownership interest and either retires or works for several more years as an associate for the practice.
When is this co-ownership arrangement a good plan? If your practice has tremendous internal growth potential but you are currently doing all that you possibly can, then a second doctor will allow the practice to grow to the next level of achievement. The practice market value will also grow to the next level. However, be careful. This is the point in a deferred buy-in arrangement where doctors experience serious problems unless they have properly contractually structured the relationship. As the practice grows, you will consider all of the increased value to be yours since you own the practice. The associate will consider that he or she was responsible for all of the growth and should not have to purchase it. And in a sense, both of you are right. At this point the negotiation process normally destroys the relationship. Fair can not be negotiated, only determined! Negotiations can be avoided, however, with proper planning and a well designed contract.
Co-ownership (partial sale) arrangements are not for everyone, but for those practices that can adequately support the plan the financial benefits can be tremendous indeed. The end result (after the final sale of your portion) is quite often equivalent to selling your practice for twice it's current market value. Find out if your practice can support a co-ownership plan and always seek professional advice before you allow any associate into your practice. And NEVER allow an associate in the practice without a contract.
Patients with periodontal disease don't typically worry much about their 9mm pockets either, until someone carefully explains what is going on and what will happen if they do not seek treatment. The key to timing the sale of your practice is to first understand and acknowledge your present circumstances. At such time as a little probing along the gumline indicates that the disease is either present or progressing, then it is time to begin the treatment.
A key indicator for timing a practice sale is whether your practice gross has flattened out or started to decline. Since a large part of your practice's value depends on the amount of verifiable recent collections, a drop in revenue often means a significant loss of practice value. From a financial standpoint, the right time to sell is before your practice stops growing.
Perhaps the best indicator, however, is how motivated you feel inside. Would you describe yourself as more of an increaser or a decreaser? Increasers and decreasers have different needs, and should approach the transition process from different angles. If you can't wait to get back to the office on Monday morning; if you still enjoy managing and motivating your staff; or if you are constantly looking for ways to grow your practice and see more patients, you are an increaser. On the other hand, if you find your body in the practice while your mind is on the golf course; or if you have seriously entertained thoughts of cutting back your time at the practice due to stress or fatigue; or if you are bored with practice and just marking time, you are probably a decreaser. In addition, all of you will reach the point where you will begin to sense that your body is beginning to feel the effects of the constant stress and punishment which dentistry hands out. If that's you, then you are also a decreaser (you just haven't admitted it to yourself yet). This is true even if your practice is currently prospering.
If you are a decreaser, time is not on your side, and many thousands of dollars in practice equity are at risk. Decreasers rarely become increasers, no matter how hard they try to talk themselves into it. The longer they wait, the worse it gets. However, once the burdens of ownership are taken off their backs, we have seen many decreasers really begin to enjoy dentistry again. And the more they enjoy it, the more relaxed and productive they become. Perhaps it is because they can take a stress free vacation for the first time. Perhaps it is because they don't have to see every untimely weekend emergency patient. Perhaps it is because they can really focus on the quality patients in their practice. Perhaps it is because they can now take more time pursuing their other interests. Perhaps it is a little bit of all of these reasons.
A decreaser's primary motive in beginning a transition would likely be to enhance his quality of life by making the most out of his remaining time in dentistry. His secondary motive would be to lock in the value of his practice before it declines, and convert that value into an interest bearing asset. By so doing, the typical doctor can have four or five times the amount of money (from the sale of his practice) he would have received by waiting until retirement to sell. (More on this later.)
If you are an increaser, the primary reason to consider selling any portion of your practice would be to bring in another equally committed doctor to help manage the growth. Associates are not equally committed doctors. That's why they leave. That's why increasers who bring in associates eventually give up on their vision of how good life could be with another committed pair of hands in the practice. But it doesn't have to be that way, and increasers simply need to learn how to structure a practice opportunity for a young doctor that is worth committing to.
If you decide to sell, you don't have to quit. You just need to know how to structure the right kind of relationship with a new partner. Most dentists equate selling their practice with retirement, or a loss of control and status, and therefore often wait too long to begin the process. Across the country, we see more and more dentists selling their practices ten or more years before retiring from dentistry. If properly structured, these "pre-sale" arrangements can be an excellent mechanism for locking in your practice equity while maintaining your income until retirement. As with any long-term relationship, bringing in a young equity partner will require more effort than simply walking away, but the quality of life and financial rewards are well worth it.
We are not talking about a small amount of money here either. A 50 year old dentist with a practice worth $300,000 can easily have over $1,000,000 more capital available at retirement, just from the sale of his practice, than the dentist who waits until age 65 to sell. Moreover, the "pre-sale" doctor will have more control over his schedule, more time to do other things, and an income comparable to, if not better than the solo practitioner. So what's the catch? You must be willing to enter into a Win/Win relationship with a younger doctor. That's it. Could you do that for a $1,000,000 payday at retirement?
In summary, our experience over many years suggests that any doctor over age 50 who does not have a plan underway for the transition of his practice is jeopardizing one of his most valuable assets. Far too many doctors wait too long and receive too little. This is a highly individual and complex issue worthy of very careful planning and consideration, involving you and your family. A thorough and realistic evaluation of your individual situation can be invaluable in arriving at the best decision.
Contrary to conventional wisdom, you do not have to "live together" for a year or two to see if he or she is the ideal candidate. In fact, the longer the relationship goes without the requirement of an equity investment, the greater the likelihood that it will end in disappointment. Keep in mind that a commitment to ownership is a much different kind of commitment, and brings with it an entirely new mind set and focus for all concerned. We have seen countless sellers who have had well paid associates in their practices for years without any problem, all the time expecting that someday they would simply sell the practice to the associate and ride off into the sunset. Virtually all of these situations have ended in disappointment and professional divorce. Some have ended tragically, costing the seller years of his retirement. Don't put you and your practice at risk! If an associate cannot or will not make a commitment to ownership now, how can you be sure that they will when you need them to?
If per chance you have an associate in your practice now, and if you think you would like to commit this associate to an ownership role, then don't do anything without first seeking professional guidance. We have found that the initial approach to the associate is critical in creating the proper environment in which to get the commitment. If you get things off on the wrong foot, it is unlikely that anyone can resurrect what may otherwise have been your best shot at getting an excellent transaction completed.
The absolute worst thing you can do is to hire someone to appraise your practice and then present the appraisal to the associate with the expectation that he will simply take it at face value and write you a check. If you really want to insure that the transaction actually happens, then get some professional advice from someone who knows how to put these things together and let that advisor make the initial presentation.
We see discrepancies of 40-50% all the time, as the purchaser postures for some intense negotiation and compromise. But assuming the seller can somehow cross the valuation bridge, he must then assume that he has all the necessary banking connections to finance the purchaser. He must assume he has the knowledge and expertise to work through all the complex legal, financial and tax issues surrounding the sale. (A poorly structured transaction can cost far more in taxes than what you would ever pay to a consultant.)
Or, if the dentist uses an attorney or accountant to assist him, he must assume they actually know something about dental practice transitions, and that they will actually help rather than hinder the process. Ultimately, he must assume his time is of little or no value, for he will surely spend hundreds of hours trying to put all the pieces of the puzzle together.
The truth is that dentists who attempt to go it alone either never sell their practices, or they eventually panic and end up negotiating away far more than it would have cost them to have it done the right way. If you decide not to use a professional consulting firm, then at least be aware of the risks you are taking with one of your most valuable assets. These risks include, but are not limited to, the following true accounts from actual happenings:
...the risk that you will waste countless hours with flaky buyers who think they can wait you out for a lower price;
...the risk that any purchaser will be simultaneously pursuing multiple practice opportunities, and may inform you after months of negotiation and posturing that he has decided to purchase some other practice;
...the risk that you and a serious purchaser will not be able to come to terms on the price or terms because neither of you can speak objectively or with authority to the issues;
...the risk that the purchaser will have an advisor who will employ an adversarial approach to the negotiations;
...the risk that you finally locate the perfect buyer, only to later watch him or her become offended by your attorney and go away;
...the risk that you will not realize the full fair market value of your practice and sell it for less than it is worth;
...the risk that you will eventually get weary of the process and negotiate away large sums of money just to get it over with;
...the risk that the purchaser you finally come to terms with will be unable to secure the financing for the purchase;
...the risk that you will still have to pay your attorney to draft extensive documents, and that he will not know how to properly draft certain key provisions which are absolutely essential (they never know some of this until we explain it to them);
...the risk that the purchaser will fail to manage the practice properly and that he will run off patients and staff;
...the risk that the purchaser simply moves the patients to a new facility with new equipment and then claims he owes you no more money on your note;
...the risk that the sale will not happen during your lifetime.
OK, I agree I need a professional, so who should I call? The real question here is, "Who can you trust with one of the most important transactions of your life?" "Who can you trust?" That is the quintessential question, and rest assured the purchaser will be asking the very same thing. Who can the buyer trust? And what if his advisor tells him something different than your advisor tells you? The ideal advisor would therefore be someone who could be trusted by both sides to be competent, fair and objective. (This eliminates the attorneys, accountants and brokers who represent only one side.) With that trust the respective parties could proceed forward in confidence toward their mutual objectives, knowing that everything would work out. Such an advisor would be in tune with the needs and expectations of both parties, and would be in a perfect position to know how the demands of one party may impact upon the needs of the other. He could then act as an intermediary for minimizing conflict and resolving concerns.
Of course, the ideal advisor should specialize in dental practice transitions. Too many dentists entrust their most valuable asset to someone who sells dental supplies for a living and dental practices on the side. Ideally, your advisor would be competent in financial as well as legal matters, and would be capable of coaching and interacting with the lawyers and accountants who will likely be involved. An advisor who works in this capacity to the fullest extent will save you untold thousands in legal and accounting fees, and ultimately will help ensure that the transaction really happens. (Attorney's aren't known as deal killers for nothing!) An advisor should have direct experience in structuring successful transactions similar to the kind of transaction you wish to have.
This advisor should be performance oriented, deriving his compensation from the results of the process, not by the hour. Consultants who offer to work by the hour may doubt their ability to get the job finished. They can run up sizable bills without really accomplishing anything. Remember, until there is a closing, you don't get paid. If the consultant is to represent both sides, he should be paid by both sides, and his fees to each party should be fully disclosed. Ideally, this advisor should have resources available to assist the purchaser in realizing the potential of the practice, thereby assuring the seller that his practice and patients will be properly cared for and that the purchaser will have the greatest chance of success.
One word of caution about attorneys. Some attorneys are reasonable people who
may make some minor but meaningful contributions to the process. However, too
many attorneys have little or no understanding of the business aspects of a
dental practice transaction, and no comprehension of the delicate nature of the
issues at stake. In an attempt to control the process (thereby generating much
more in fees) they will often give absurd and destructive advice to their
clients. The problem is that you, the dentist, won't know which advice is good
and which is absurd. A good consultant will. After all, a practice transition
specialist deals with similar issues day in and day out. He can tell you when
certain demands are out of bounds. If you happen to get conflicting advice from
your advisors, be careful not to make the mistake of assuming that the lawyers
always know what is best just because they're lawyers.
First, pay off or at least do not incur any more practice related debt. Your practice value consists primarily in your relationship with patients, not the value of your equipment. Resist the temptation to go out and purchase new equipment with the expectation that it will enhance your practice value. It will not and you will never get your money back.
Second, objectively evaluate your staff and get rid of the dead wood. There are far too many doctors who cannot bring themselves to confront the fact that they are being held hostage by staff members who have been there too long and think they are indispensable to the practice. Don't you believe it. A truly excellent staff will make the practice much more valuable and attractive to a young purchaser. If your spouse works in the practice, she should likewise phase out (or be ready to) once the new purchaser acquires the practice.
Third, take positive and conservative steps to increase practice collections and improve new patient inflow. Generally speaking, practices with greater collections from fee-for-service (FFS) patients carry a higher market value. Practices with high patient retention and a healthy new patient flow are likewise more attractive to purchasers.
And fourth, if you don't know how to do the three things previously mentioned, get some professional help. Some consultants will perform an in-office diagnostic analysis on your practice without cost or obligation. Often such analyses turn up important opportunities that can mean much more income and profit, while improving the practice profile for transition. Our experience has been that such pre-transition investments into your practice can pay big dividends when it eventually comes time to sell.
Not only is it possible to apply such principles, it is tremendously effective. PARAGON consultants are trained in the fine art of dual representation and have handled in excess of 1,500 clients in this fair and equitable fashion.
PARAGON truly believes that there is no reason for a practice transition to be an adversarial experience. This is especially true when most transitions result in the buyer and the seller working together after the transaction is finalized.
But probably most importantly, since 1988 over 97% of our clients surveyed
indicate that they would highly recommend our services to their colleagues (many
of these have indeed referred us toi colleagues). It's hard to argue with
Most consultants or brokers charge a 10% seller fee for their transition
services. PARAGON has a more equitable fee structure for our dual representation