THE MILLIONAIRE DENTIST PODCAST

EPISODE 109: Are you set up for a successful transition?

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EPISODE 109: ARE YOU SET UP FOR A SUCCESSFUL TRANSITION?

Casey and Jarrod are joined by Stacy Phillips, CFP®, to chat about practice transitions and why you should start thinking about them years before you're ready to retire.

 

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EPISODE 109 TRANSCRIPTION

Speaker 1:
Hello, everyone. Welcome to the Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.

Casey Hiers:
Hello and welcome. This is Casey Hiers back at the Millionaire Dentist podcast. In-studio with co-host Jarrod Bridgeman in a gorgeous powder blue sport coat.

Jarrod Bridgeman:
Hey, that's me. What's up?

Casey Hiers:
Really dressing up for this today. I like that.

Jarrod Bridgeman:
I like to have a good visual presentation for podcasts.

Casey Hiers:
Yeah. I'm feeling fancy and professional. There we go.

Stacy Phillips:
Should we start calling the water boy?

Casey Hiers:
Shot fired. We also have with us, Stacy Phillips, he's a certified financial planner, amongst other things here at the firm. We wanted to bring Stacy in today to talk about transitions.

Stacy Phillips:
Transitions? You talking about eyewear or hair replacement? What we talking about here, Casey?

Casey Hiers:
No, we're talking about that funny, goofy topic that practice owners wait too late to bring up, selling their practice, how to do it, who to do it to, who to work with, what the variables are. There's a lot of nuance to this. We're not going to get in the weeds a ton, but we're going to cover it from a high level, all the areas or many of the areas that need to be addressed. And Stacy, you've just done two of these recently.

Stacy Phillips:
We sure have and you brought up the topic and I was like, wait a minute, we have 30 minutes and I'm thinking it's going to take five hours to talk about transitions.

Casey Hiers:
Well, let's start here.

Jarrod Bridgeman:
Just take a giant breath and say everything you want to one sentence, just let it all out and we'll be done.

Casey Hiers:
When is a good time for a practice owner to start thinking about this? Because the times I talk, when I speak to practice owners and they say, "I'm thinking about doing something the next two or three years," and then I've talked to somebody that they're 10 years out and they say, "I want to talk to somebody about doing this the right way."

Stacy Phillips:
I would say that a good time is yesterday. In all seriousness, you could talk five to 10 years in advance, start thinking about how you want this to go down. There's a lot of different ways this could happen. A lot of things you have to think about. Yes, the short answer is early and way before you think you need to.

Casey Hiers:
Well, these are done poorly so often and it stinks that we have more what not to do than what to-dos, but we do have a full page of what to do. But the first one is timing. Don't wait too late, give yourself options. Five years out, that's none too soon. Seven years out, that's great. Because a big part of it is what? Having an attractive practice with attractive financials, when your profit and loss and your balance sheet and your overhead look good.

Stacy Phillips:
Absolutely. You have to make sure your practice is in a good position to potentially bring on an associate or just go straight to an actual sale.

Jarrod Bridgeman:
Or to make people want to buy it. If your practice is doing [inaudible 00:03:02].

Stacy Phillips:
Well, what happens a lot of times is you have a dentist that is in their mind, they're already kind of checking out and they're maybe within five years of retirement. And inevitably what happens is their production starts to taper off those last five years. And that obviously does not look good when you go to sell if things are tapering off. You want to at least maintaining or increasing when you go to sell.

Casey Hiers:
Well, 80% of associates don't become partners and so you could find a great person and just so much in common, so much synergy, and then all of a sudden they go, "I don't think I want to buy this practice," or, "I think I want to move."

Jarrod Bridgeman:
You might have to go through several associates.

Casey Hiers:
Potentially.

Jarrod Bridgeman:
Potentially.

Stacy Phillips:
Yes, you have to plan for that. Absolutely.

Casey Hiers:
And so again, that two or three year, hey, I want to start looking into this. That's a tire fire. You need to be looking at this 10 years out. And then when you are five to six years out, it needs to get real specific. But as a listener, do you want to buy a practice that's heavy insurance, your adjustments are 30%, your overhead 75%, your fees are off, the income's not great? No. To get your practice in shape and attractive for somebody to buy, all of those factors be, looked at, addressed, and attractive for a new buyer.

Jarrod Bridgeman:
Well yeah, because they want to come in and make money. Start making profit.

Casey Hiers:
What? Is that a Mr. Obvious statement?

Jarrod Bridgeman:
Listen.

Casey Hiers:
Just because you're wearing a powder blue sport coat, doesn't mean you can say.

Jarrod Bridgeman:
Listen, I subscribe to a financial magazine. I haven't opened the emails yet, but I read the headlines.

Stacy Phillips:
But did you sleep at a Holiday Inn last night?

Jarrod Bridgeman:
The hotel-motel Holiday Inn? Who's going to want to buy something that's not profitable.

Casey Hiers:
Yeah. Getting your practice in good shape, going to take some time.

Stacy Phillips:
Even if the practice is profitable, you still have to consider the fact that you need the, if it's an associate, they need to be profitable once they buy-in. If it's not set up such that they have a good income or an increased income over what they were making as an associate, then why would they want to buy in?

Casey Hiers:
Yeah, that's the biggest question. When is the right time to make? Again, it's all about timing. But having an associate get a loan, buy-in, be a partner. You're right, the timing of that has to be really, really good. Too many practice owners, they don't pay attention to how that's going to affect their pay as the older practice owner. And then with a shiny new loan from the bank, the younger associate, now partner, maybe a 25% partner, maybe a 50% partner, there's a whole bunch of structuring things we can get into but they're going to need a bump in pay, how's that work for both practice owners?

Stacy Phillips:
Correct. It's a give and take. The selling doctor may have to give something up. Their income could down a little bit to allow for the associate to come in and have a solid or increased income when they buy-in.

Jarrod Bridgeman:
Are you saying that probably, not probably, but it doesn't have to be a 100% right away, just not a straight-up sale.

Stacy Phillips:
Correct. Think about if you're an associate fresh out of dental school for a couple years or whatever, you come in and somebody throws the opportunity out there to purchase a practice. I know if that was me, I would be scared at purchasing a possibly multi-million dollar dental practice.

Jarrod Bridgeman:
More debt.

Stacy Phillips:
Yes, more debt. Fear of, can I get a loan? There's so much that goes into that.

Jarrod Bridgeman:
And zero business experience.

Stacy Phillips:
Correct. You don't learn a whole lot of business in dental school. Another thing that is a big part of this as well, is if you're bringing on an associate and you want them to buy in, they really need to know what's going on in that practice.

Casey Hiers:
Leadership. The older dentist needs to show leadership and typically, they don't want to show key documents when again, their adjustments are off the charts, their overheads.

Jarrod Bridgeman:
Those skeletons in the closet.

Casey Hiers:
A little bit. But that's the worst thing you can do because then all you're doing is delaying it. You need to have big boy and big girl conversations out there if you're going to transition. You need to understand each other's personalities, how they practice because that's huge. But what's the plan? How's that structured?

Stacy Phillips:
Yeah. If you're not providing details to the person buying in, then how can they make an educated decision to purchase that practice?

Casey Hiers:
Yeah. I think the first answer to our listeners out there is if you're 10 years or less out, it's time. You need to really start looking at what it looks like, what the structure is, when you want to walk away, when can you walk away? We talked about this, Jarrod, a lot of older practice owners, they get this rocking and rolling and they go to sell and walk away and they quickly realize they don't have enough money. And so then the older practice owner sticks around a little longer and the younger practice owner doesn't want to hurt their feelings but this wasn't talked about. That can be incredibly awkward. Even if the numbers are good. This is a minefield.

Casey Hiers:
And so what do most people do? It's too hard, DSO comes a-knocking, dangling that carrot, they get the big check and I've heard it from dentists, I'm the messenger. I'm not coming up with this. They wish they had other options. They needed the money. It sounded easy. They didn't go out on their terms. Their staff wasn't happy. It's not what most people want but they're vulnerable to it. Corporate dentistry knows that. They're running a profitable business themselves and so then all of a sudden you've got someone who got into dentistry for a variety of reasons but one, to manage themselves. They're not being told how to finish dentistry in their last couple years.

Stacy Phillips:
Another thing too is even if you use a broker, you kind of lose control of the situation a bit. Because once you sign with a broker, they're going to sell it to whoever they want to sell it to. You really have no choice at that point.

Casey Hiers:
And that's what 10%?

Stacy Phillips:
Absolutely.

Casey Hiers:
Yeah. Thank God our clients have us. We do this for much less. This is a once-in-a-lifetime, once in a career situation so there is an additional charge for us to help but we help our clients with transitions all the time and they take a deep breath because we bring everybody in, all the cards are on the table. Shocker, their financials are already good, their overhead's already good. This is a practice the younger dentist wants to buy and it's not a 10% charge from a broker. It's a wonderful situation for our clients. But for those listening who aren't clients out there, some of the little things we said will make all the difference in the world.

Jarrod Bridgeman:
Well, just a couple weeks ago, we had some clients in here who were doing just exactly this and it was very neat to see them both sitting down at the same table with our...

Casey Hiers:
Our team.

Jarrod Bridgeman:
Our team and seeing them, of course, there's always going to be compromises when there's two different people, two different ideas but it seemed very smooth.

Stacy Phillips:
And part of this, the whole situation as well is sure you're going to sell and you have an agreement in place. There's also the financing. You need help with that. That's not an easy thing for somebody to come in and buy a practice. Could be a multi-million dollar deal. We can assist with the financing.

Casey Hiers:
Structure. How is it structured? To your point, you want to buy the whole thing, maybe break it up in phases, maybe do the land and the building late. There's a whole bunch of ways to structure it.

Jarrod Bridgeman:
Well, because I was thinking, it's not easy to even just buy a regular old house, let alone a business. I hire people for that stuff.

Casey Hiers:
Good one.

Jarrod Bridgeman:
Thank you. Sorry. Sorry. I'm feeling big.

Casey Hiers:
Sorry.

Stacy Phillips:
Another trap that some dentists fall into as they are progressing towards retirement, is they get kind of set in their ways and they only want to do what they want to do. And when you bring in an associate or somebody that's going to buy your practice into the fold, you have to throw them a bone. It can't just be you all the stuff you hate doing. They need to be fed with some good cases, a steady flow of patients to make this all work.

Casey Hiers:
Yeah. We get more stubborn in our old age and I've heard that so many times. Well, I'll bring so and so in here. I'll have them do the cases I don't want to do. It's like, okay.

Stacy Phillips:
Yeah, that doesn't work very well. Unfortunately.

Jarrod Bridgeman:
Right. Well, and he should probably also make sure they have enough to do.

Stacy Phillips:
Absolutely.

Jarrod Bridgeman:
Bring someone in just because, oh shoot, I'm older now, I need to bring someone in but if you don't have enough cases in general.

Stacy Phillips:
Yeah. You have to have the patient base there to be able to bring somebody in and keep them busy.

Casey Hiers:
And the heavy insurance practices, that's what's hard because there's dentistry to do. The associate that's going to be a partner, maybe they've had a guarantee of some sort as an associate and so all of a sudden they've got to buy and it's a different structure potentially and they don't like it. I've talked to people where some of these young dentists, they don't even know where they want to live if they want to live in that city or not. And it's a fart and a win is what comes to mind, but that's probably not the best terminology for our podcast. But some of these conversations are like a fart in the wind.

Casey Hiers:
Some of the young people don't really know what they want. And so the older practice owner has to take that leadership and how much better to have a solid team that knows what they're doing to help. Because again, it is a minefield. Most don't do these well. And most when they transition, it's very frustrating but it is feast or famine. We know a lot of people who they've done a nice job. Typically what are some common denominators? Time, leadership, the numbers make sense, a clear plan, good communication and sometimes that can be hard.

Stacy Phillips:
Yeah. And you touched on it earlier but mentorship is huge. You have to invest some time in the person buying your practice to make it all work out in the end.

Casey Hiers:
No, there's an emotional safety to that. And some of the best ones, there is almost a mentor-mentee relationship. And is it self-serving? Sure, you want to sell the practice to somebody so this might be worth your time to take that leadership and take them under the wing but also maybe learn from them. Maybe there's the younger folks might have some good ideas too. And so that emotional part of it is important. Unfortunately, that can't drive it. And too often, that emotion is what drives these transitions and they're just a tire fire. And the practice broker's fine. The legal fees, they're fine. They're happy. Most people are happy except who? The practice owner trying to sell it and sometimes the younger dentist buying it. They realize, well, I want a fee for service practice. I don't want all these insurances. Well, you can't realize that in the fourth quarter. Those conversations have to take place early.

Stacy Phillips:
Yes. Getting back to that, why do you have to look so far in advance and start planning? Well, when you get to the very end of the finish line here and the sale happens, part of the sale may be that you're required to stick around for six months, a year. You may not want to have a walk-away sale. Maybe you just want to go down to two days, you sell the practice and you become an associate and you still work there a couple days a week. You have to plan way ahead for all of these type of things in order for it to all work out the way you want it to.

Casey Hiers:
Well, in practice, listen, everybody overvalues their stuff. Everybody thinks their house is worth more. And so unfortunately that is true in dentistry. Some of these practices, they've been built from the ground up, the older practice owner is going to potentially overvalue it in their mind. That's an absolute hurdle that you need to look at. But look at, would you want to buy your practice? I think that's a question, a lot of practice, would you want to buy your practice, looking at its overhead, looking at the income that's coming off, all the financials?

Stacy Phillips:
And you need an outside opinion for all of that because you're right. If it's your own eyes on it, you're instinctively going to overvalue because all the time you've invested in it over the years. The evaluation needs to be done by an outside party to give you a fair assessment of what it's worth.

Casey Hiers:
And guess what? The younger doctor doesn't know or doesn't care about all the sweat equity that's been put into it. They don't because I've I hear it from the older doctors. They go, "I don't think they realize what I've sacrificed for this." And they don't. But it really does, that's why it comes down to what? The financials, the numbers, the leadership, the plan. And people might go through a couple of associates. Again, 80% don't become partners. When you start thinking 10 years, listen, you need to spend years getting your numbers right and the practice, one that is attractive. And then you're going to take some years to find the right associates and you might burn through a couple. But unfortunately a lot of the younger folks, it's like the tail can wag the dog and I've heard this, but the older practice owner, they've basically put all their eggs in one basket, one associate basket, and that associate's hemming and a hawing a little bit. They kind of have you if you haven't planned this out the right way.

Jarrod Bridgeman:
If you go through, let's say two or three associates, that could be anywhere from six to 10 years of time wasted.

Casey Hiers:
I was going to say five or six on the low end and you're right. Transitions, this is a topic I could probably present two hours of CE on and I field a lot of questions when we do go present, but it's a complicated topic. It an emotional topic, but it's also, there's a lot of numbers in it too. And so it's incredibly challenging when done right. Man, we have seen some excellent transitions in how they're structured and everybody is happy. We're not quite singing kumbaya and pounding the drum, but it's damn close. We go out for beers afterwards to celebrate.

Stacy Phillips:
What do you think the solution is to doing this right?

Casey Hiers:
Wow. One solution, that'd be too self-serving. The solution is to plan for it, to think through it critically, and to have a team to help in this nature. Some of those conversations need to be had with your financial planner. What do I need to retire? And where am I at? That dials into what number do I need to get. Talk to your CPA, talk to your accountant, talk to the folks that handle your financials, and really understand all of that.

Stacy Phillips:
Yeah, absolutely. That's where I was going with that is you need a team of experts to help you through this process. It's so involved and there's so many pitfalls that you need to try to avoid for it to be successful.

Casey Hiers:
And I wouldn't call practice brokers the experts that you need, they execute the deal. When it gets to them, they're there to execute the deal. They are not there to necessarily make the deal better one way or the other or structure it in the best way for it. They are there to do a job.

Stacy Phillips:
That's correct.

Casey Hiers:
And so that can be a tricky thing as well.

Stacy Phillips:
Yeah. They're not there to guide you on how it's going to work out the best for the purchasing dentist. They want to sell it. They want to get their commission and move on.

Casey Hiers:
Well, for our listeners out there, we have resources online for transitions. And sometimes this is the catalyst for people. They look up and they realize, hey, a lot of my friends aren't selling their practices the way they want to. I don't want that to be me. What do I need to do?

Stacy Phillips:
Yeah. Hopefully, this is helpful to someone listening to the kind of get them started down that path of how far in advance you have to plan and the things you need to think about.

Casey Hiers:
Don't screw it up.

Jarrod Bridgeman:
Thanks, Stacy.

Stacy Phillips:
Thank you, guys.

Jarrod Bridgeman:
Thanks for not screwing it up.

Casey Hiers:
Appreciate your help.

Stacy Phillips:
I'm pretty sure I screwed it up, but you know.

Speaker 1:
That's all the time we have today. Thank you to our guest for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.