Is this the right practice for me?

A buyer needs to be able to see him or herself in the practice they are looking to purchase. If you feel you are a good fit to the basic philosophy, skill level and personality style of the Owner/Doctor then there is an extremely high likelihood that this practice is a proper match. Doing a chart audit and looking at study models are extremely helpful tools to utilize during your due diligence process.

Is this the right buyer for my practice?

As a seller you need to feel comfortable endorsing the buyer. You need to discern that the buyer's philosophy and skill are on par with your own. A good way to check on a buyer's dentistry is to seek references from specialists to whom the buyer has referred patients that he/she has worked on. You can also check study models as well as discussing treatment planning with the buyer to get a better understanding of his/her experience.

When should I begin to consider selling my practice; or looking for a practice to purchase?

There are three possible phases in transferring practice ownership: finding the buyer/seller; negotiation and documentation; and the transition. The "finding" phase can take months to years; the "negotiation and documentation" phase can take from two to ten weeks (longer in a buy-in); and the "transition" phase can be nonexistent to years.

In a general practice, the seller should begin about one year before he/she wants out. In a more difficult sale (i.e., a less desirable area, specialty practices) the seller should begin even earlier. A buyer should begin when you are ready to own a practice. This typically occurs about two to four years out of school.

How do I find a buyer/seller?

There are many ways to find prospects: professional journals, suppliers, referrals from other professionals, brokers, residency programs and schools. Practice brokerage has become much more common due to the complicated nature of the process. Using an experienced professional is the best way to locate buyers or sellers and maintain confidentiality. If you choose to not use a broker, please be aware that finding a prospective buyer or seller is just the first of many steps.

What options do I have for selling or buying?

There are numerous methods of transferring ownership in a practice: complete sale; associateship leading to complete sale; associateship leading to partnership and eventual buy-out; sale where the seller becomes the associate; delayed buy-out; sale of a portion of a practice; merger; and sale of charts.

The seller needs to decide how much longer he plans on working and whether he/she intends to cut back during that time frame. If the time frame is less than two years, in most cases the complete sale is the method of choice.

Is an associateship phase necessary?

There are a number of issues that affect the answer. If the practice being sold is a general/solo practice, the answer in most cases is no. If the practice is large enough to support more than one doctor or if it is a specialty practice, then the answer might be yes. Practices can and are successfully transferred without the buyer working in the practice beforehand.

How long should the transition last?

Interestingly, many transitions are quite short. The keys to a successful transition are: a good letter of introduction and a staff who will help endorse the new doctor. In many general practices, the transition lasts only until the owner finishes the cases that were in progress as of the closing date. If the practice can support more than one doctor and the seller would like to stay on, then the transition can last as long as agreed to by both doctors. In specialty practices, a transition may need to be longer to accommodate the referral sources introduction to the buyer.

Has all the dentistry been done? There is nothing left for me to do!

To a great extent the notion of all dentistry being done within a selected practice is a misnomer. There are always new things to be found in the recall patient visits, and the reason one buys an existing practice is to inherit new patient referrals from the active patient base. If a practice has an established "track record" it would be illogical to make a blanket statement that all the dentistry has been done because if that were true - there would be nothing more for the seller to do either. The real issues to be concerned with are: is your seller ethical, and how conservative, progressive or aggressive has the seller been in his/her treatment planning.

What is a practice worth?

The value of a practice has two components: tangible and intangible. The tangible assets include equipment, furniture, leasehold improvements, supplies, and instruments. The intangible portion of the value (commonly referred to as goodwill, blue sky or economic going concern) is defined as the value a buyer is willing to pay over and above the value of the tangible assets. This value is based on many factors and two key criteria are: the cash flow and the desirability of that particular practice. A buyer will evaluate many factors (i.e. location, patient base, staffing, fee structure, etc.), the more positive those factors are - the more he/she will be willing to pay. As a general rule, the intangible portion of the value is about two-thirds to three-quarters of the overall value. Be very careful if you are trying to use a rule of thumb to value a practice - the owner/doctor runs the risk of either overvaluing or undervaluing the practice. It is advisable to have a professional who is knowledgeable about the dental marketplace do an appraisal/analysis of the practice.

Where does the money come from?

The money can come from any or all of three sources: the buyer, the seller or a lending institution. The seller should decide before the practice is put on the market whether or not he/she wants to finance any part of the sale. There are both advantages and disadvantages to seller financing. Generally if the sale is a complete sale (100% buy-out) a seller will be reluctant to hold a note. Since the risk to the original owner/doctor in a buy-in transaction (partial purchase with a delayed completion) is reduced, it is very common that a majority of the purchase price will be paid over time.

Over the last few years, many banks and finance companies have entered the financing field. Typical terms in a complete sale are 100% of the purchase price plus working capital, with a seven to ten year payout at prime plus 1½ to 3 points. The stronger the buyer is financially, the better the terms he/she should anticipate. The most critical issues for a lender in reviewing a transaction are: the credit rating of the buyer and the cash flow of the practice. Lenders want to be assured there is sufficient revenue to pay the business overhead, repay the debt service on the note and meet the personal needs of the buyer.

What are the tax ramifications?

For the buyer, there are no taxes to be paid. The buyer is benefiting from the purchase. Generally, the entire purchase price can be written off. Supplies are an immediate expense, equipment is typically a five to seven year write off and any of the intangible assets (the goodwill can be subdivided into restrictive covenant and patient records) are a fifteen year write off. Therefore, the objective of most buyers is to classify as much of the price (within reason) into tangible assets.

The seller will pay taxes on any of the profit from the total sales price. For equipment, there is no tax up to the basis, ordinary income up to the original cost and capital gain over the original cost. For the intangible, goodwill and patient records are taxed at capital gain rates and the restrictive covenant is taxed at ordinary rates. C corporations have the additional tax complication of a tax at the corporate level and then the personal level. As with any tax issues, check with your accountant/tax advisor before proceeding with a transaction.

Do I need an accountant/attorney?

Both seller and buyer should each have their own accountant and/or attorney. Only an accountant can give you current and relevant tax advise and only an attorney can give you legal advise. Carroll & Company is not a legal firm and all of our services are provided as a courtesy to both buyer and seller.

Typically an accountant will become involved during the due diligence period and then again to review the allocated values of your purchase price for tax purposes. An attorney generally should become involved once the business aspects of the transaction have been agreed upon. The fees charged by any outside support professional are commonly based upon an hourly rate and each transaction differs in the amount of time it takes to be completed. There are many sources for referrals to quality support professionals, if you are using a broker, he/she should be able to refer you to an appropriate resource.

What other expenses should I anticipate?

When purchasing a dental practice the expenses to anticipate are: (1) accountant - to review the books and records of the practice in question; (2) attorney - to review the sales related documents and lease; (3) lease deposit/security deposit - typically a landlord will request a security deposit; (4) nominal escrow fee; (5) fees generated by any other support professionals hired.

How is the office space handled?

If the seller owns the office space/building, it will either be sold or leased to the buyer. Therefore, there will be additional negotiations. If the building is sold at the same time as the practice, the buyer will probably need some of his own money for a down payment on the real estate. However, in the current market many lenders are loaning 100% of the purchase price.

If the seller leases the space, he/she should alert the landlord of his/her intentions as soon as the practice is put on the market. Lease complications with disinterested landlords (the landlords generally have little or nothing to gain by a tenant transferring his business) can sometimes be a major roadblock to getting a practice sold. Once a transaction reaches a certain point (contracts are being prepared), the buyer should then contact the landlord and discuss either getting an assignment of the seller's current lease or a new lease in the buyer's name. If a lending institution is involved, they generally will insist that the lease term (base lease plus renewal options) run at least the length of the loan.

What are the key ingredients in a partnership?

Key ingredients include: the percentage of practice being sold, the price, the terms, how the income will be split, management of the practice and a method to value the practice for an eventual buy-out. A common issue is the determination of a fair price for the associate to pay for a buy-in because generally the associate wants a discount for the revenue they generate. In many cases, a price reduction is done in order to complete a buy-in. Concurrent with determining a price, a successful partnership venture needs to establish how future income revenue will be split. There are numerous methods for splitting income. A very successful method has two elements: production and percentage of ownership. Basically stated, an owner should be compensated chairside for the production generated and also share with any other owner(s) some of the residual profit in the practice. Approximately 50% - 80% of the profit can be split by productivity and the balance by percentage of ownership. That being said, during the buy-in period the cost to the new partner will need to be deducted from his/her share of the profit.