Author: marketing

Do You Really Need a Broker?

Date Posted: 2006/05/21

As a professional, you have learned to listen to your patients’ questions and provide careful answers designed to educate them about the benefits of preventive oral health care. As a broker, I have similar experiences and a similar set of answers about our services.

Why do I need my practice appraised?

Much like the patient who doesn’t seem to understand the obvious benefits of regular preventive care, some dentists may be oblivious to the benefits of a practice appraisal. An appraisal serves as a tool that addresses many career and business needs: retirement and estate planning; property and personal insurance reviews; refinancing; practice sales; incorporating and ‘freezing’ capital gains and uncovering inefficiencies. I work closely with seven dentists in my company and each of them shares my frustration. They can’t understand why their colleagues won’t invest in a practice appraisal when it often initiates a process that may lead to numerous, beneficial results.

Why should I employ a broker to sell my practice?

Much like the trend towards do-it-yourself or DIY home renovations, many dentists take on the task of selling their own dental practices. While DIY is often promoted as a cost-efficient measure, common sense also states that we get what we pay for. Ask yourself these questions: Would you sell your own car? Would you sell your own home? Would you sell your own practice? For the majority, the answer may be, “I would like to DIY (and save the fees) but what are the results?” The market has proven that those who sell their own practices rarely achieve the same results as a third-party professional who specializes in the art of selling the asset. The National Association of Realtors (a US-based group) has studied the For Sale By Owner (FSBO) results versus those of Realtors® and found that in a large majority of sales, a Realtor not only achieved a higher sale price (before commissions) but he or she usually negotiated more favourable terms for the seller such as preferred closing dates and fewer ‘inclusions’ (i.e. appliances).
When I listen to stories of those who elected to sell their dental practices without a broker (and there are more of these stories than I wish to admit) the results are not what you may expect. While most dentists say the deal “more or less went as I thought it would” they also admit they made some miscalculations that resulted in a failure to achieve what they had first anticipated. One of the key errors of the DIY dentist is failing to properly identify what he or she owns, and its appropriate market value. Even with the aid of a professional appraisal, many admit they ‘gave away’ some assets during the negotiations in order to induce a buyer into the final deal. Brokers, on the other hand, are not in the business of giving anything away. Other DIY dentists tell me they did not understand some of the intricate strategies for reducing taxes, and the techniques for limiting the costs of selling. Some areas to also consider are the benefit of adjusted closing dates, notification obligations for staff terminations, pay-outs of equipment leases, and landlord fees to assign a premise lease, to mention a few.
In short, a broker will almost always yield a higher total sale price — simply because it’s in his or her best interest to do so. A broker should also be familiar with the most current tax structure or cost-reduction strategies for a selling dentist. It’s always best to consult with a professional to be advised of recent changes. I often speak with accountants who are so busy with the bigger picture of taxation rules, that they sometimes do not know the finer points of a dental practice sale or the allocations of sale price that may be favourable to their clients.
In the end, I suggest that the DIY dentist will net the same proceeds from a practice sale when using a broker as when selling on his or her own. I also submit that you can choose to pay a commission to the broker, and let him or her manage the deal, or you can pay the commission, in effect, to the buyer as he or she negotiates a better price or terms. Many buyers admit that they see a DIY dentist as being somewhat unsophisticated and the immediate belief is that “I’m going to get a good deal from this dentist.” While this may not be true, the perception is that the DIY dentist is a rookie and the buyer will gain an advantage by means of a lower sale price. Is that how you wish to be seen?

Timothy A. Brown is the President & C.E.O. of ROI
Corporation & ROI Capital, companies that specialize in dental
practice appraisals, brokerage, consulting, locum
placements, associateships and practice financing across
Canada. Timothy may be reached at 905-820-4145 or at
timothy@roicorp.com.

The Whole vs. the Part: Appraising a Dental Practice with Multiple Owners

Date Posted: 2006/04/14

Our company regularly appraises group dental practices, and in most cases the dentist who has requested the appraisal has not informed his cost-sharing or equity partner(s) about the process. Confidentiality concerning financial affairs and future intentions is the usual reason given to us. With this in mind, how does one go about appraising ‘part’ of a group dental practice when the ‘whole’ is not aware of what’s transpiring?

We have always promoted the ‘whole’ theory of appraisal, which means that the entire practice should be appraised, including all the equipment, leaseholds and goodwill. Proceeding in this manner allows for the individual(s) share to be more easily identified. When asked to appraise just one portion, we often discover — sometimes after the fact — that items have been overlooked. Therefore, the appraisal may be inaccurate — which is a very frustrating situation for a purchaser (in the case of a sale) and also for the accountants, bankers and lawyers who may be relying on the accuracy and completeness of the appraisal.

Leaseholds

About 20 percent of Canadian dentists share the ownership of their premises with another dentist. When determining the value of each owner’s share of the leaseholds, we strongly recommend that the entire facility be appraised so that an individual value and ownership share can be more easily allocated. Occasionally a dentist has said to us: “Don’t bother with that side of the office, it’s not mine” and we find that shared space did indeed exist (i.e. mechanical rooms, staff areas, laboratory space, etc.) While it is always best to appraise the entire facility, some may argue that this means a partner is getting a ‘free’ appraisal (and yes, this may be true), but it is the most prudent way to identify and record the value to which you may be legitimately entitled. An alternative is to be open about the purpose of the appraisal and for each partner to share in the cost, thus lowering each dentist’s proportionate share of the appraisal fee and reducing the chances of ill feelings later.

Equipment

As with leaseholds, dentists often tell us to ignore certain rooms: “Nothing in there is owned by me.” Later they call to say: “Sorry, I forgot to tell you about the xyz machine that we share 50/50 — it was in ‘his’ room when you were here.” Once again, this frustrates the dentist and the appraiser and in some instances, has accidentally caused a transaction to become adversarial when the buyer learns, late in the process, that he or she now must pay more for something that was honestly overlooked. Our advice is to list and record every single asset in the practice, regardless of who owns what. At that point it is easier to delete the individually owned equipment or identify excluded items.

Goodwill

Goodwill is actually one of the easier assets to appraise. If the financial statements of the partners are jointly recorded (i.e. all revenues and expenses are reported through one entity) the appraiser will value the entire goodwill and then apportion the rightful value according to the Shareholder Agreement. Most of these Agreements distribute value equally between the partners (i.e. 50/50). One complication that often arises occurs when one partner earns a larger percentage of the overall income (either dental or hygiene) than the other. While their Agreement states that an equal distribution should occur, the reality is that if one produces a larger share of income, he or she will invariably feel entitled to a greater share of the goodwill. In the end, it is the Shareholder Agreement that is the determining factor — perhaps you should review yours to see what you are legally entitled to claim.

When the partners maintain totally separate financial statements (as is the case of most cost-sharing relationships), the appraiser will simply examine the income produced and expenses incurred solely by the client, similar to the appraisal of a solo practice. So, whether you are in an equity partnership (shared revenues) or a cost-sharing arrangement (shared expenses only), be certain that you understand your entitlements. This “whole” approach to valuations is the best method to determine the fair market value of the entire group practice. Once completed, a consultation with your appraiser, accountant or lawyer will help you to accurately determine: what you own, what you can (or cannot) sell, and what your practice is really worth.

Ontario Dentist – April 2006

Associates and the Sale of Your Practice – An Appraisers Perspective

Date Posted: 2006/04/07

Buying and selling a dental practice on the open market in Canada was a rare occurrence prior to the 1970s. That was a time when, upon graduation, a dentist could simply
move to the community of his or her choice, open a practice and be immediately busy providing dental care. Many practice transitions at that time involved the retiring dentist ‘giving’ the practice to a colleague in the hope that the new owner would pay a token amount for the equipment, perhaps assume a premise lease and look after the patients.

But times have changed. As more areas of the country have become better served by the profession, there has been a recognition of the many benefits to a practitioner of buying an existing practice and paying the departing dentist a significant sum for the goodwill in their operation (in addition to monies for the equipment, leasehold improvements, instruments
and supplies). As a result, the marketplace has become very active. Hence the importance of focusing on the best way to sell a dental practice. Some dentists wonder if an associate buy-in is the answer. Based on my experience as a practice appraiser, I will answer the often asked question: “How does having an associate in my practice affect its sale?”

Attracting an Associate

With the average age of practicing dentists from the baby boomer cohort continuing to increase, and the seemingly younger age when they choose to sell, one can safely predict that there are several hundred practices on the market at any given time. While there are about 450 new graduates in Canada each year, only a fraction of them are looking to buy a practice right out of school. An owner might rightly be worried about competing for this limited pool of potential buyers. This is especially true in rural and remote regions of Canada, where fewer young dentists are willing to locate and where it can take years to sell a practice.

One long-standing perception is that the best way to sell a dental practice is to attract an associate as a potential buyer. In the ideal scenario, this person works collaboratively for a few years under the mentorship of the senior practitioner, gradually becoming more confident and accepting of more responsibility. The owner continues under the illusion that the associate is eventually going to buy him or her out. It has been my experience that this belief often proves false and most owners are disappointed that the hoped for buy-in doesn’t occur. The (usually) younger dentists in these situations thrive by virtue of being able to gain valuable experience while enjoying a level of security and limited risk. If you do attract an associate and get assurances that he or she will buy the practice, remember that anything can happen. If the associate leaves, you will have to start the process all over again, but you’ll now be further along your retirement timeline. You’ll also have to assume any additional financial investments you may have made to expand the practice when you found an associate.

If attracting an associate for a buy-in isn’t such a good idea, what about an associate who is already in place? It has been my experience that long-term associates are often not good buyers of the practice they work in. If a dentist has been an associate for more than 5 years, it’s usually because he or she does not want to own a practice — ever. Consider this true story: 3 associates were asked to make an offer on the practice they worked in. The owner had made it clear for years that he wanted to retire ‘soon’. These associates were great practitioners and were successful by all measures. They also had an excellent rapport with their senior colleague. When the request for an offer to purchase was made, the owner naturally thought all of them would be very interested. One associate declined outright. The second, who was a newer graduate, thought the practice was overvalued, while the third simply left (there had been no written associate contract) and moved a kilometre down the road, even attempting to take patient records as he left. So much for
perceptions and collegiality!

The Impact of Having An Associate in the Practice

From an appraiser’s perspective, having an associate in a practice usually impacts negatively on the goodwill value, for several reasons:

1 . In the absence of a written associate agreement, goodwill values will be adversely affected. Although the enforceability of such an agreement is not certain, the existence of non-com-petition and non-solicitation clauses will go a long way toward protecting an owner from sudden departures from the practice. Without a robust agreement which stipulates that the associate(s) cannot simply move ‘next door’ after leaving or after a new owner takes possession of the practice, there is a great risk to the purchaser of paying for something (cash flow based on a certain number of clinical hours and patients) he or she may not receive.

2. A long-tenured associate may feel as though he or she ‘owns’ some of the practice, simply by virtue of having treated patients that the owner has never seen. Furthermore, the associate’s efforts may be the reason behind the growth of the practice (revenues, patient base, staff numbers, etc.). Potential buyers may see this perceived ‘ownership’ issue as a risk to them, so they are generally less willing to pay as much for goodwill in a situation where there are long-term associates in a practice.

3. Assuming that there are adequate agreements in place and that the associate desires to stay with the practice after the owner sells, there remains the issue of compatibility. Every one of us is an individual, and we just might not get along with someone new for professional or personal reasons. If these differences are material, the new owner may have to seek out another associate to work in the practice. This can prove difficult in geographically challenged remote and rural areas. If no one can be found, the new owner may be forced to work longer and harder than planned, or to refer some patients to another office — patients who have contributed to the cash flow of the practice and who would have been part of the patient base included in the purchase of the practice.

There will always be debate about the benefits of grooming your buyer. If you need an associate in your practice, either to handle increased patient flow, to allow you more opportunity for time off, or to fulfill your desire to mentor a promising young practitioner, then hire one. However, don’t automatically think of your associate as your successor.

Selling Your Practice: The Science of Due Diligence

Date Posted: 2006/03/13

When I first started in this business more than 25 years ago, the scope of general dental practice was much narrower and it was usually very easy to determine the clinical treatments and recordkeeping systems when appraising a practice for sale. The expanded scope of today’s practices means a potential buyer has a much larger task when investigating the type and style of the current owner’s operations, both clinical and administrative.

It is now customary for a buyer to perform an inspection of the records, both clinical and financial, either prior to making an offer or shortly after the offer has been accepted. The customary term for this process is “due diligence.” While we always suggest that a buyer thoroughly examine a practice prior to submitting an offer, today’s very active market (mostly in the larger Ontario cities) dictates that offers must be submitted quickly to enter the competition. Thus, some offers must contain a “due diligence” clause.

What records should the seller make available for “due diligence”?

• If requested, patient charts, models and X-rays should all be presented to the buyer. These are the best indicator of the philosophy of a dental practice, and under no circumstances should a layperson be permitted to examine these types of patient records. Delegating this crucial element to anyone else is a mistake and may also be a violation of privacy legislation unless specifically provided for in the Offer to Purchase. Patient records may be required by a buyer to verify the data contained within the appraisal and also, with respect to obtaining financing, to satisfy the bank and accountant that the practice has been adequately examined. Other records to be viewed may include:

• Appointment and day sheets for previous and future appointments
• Employee personnel files and performance reviews
• Financial production reports (daily, weekly, monthly, annual)
• Procedure analysis reports
• Bank statements and deposit books.

What records are not necessary to be examined?

The seller’s income tax returns (T1 General) as they contain personal data that is not related to the practice.

When should I meet the staff?

Meeting with staff is not necessary at this point — the goal of due diligence is to examine the paper records, not the personalities of the practice. The staff will have a better opportunity to meet the buyer separately — with the owner present — so they do not feel that it is the quality of their work that is being examined. Once the buyer commits to the purchase, then and only then should he or she be permitted to meet the staff.

How should a buyer perform due diligence?

1. Visit the practice after hours and examine a minimum of 50 to 100 patient charts. (Don’t ask to examine the records during working hours, as it will interfere with the normal routine and confuse or upset staff and patients.) Look for the date of the last appointment (it should be within the last 12 months to be considered ‘active’) and the type of appointment (recall or other). Is there a treatment plan? What codes are being used for certain procedures? Are the fees recorded in the chart or just on the ledger cards or in the computer?

2. Examine the appointment book, both for the past one or two months and for the upcoming months ahead. How far in advance are hygiene appointments booked?

3. Study the day sheets to determine the time allotted for each procedure and the usual booking times reserved for recalls and restorative procedures. Can you complete the treatment in the same time frame or do you require longer appointments? If the latter,
production may be reduced accordingly.

4. Ask to see the equipment service log/records, if available, for recent entries.

Ontario Dentist – March 2006

Is it Time to Purchase a Dental Building?

Date Posted: 2006/02/03

The real estate market is hot! Prices may be peaking, especially in urban areas, but interest rates are remaining low — at least for now. So, is it time to buy a building to provide a ‘home’ for your dental practice? We think it is.

Our appraisal database reveals that building ownership was very popular, and was almost the norm until about the mid-1970s. Then, as interest rates began to rise in the early 1980s, leasing became the preferred choice. Because of this shift in demand, landlords soon found themselves with the upper hand. Fewer dentists could afford to purchase office properties and premise leases of the day ended up being structured very favourably towards the landlord’s interests. Now, what’s old seems to be new again — building ownership is becoming the preferred choice of many of our dentist clients.

Assuming that a suitable property or vacant land is available in your community, we would suggest that this may be one of the best times to purchase real estate. When the total costs are factored in, including interest payments, property taxes, insurance and repairs and maintenance, building ownership will usually result in lower total occupancy costs over the life span of a practice.

Even once the lost opportunity cost of the required down payment is calculated, ownership yields a higher return on investment when compared with renting and reinvesting the difference. For the dentist who has $1,825 per month to spend on occupancy, and based upon the ten assumptions listed, the following example (Figure 1) may help you determine whether owning is better than renting (This spreadsheet is available by e-mailing the authors, allowing you to insert your own numbers).

Not every dentist desires to be a tenant in his or her own building, and not all dentists can commit to the burden of another mortgage (after considering home and possibly vacation property debt). Other deterrents to building ownership stem from the fact that a dental office (especially in a renovated home) is generally a single use facility. At the time of a practice sale, there will be great expense to return the building to a state where it can used as a home once again — if the new practice owner wishes to relocate, or in some situations, where a rural or remote practice cannot be sold at all. Further, many retiring practice owners we speak with are generally not interested in remaining as landlords themselves, should the new practice owner not wish or be able to purchase the building as well as the practice.

Although many tax advantages are possible, we would suggest that practices which are located in adjuncts or wings of the dentist’s private residence are less saleable than those located separately on other lots (or at least those that are amenable to subdivision). Lastly, leasing space allows one to free up capital for other purposes and provides for a larger expense write-off on an annual basis (as only mortgage interest and building depreciation is deductible).

We predict that the trend towards building ownership will continue to rise until such time when mortgage interest rates climb to to seven percent or more, and resale values level off. Despite this prediction, be sure to weigh all the positives/negatives of ownership (the qualitative issues), check with your accountant, and do the ‘math’ (the quantitative issues) regarding your own situation.

Co-authored by Dr. Jeff Williams

Ontario Dentist – February 2006

Ten Tips for the New Practice Owner

Date Posted: 2005/10/13

Many practice management companies offer expensive advice and strategies for dentists to market their services in today’s increasingly competitive environment.  However, the most successful dentists have learned that marketing need not be costly or unique.  Here are 10 common-sense suggestions for marketing a dental practice:

1.  Shop where you work.  Visit the local retail stores and get acquainted with other business owners in the area.  They are great referral sources and may be a big asset to your practice.  Don’t overspend or be obvious, just buy a few items from time to time, meet the senior staff and long-serving employees and be sure to leave a supply of your business card with the owners.

2.  Introduce yourself as a new business owner when you meet people in the neighborhood.  Let them ask what you do first, and then tell them that you are a dentist.

3.  Look people in the eye, not in the mouth.  For some dentists this is difficult, but most people with esthetic and cosmetic dental issue are slightly self-conscious and don’t appreciate being looked in the mouth at a first meeting.

4.  Avoid contrived advertising.  Gimmicks do not produce the best long-term results – I have found that direct marketing via flyers, newspapers, cheap give-aways, Yellow Pages and other techniques usually employed by low-budget businesses will produce limited results in the early stages of practice.  Ads work for some locations and styles of dental practice, but most good practices are built on word-of-mouth referrals from existing patients, not from casual walk-ins who respond to glitzy advertisements.  Save your hard-earned money for staff training, continuing education courses and office upgrades.

5.  Join local interest groups.  Business associations, charities, social clubs, religious institutions, sports teams, and museums are always great sources of networking and meeting new people.  Individuals will often be more outgoing and sociable at events within their own community.

6.  Meet your fellow professionals.  Physicians, pharmacists, chiropractors, and school nurses may know many people who will need your services.  Be sure to introduce yourself to your neighboring dentists as well.  Good rapport is important, and they may appreciate your interest in working together versus the more traditional competitive view.

7.  Join in community events such as streetfairs and sidewalk sales.  Find a professional and dignified way to participate in these activities with other businesses in your community.  On Halloween, a dentist on my street gives out sugarless gum and toothbrushes.

8.  Live where you practice, if possible.  The smaller the community the more important this may prove to be.  Many dentists commute to their offices for various reasons, but if you live close to where you work, you will most likely meet more people, gain more respect and build your practice faster.

9.  Sponsor local sports teams.  Hockey and soccer and very popular these days, but a pitfall is that once you have sponsored a team, parents may expect you to sponsor all the teams in the area.  Choose one sport, and rotate your sponsorship over the years to be fair to all the kids and parents who need your support for uniforms, equipment, etc.

10.  Put your home phone number on the answering service.  While many of us may not want to be bothered after hours, this shows you care.  Many dentists who leave a pager or cell number on the office answering machine report that in most cases patients who call after hours may be reassured verbally, perhaps issued a prescription and then will usually make an office appointment for the next working day.  In the rare instance when you may have to come to the office in the evening or on the weekend to attend to a patient, he or she will be deeply appreciative and rave about your service to others.

Whether you buy an existing practice or set up a new office, these 10 tips should help grow your practice at a modest cost for sizeable return.

Ontario Dentist – October 2005

Investor Dentists: Will they Drive Valuations even Higher?

Date Posted: 2005/07/03

Investor dentists are entering the marketplace in increasing numbers. These individuals typically seek to buy established practices and then employ the previous owner and/or new dentists as associates. Most do not actively work in the practices they buy. What effect is this emerging trend having on dental practice sale prices and valuations?

We receive inquires from a select group of dentists who for years have been seeking dental practices purely for investment purposes. Ever since the early 1980s, when retail dentistry became popular, the trend towards absentee-owner dental practices has been growing slowly. Today’s sophisticated investor dentists study the expanding dental economy and report the following factors as motivators for their business plans:

1.     Low interest rates that are stimulating borrowing and boosting purchasing power.
2.     A steady growth in dental spending at the consumer level, contributing to increased dental practice earnings nationwide.
3.     A more entrepreneurial style of recently graduated dentist.
4.     Third-party financiers who are seeking secure investments, thus increasing interest in dental practice ownership.

These factors combined with the widely held knowledge that dental practices are profitable are influencing values. This strong demand for desirable practices is likely to increase sale prices. One dentist recently mentioned that he predicts the regulations could change, permitting anyone to buy a dental practice, a custom that is legal for medical practices. The regulations in Ontario permit only a dentist to split fees with another dentist, although management services can be provided to dentists, at a fee. Thus, we see more management companies seeking to purchase dental practices, if only to own the equipment and facilities, while allowing the dentists to earn the fees. Their aim is to profit from the management services offered while still complying with the current regulations – a practice that appears to be more feasible.

Over the past year, there has been a significant increase in the number of inquiries from these management companies. They usually examine a dental practice solely as an investment opportunity and budget that well managed dental practices will yield a gross profit margin, after all the dentists and other expenses are paid, of five to 15 percent of annual gross income. For example, a practice grossing $500,000 per year could yield a return on investment of $25,000 to $75,000 per year. Absentee owners and investor dentists typically use a multiple of annual earnings to indicate value, much like the stock market. Recent open market transactions indicate that investor dentists are prepared to pay between 10 to 20 times the annual return on investment figures.

I predict that the trend towards more absentee owner practices will continue and that management companies as buyers will increase sale prices. In the event that the dental regulations were indeed to change (although I suspect it’s a highly unlikely event) such that anyone could own a dental practice, valuations would increase significantly.

What would your practice be worth to an investor dentist?

Ontario Dentist – July 2005

Looking Down The Road: Five Predictions to Help You Stay Ahead of the Curve

Date Posted: 2005/06/03

As of late spring 2005, the dental practice market has proven to be the most active I have ever witnessed. Based on the volume of appraisals our company performs, I can usually predict the number of practices that will be put on the market within the next one or two years. Similar predictions have been made before, and some did not come about for various reasons. This time I am going out on a limb again, and barring any unforeseen market forces, such as the events and aftermath of September 11, 2001, I think I am on the right track with these five predictions:

1. The number of baby boomer dentists wanting to sell their dental practices in the next one to five years is growing rapidly. These are the “Freedom 55” dentists who have been planning and preparing for this for almost a generation. While many in today’s more mature dental market (those who are 65 or older) do not understand this generation’s mindset, I can assure you there are hundreds, if not thousands, of dentists in Canada who want to exit ownership soon. The same trend has emerged with medical doctors, but they do not enjoy the luxury of a saleable practice.

2. The number of willing, ready and bank approved buyers is likely to grow in the major centres. Unfortunately, the number of buyers will continue to decline for practices in the outlying, rural and more remote regions in Ontario. The profile of today’s buyers dictates that the large majority will want to practise within a one-hour drive of the Greater Toronto Area and a few other cities such as Ottawa. For the purpose of this prediction, the GTA is considered the area within a 60-minute commute from Yonge St. and Highway 401.

3. Prices for dental practices will peak in one or two years. With the continuing demand in the GTA, prices may increase another five to 10 percent, but the trend is likely to come to a head soon. There comes a point when the sale price does not justify the risks, and dentists may revert to setting up a new practice or continuing to associate while waiting for the market to decline. Although the purchase of an established practice remains the No.1 choice for most young dentists, the short supply of the last five years has forced some into setting up new offices, sometimes against their better judgment.

4. Financial institutions will begin to tighten their credit systems. We have witnessed a low interest rate environment for an extended term and when rates begin to climb – even slightly – banks may begin to withdraw from the market. It is inevitable that a few loans will go into default, some losses will be realized, (mostly new set-ups) and banks will tighten their policies. This is a long-standing trend in the financial industry: enter the market, compete with low rates and fast credit decisions and then, once market share has increased, draw back.

5. More dentists will want to exit ownership immediately, avoiding the many costly and unknown factors of the transition. This will free up more practices for today’s long list of buyers-in-waiting. The associate buy-in models of the past are not as viable due to the dramatic variances in philosophy of the two generations of dentists who contemplate such plans. Most of the baby boomers I speak with are seeking freedom from ownership, without the burden of working with or training their replacements.

As in any predictions, there can be unknowns. All things being equal, I submit that these five are highly probable. What’s your time line? Will you be ready if these predictions materialize?

Ontario Dentist – June 2005

Break Up Value: Are the Parts Worth More than the Whole?

Date Posted: 2005/05/07

On occasion, a dental practice must be relocated as a condition of sale. This occurs when the real estate may be more valuable if vacant than when occupied by a dental office, as is the case with many converted residential properties in highly desirable neighbourhoods.

When a typical dental practice is sold as is and where is, the purchaser is responsible for assuming the rent, staff, existing equipment and all other practice commitments. However, when the goodwill of a dental practice is the only item sold, the value of that practice may be the same, or even higher, than the value of the practice if sold as is, where is. Why is this? Purchasers who have a large under-utilized office of their own nearby may recognize a unique opportunity: they can add hundreds of patients into their existing hygiene program, achieve higher utilization of existing staff and facility, and obtain a direct endorsement from the selling/retiring dentist.

When certain dental practices are professionally appraised, the break-up valuation method for goodwill may yield a higher result for the owner compared with traditional goodwill valuation methods. The goodwill value could be the same, or even greater than the total practice value as is, where is. In special circumstances, the goodwill value may exceed the total practice value if certain conditions are met, such as when some key staff are willing to relocate, or when the economies of scale can be dramatically enhanced due to the merger.

Recent open market sales of “goodwill-only” indicate that purchasers are willing to pay more for a goodwill only sale (i.e., charts, patient lists, etc.) if the patients can be relocated into the purchaser’s office immediately.

The cost of attracting a new patient to a dental office is increasing, as advertising and promotion methods become more sophisticated.

The break-up scenario is applicable to those who are thinking of selling, but are fully aware that their office may be a detriment to the sale. By timing the sale of your practice to the ideal time to vacate the premises, you may obtain a higher overall price. The retiring dentist can usually donate the old equipment and obtain a tax credit. The property, if owned by the selling dentist, may actually become more saleable in certain markets, thus yielding higher real estate valuations as well.

The cost of attracting a new patient to a dental office is increasing, as advertising and promotion methods become more sophisticated. Some dentists now compete more aggressively than in the past and new patients may be at a premium in the high-density areas surrounding major cities, mostly in the GTA. What does it cost to gain a new patient using traditional marketing, advertising and promotional methods? How much would you pay other dentists to recommend you directly to their patients?

The Associate Buy-In: Why Does it Fail?

Date Posted: 2005/04/13

From interviews with young dentists seeking to purchase a dental practice, our company gathers considerable data related to associateships. Together with informal student surveys, these meetings suggest that one of the top three reasons for choosing dentistry as a career is the opportunity “to be my own boss.”

Unlike the previous generation of dentists, many of whom went directly into ownership (1980s and earlier), today’s graduates often choose to associate within an established practice for one to five years in order to learn the basics of a real-world dental practice. Some are granted an option to buy into these practices after a specified period of time. A number of associates tell me they agreed to this concept at the outset but had absolutely no intention of actually completing the buy-in process. Some admit they are simply continuing in the position until a better opportunity comes along and sadly, many principals are unaware of this situation.

A majority of buy-in scenarios will predictably end in failure. Why do so few of these transactions fail to materialize into the desired win-win partnership between principal and associate?

In most instances the parties end up going their separate ways, sometimes with excessive financial loss, a loss of professional respect and even the occasional lawsuit. I suggest there are three key reasons why most associate buy-in arrangements fail:

1. Communications

Principal dentists hire an associate for three main reasons:

  1. They have too many patients and cannot treat all their needs.
  2. They want to take more time off and/or expand the hours of operations (evening and weekend) to better utilize the equipment, staff and facility.
  3. They believe in the ‘hire and groom the buyer’ theory.

Associates join a practice for three main reasons:

  1. To earn income and reduce student debts.
  2. To gain experience.
  3. To allow some time while searching either for a suitable office location or a practice to purchase.

The two parties may not be forthright with each other from the start. The principal usually wants relief from a heavy workload, but he or she is not ready to part with control or ownership. The associate wants income and experience but is not ready to commit to an increased financial burden while paying off student debt. In addition, young dentists in the early stages of their careers often lack a clear vision of their professional future. Yet principals seem intent on offering them the “opportunity of a lifetime,” which can ignore the associate’s youthful ambitions. Associates seem intent on agreeing to the future buy-in scenario if only to appease the owner in order to get the position. Poor communication of true intentions is the number one reason the well-intended associate buy-in fails.

2. Equitable Allowances for Contribution

Principal dentists are proud and have invested many years of hard work, equity and time building the practice. When selling, they will naturally seek what they perceive as deserved value for these efforts. Associates are young, energetic and, given the opportunity to work, will usually make every effort to help a practice succeed. When price enters the discussion, the two parties typically hold opposing views about what the practice is worth. The principal wants full value, while the associate believes he or she has contributed to this value and feels entitled to a discount. Both parties may indeed have valid positions, but money is always a contentious topic. Many principals report being insulted with the associate’s initial price proposal, often to the point where they lose all desire to continue the negotiations. Associates believe the practice would be worth substantially less without their contribution. So who is right? The answer is perhaps both, but this process usually leads to failure. Price is a very subjective matter, and one that can ruin the otherwise good intentions of both principal and associate. My advice is to have the practice appraised before the associate begins, and then re-appraised at the time of a possible buy-in. Associates need to respect the years of work invested by the principal and principals need to respect the efforts made by the associate to keep the practice growing.

3. Timing

Sometimes the principal is more eager than the associate (and vice versa) for a major career change. Many principals, who were initially simply looking for relief suddenly feel pressured by the associate to sell the practice (or a share of it) before they are truly ready to begin the process of letting go. This poor timing could have been prevented had the intentions of both parties been properly communicated at the commencement of the relationship. These opposing timelines often portend failure. It’s not that they don’t get along – most seem to work together fine – but it appears that one is inadvertently pushing the other to act prematurely.

I have ten associates, all of whom are wonderful, highly productive individuals. They enjoy freedom from ownership while having the luxury of not investing in or managing the business. On the other hand, I enjoy more time off, reduced client loads and some profit from their efforts. If we ever began the process of an associate buy-in, we would first consider the three main reasons for failure: communication, contribution and timing.

What have you told your principal dentist? What have you told your associate dentists? Are these your ‘true’ intentions?

Ontario Dentist – April 2005