The Five Ways
to Open a Practice

John McDonnell

When most practices are sold today, the seller leaves either immediately or within 3-6 months; however, there are other options available to the seller for the sale and transition of their dental practice. If a dentist is interested in having a transition plan to ensure selling their practice at its peak and having their earnings during that time period also be at their highest, planning and choosing one of the following five (5) options will be a positive path to pursue.

  1. Sell the practice and leave
  2. Sell the practice and stay
  3. Delay the sale of the practice
  4. Equity Buy-in Buy-out (Partnership)
  5. Merge in – Merge out


OPTION #1 SELL THE PRACTICE AND LEAVE
Selling the practice and leaving is still the most common of practice sales in our industry. In this option. the seller normally leaves immediately following the sale or within a 3-6 month period. The reason for leaving so soon is that many of the solo practices do not have enough patients or a space large enough to have two full time dentists in the office simultaneously. As the buyer needs to pay the overhead of the practice, themselves and the bank loan for the practice purchase, there is nothing left for the seller.

Benefits To The Buyer When The
Seller Leaves

  1. The new owner can be in control and develop the practice in their own style.
  2. The patients won't have the long term seller in the office and will be more open to seeing the new owner.
  3. The buy is taking over for a senior doctor so will likely attract and get referrals for younger families.
  4. A buyer can make equipment and systems changes that they want without the seller standing in the way.


OPTION #2 SELL THE PRACTICE AND STAY ON AFTER THE SALE:
What if you could sell your practice and your office space if you own it at the Fair Market Value for each and stay on after the sale continuing to enjoy performing dentistry and earning a fair compensation for 2 to 10 years or more depending on your age and exit timetable? When we interview dentists who are preparing their exit strategy, the common theme that we hear is that they still enjoy dong the dentistry, taking CE courses and seeing the patients, but they do not like running the business, dealing with insurance companies and handling staff issues.


Benefits Of Keeping The Seller Practices After The Sale

  1. When the practice can support two full-time dentists, the former owner can be the best choice to be the associate of the new owner.
  2. Because of the clinical and management skills of the seller, this can be a valuable resource for the new owner.
  3. Patients are more likely to remain with the practice and not leave when the seller stays on after the sale.
  4. When the seller performs procedures that the new owner does not, these procedures can continue to be provided in the practice.


OPTION #3 DELAYED SALE OF THE PRACTICE:
This option is becoming more popular as it allows the seller to stay in control of the practice, maximize their earnings and gives them an opportunity to sell the practice at its peak. This option requires the office space to be large enough for at least two full time dentists. It also requires the practice to either have enough patients and work for two full time dentists or have the potential of patients to be served. If not, the practice will need to have a pro-active marketing plan for new patients so that the two dentists can be productive full time.


This option is similar to the sell and leave strategy in that there is a signed asset purchase agreement with a specific target date for the practice sale. There is an associate with and employment agreement for the period of time between joining the practice and the targeted sale date. This time period is normally 1-5 years depending on the needs of both the seller and the future buyer associate. At the end of the 1-5 year period the associate purchases the practice by borrowing 100% of the sale price to be paid to the seller on the pre-arranged target date for the closing. A methodology is agreed upon in the beginning to calculate the sale price at the time of the closing and is part of the mutually beneficial agreement signed at the start of the process. This agreement includes a 3-6 month time period during which both the host dentist and associate can terminate the delayed sale purchase agreement without any penalty in case they do not work well together.

 

Benefits For The Buyer To Choose A Delayed Sale

  1. The buyer has a chance to get to know the patients in the practice, the staff and the office systems. So by the time the delayed sale is implemented, a smooth transition can occur.
  2. As the buyer works in the practice for 1-5 years before the purchase takes place, the patients are familiar with the buyer and the production schedule is in place.
  3. As the delayed purchase takes place when there is enough production for two dentists, the seller normally stays on after the delayed sale takes place. The seller's performance is steady and gives the new owner stability.


OPTION #4 EQUITY BUY-IN BUY-OUT (PARTNERSHIP)
Over the last 30 + years approximately 25% of all dental practices have chosen to be partnerships. This percentage has not fluctuated more then 2% over those years.


This option requires a space and practice large enough for at least 2 full time dentists. The number of years needed to justify this option for the senior dentist we feel is 5-20 from the retirement of the host seller. If a dentist has practiced solo for over 30 years and is in their 60's we do not feel that this option is viable at that stage of practice.


This option is particularly applicable to an owner who currently has a good associate in place or is in the process of choosing a new associate. This strategy is for the owner who wants the peace of mind of having their heir apparent under contract with a plan for the equity buy-in buy-out partnership in place. Often good people (owners and associates) say they will discuss a transition plan in the future and the future never comes. And without a win-win plan they normally fail in their attempt to have a partnership. We suggest that the discussion happen early on and that agreements for the partnership be signed by all in the beginning. This will insure the successful process of a buy-in buy-out partnership strategy.


Benefits For Buyer To Choose The Buy-In Buy-Out Partnership Option

  1. This option gives the buyer a clear track to an equity potion instead of being in a dead end employee job.
  2. Many buyers want to be in a practice with another dentist to share ideas and case presentation options.
  3. Having a partnership can allow the partners to have a reduced weekly work schedule if they so choose.


OPTION #5 MERGE-IN MERGE-OUT:
When a dentist practices in a home office or does not want to sign a new long term lease in a professional building, the merge out strategy is a good option. The practice can be merged into a larger practice close by and the selling dentist can move with the patients for a period of time earning compensation after the sale. When the selling dentist can come with the patients for a period of time this assures the buyer that the patients will come to their practice.


Assuming that the selling dentist's office is large enough for 2 full time dentists or more then the merge–in strategy in can be implemented. If a young dentist in the area has a smaller office space or a following of patients, they can purchase the seller's practice and merge their patients and practice into the larger space. This again may allow the seller to remain in the practice if they choose seeing patients.


The merge –in merge- out option allow the seller to get the maximum practice sale value. When they merge the practices many of the expenses are lower while the earnings in the joined practice are positive so a positive cash flow for the buyer should result as well.

Benefits Of The Merge-In Merge-Out Option

  1. This allows a young dentist who has started a new practice to seek out a senior dentist practice and merge it into their new space. This strategy can jump start the production of a start up.
  2. This allows a young dentist with a following of patients to purchase a practice and space and move these patients into a new office space.
  3. As this strategy consolidates the expenses of the two practices and eliminates the fixed costs of one practice, it can be a very lucrative option.


It is very important that every new owner plans ahead for their entrance into practice. The earlier the better! Too many times the new owner moves too quickly without considering all of the available options.


However if you start early and commit to a healthy transition plan all of the above options will be open and available to you. When you implement a plan you will likely make an informed choice thus assuring your success as a new owner. And more importantly you will reduce your stress knowing you have made a good choice.

How To Explore The (5) Options To Buy A Practice

  1. Choose a transition organization that specializes in practice transitions 24/7 365 days a year and does not have other products and services to sell.
  2. Have the practice you have selected valued by a qualified, experienced transition specialty organization in the dental industry.
  3. Decide what you want to do about your entrance into practice strategy and what your timetable is.


For a transition to be successful, it must work for both the buyer and the seller. Know your options as you begin the process of looking for work after graduation. For both the buyer and the seller,


THE TIME TO PLAN IS NOW. JUST DO IT!

John F. McDonnell is the founder and president of the ADS McNor Group, a dental brokerage and practice transition firm focusing on the MD, DC, VA, PA, DE and WVA areas. He is the past president of ADS (American Dental Sales). He can be reached at johnfm@adstransitions.com or
(888) 419-5590 x410 or (888) 419-5590 x410.


 

 

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