5 Items To Consider When Planning Your Dental Practice Transition

Tue, Mar 3, 2015
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One of the biggest trends in dentistry today is the logjam that’s been created from many baby boomers still practicing dentistry. The number of dentists per 100,000 people grew from 59.8 in 2008 to 62.0 in 2011*.

The trickledown effect that this glut of practices needing to be transitioned is creating is changing the face of dental market today. Unknown to most, the issues from too many dentists holding onto their practice is only worsening the dental market in general by allowing for opportunities of corporate dental companies to take a larger hold of the market by acquiring practices on the cheap that couldn’t be transitioned otherwise due to lack of in strategy and/or buyers.

Further compounding this issue, many anxious new dentists coming out of school cannot locate a suitable, appropriately priced practice so they seek the structure and safety of the corporate practices, even though their long-term goal is to eventually own their own practice.

Read the Guide: Financial Planning for Dentists

As a result, this growing hold of the corporate movement in dentistry is pressuring the solo practitioner into taking more insurances, but that’s another article for another time. So how can you prevent this trend from continuing to happen and reverse them altogether?

The short answer is better transition planning, but let me expound on this idea more to help add clarity to this issue. Each dental transition should be as unique as your practice is—there is no one single way that is best for a dental transition. Anyone that tells you otherwise is dead wrong. It is not a square peg, round hole situation, but there is a great deal of planning that is needed in order for it to be done correctly. Here are 5 things you need to look at in your practice prior to your implementing your custom transition process.

  1. Timeframe—this seemingly simple idea can dramatically sway, if not even dictate, the type of transition you can implement in your practice. According to a 2010 survey done by the ADA, dentists under 40 plan to retire at age 61, however when dentists over age 40 were asked the same question, the average drifted up to 67**. That example is a microcosm of what we see on a daily basis of our firm. Once dentists really start thinking about what it actually takes to retire and what must happen before getting to the point of a transition, they realize a great deal of planning needs to go into a proper transition strategy and some smaller practitioners just give up altogether and close the doors. We like to tell everyone to do it the right way, you will need to start laying out the plan 10 years in advance. If you’re inside your 10-year window, your options are becoming limited with each passing day.
  2. Ideal type and logistics of your transition—a statistic I’ve seen in numerous venues over the years is that 75% of associates do not turn into partners and whenever I speak and mention that statistic, the crowd typically says it should be higher. Regardless, we think that is a real travesty and that things could be much improved with better planning. Be sure to ask yourself: “what type of transition to I envision for myself?” Basically there are 3 types of transitions: #1—A tiered transition—this is where portions of the practice are sold over a period of time (i.e. 50% now and the second 50% in 4-8 years, etc). #2—A “walkaway sell”—this is when the heir apparent is brought in, the transition done, and the host dentist leaves all occurring within a 12 month period typically. #3—A combination transition—this is basically a combination of the previous two options. Monetarily, the tiered option mentioned above will net you the most for your retirement, but most cannot afford this type of transition, wait too long to plan for it, or simply do not have the personality for it, but if this is done correctly, the goodwill of your sticking around will pay dividends for the transition value. Whichever type of transition you plan, you’ll want to consider what both you and the associate are looking for. The associate needs some guarantees on the front end (i.e. salary, contract, a strategy up-front for the transition, etc)—handshake deals are not okay when dealing with transitions, so that cannot be part of your plan. There needs to be specifics and it needs to be written down. Once the associate needs are covered, you need to make sure your concerns are dealt with appropriately (i.e. price, when you stop working, making sure your patients are taken care of, etc). Make sure you mention your ideal way to unwind from the practice—are you a “cold turkey” or a “phasing-out” kind of person? Whichever it is, I will give you this one bit of advice: make sure you have a plan on what you want to do once you are retired. Whether that is philanthropy, family, hobbies, etc, one of the worst mistakes I’ve seen in my 12 years of experience is a dentist retiring without having a plan to fill their time. Also, while you’re thinking about this question, you’ll want to have a pre-determined plan on the real estate if you own your practice location…that has to be part of the deal and considered as part of your transition plan.
  3. Business model—once you have a timeframe and a general idea of the logistics and type of transition plan you want to implement, you’ll need to make sure your business model can accommodate your ideal scenario. One of the first items to consider with your practice is your production level. If you produce $600k, your practice is too small and you can’t afford an associate for a transition. There is not any one dollar amount that translates into bringing in an associate, but it is an amalgamation of multiple different factors: production, overhead, schedule, etc. Another consideration is the location size as well. Typically for an appropriately producing practice, having at least 6 total operatories is ideal—this would allow both dentists to work out of 2 chairs each plus have hygiene running at least 2 chairs. Well before the business model portion of the evaluation process and ideally during the Timeline section above, you’ll want to objectively identify if your practice is “transition ready” or if you need to prepare the practice to be able to sell it. No different than when you are having a baby and preparing the nursery, you need to make sure that your practice is ready to accommodate an associate. If you don’t have digital, get it—it’s not cheap, but many associates will look right past your opportunity if you don’t have it. Having a practice that is ready to walk into from an associate’s standpoint will allow you to command a higher price for your practice because it is more transition-ready. This is exceedingly important for dentists in rural locations as most younger dentists are looking to stay in suburbia as opposed to a more rural location. It also signals to the associate that you are dead serious about your transition and want to make sure they are comfortable when they come in. There is a happy medium to this however because it is not necessary to have all new equipment in your practice. Generally speaking, in your 50s you should only be adding equipment that is necessary to transition and/or are critical to your daily production levels.
  4. Overhead—this is one of the most misunderstood and often overlooked portions of a transition based on my experience. Though this really goes under the Business Model section above, it merits its own discussion. The overhead value will make or break your transition plans because overhead is inversely related to your cashflow and cashflow is the #1 determining factor in a formal appraisal of a dental practice value. The lower your overhead, the higher the income you make from the practice—and the more you make, the more your practice will be worth. From a planning standpoint, the lower your overhead is, the easier it will be able bring in an associate at an appropriate salary without cannabalizing your income while also lowering your relative risk to bring them into your practice. As a host dentist, you have to offer some sort of a base salary to compete for the top talent available because your competition is and those associates need some sort of guaranteed income to deal with their six figure student loan debt. To help offset the cost of bringing in an associate to be a partner, look at expanding your schedule and spreading your costs over a 5-day workweek. To have 2 dentists in a practice and not be open 5 days is not an efficient use of your business model. To compensate for this, stagger your schedule so you work one day by yourself, they work at least a day or two alone, and have the other days be the ones where you work together.
  5. Personal monetary stability—if you covered the first four items above, you’ll already be way ahead of the curve when it comes to your transition, but all of this is for naught if you can’t afford to retire, so considering your personal retirement situation is a huge factor in this as well. A statistic was real was released by the ADA a few years back stating that 96% of dentists under save for retirement to support their current lifestyle. It doesn’t have to be that way because you still have control over that as you plan for your retirement. If you think you’ll be hitting the lottery with your transition, I’m sorry to inform you that you will not. An appropriately-priced practice typically sells for 60-70% of the previous year’s revenues, so unless you live in geographically desirable area like Hilton Head, you won’t get much above that without gouging the associate. Also remember too that the price you sell for (as well as how it is allocated for tax purposes) will dictate how the transition is taxed. At a minimum, you’ll be looking at 15% and as high as 45% all in to be paid to Uncle Sam so pay close attention to ideally structuring the deal as an stock sell if you are selling or an asset sell if you are buying. Most importantly, don’t sweat the small stuff if the cashflow works for both sides and you really like the transition plan in place. After all, cashflow does trump everything and unfortunately, I’ve seen too many transitions blow up on something as meaningless as a percent of classification applied to goodwill.

They say that negotiation brings out the worst in people, but if you haven’t saved enough to retire comfortably, it will be even worse and the new owner will absolutely pick up on it which can jeopardize the deal altogether. Treat the transition as icing on the cake to supplement what you have already saved and make sure you start saving way more now so you don’t have to hold out of top dollar and ultimately have the practice decline in the process.

If you’re not on pace to hit your retirement now, you need to start looking in that mirror and start figuring it out with your team of advisors. Though it is loosening up now, this is what has happened over the last 7 years as 2008’s performance in the market led to most portfolios to be cut in half. Focus on saving more and taking less risk in the market so you don’t repeat these mistakes. If you can implement these 5 ideas in your practice transition planning it should be able to put you well ahead of the game and allow you to transition on your terms. Keep in mind, this is a transition not a transaction and you’ve worked too hard to create your livelihood to haphazardly hurry into a poorly designed transition.

*M. Vujiic and B. Munson. Despite Economic Recovery, Dentist Earnings Remain Flat. American Dental Association Health Policy Institute, Research Brief. October 2013.
**2010 Survey on Retirement and Investment. American Dental Association. www.ada.org. August 2010.

Brogan Baxter is the Chief Operating Officer and senior analyst at Four Quadrants Advisory Companies, a national accounting, financial planning, and advisory firm with only dentists as clients. They are the only dental advisory firm in the nation with a money back guarantee on their services. To learn more or put your current team to the test, contact Brian Wilson at 877.720.6213 or bwilson@4quadrant.com.


 

Topics: Practice Transition

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