THE DENTAL TRANSITION NEWSLETTER
Published on
- 06-15-2024
Three Part Plan for Transition Success!
We have all heard the old saying, “Fail to plan, plan to fail.” This is never more true than in a practice transition. Every practice transition has the potential to be a win-win proposition.
A dental practice owner spends years building a dental business and a dental practice buyer spends years paying off the purchase price and building on its legacy. Both parties deserve the best possible outcome for their efforts. When the time for selling a dental practice is imminent and a buyer emerges, it is essential for the buyer and the seller to create a written plan that details the ownership transition. In general, to have a successful change of ownership, there are three main areas of the practice transition that require planning. These areas are: the patients; the doctors; and the staff.
Transition of the Patients
A careful transition of the patient base is key to minimize attrition. Practice growth cannot occur without a plan to retain and add new patients. We suggest that the buyer implement a branded, integrated marketing strategy that includes:
- A well-crafted, succinct transition letter from the seller and approved by the buyer. This is imperative both from a legal and a marketing perspective. Introducing the buyer and offering the seller’s support for the transition will go a long way to promote patient retention. We recommend following up with two more letters or emails that will outline the enhancements that the buyer is making in the practice.
- Reinforced verbal skills training for the staff so they are prepared to answer patient questions with confidence.
- A customized mobile-friendly office website that reflects the buyer’s information.
- A customized and updated practice blog, social media sites, and listing services.
- A plan to schedule longer appointments to allow the new owner to develop a relationship with each patient of record.
The buyer should also develop and implement marketing initiatives that will stimulate new patient growth to keep the practice moving forward.
Transition of the Doctors
The transition of goodwill is an element discussed in each practice sales contract. Usually, a portion of the sales price is directly allocated to the purchase of the goodwill. If a seller agrees to transition goodwill, what does that really mean? The best way to avoid confusion and post-sale problems is for the buyer and the seller to become very specific about their expectations. Here are some questions the buyer and seller might anticipate:
- Post-sale, will the seller’s name be available for approved marketing purposes?
- Is the seller expected to introduce the buyer to patients?
- How will the patients be notified about the sale?
- What is the time frame for the transition?
- What happens if expectations are not met?
- Is there a restrictive covenant and what is the distance and duration? Non-solicitation?
- Are the accounts receivable being sold with the practice? How will the collections be handled?
Transition of the Staff
The staff is often the most important aspect of the transition of goodwill from the seller to the buyer, especially in a sale where the seller is exiting professional practice following the closing. If the transition of the staff is not well managed, the staff are likely to leave shortly after the sale, adding to all of the other challenges confronting the new business owner. If the seller is remaining in the practice as an associate after the sale, staff turnover can jeopardize everyone’s productivity and increase stress among the doctors.
The best way to retain key staff after a practice sale is to consider the perspective of the staff as you prepare for your transition. The staff is usually unaware of the sale prior to the day of closing. They didn’t ask for the change or the extra work that will be required of them. More importantly, it can be stressful for the staff to prove themselves as competent and necessary to the new owner after successfully holding their position for years. The staff also take on all of this uncertainty without additional pay.
The best strategy to stabilize and retain a supportive, engaged staff is for the buyer to be well prepared on the first day of ownership. The new owner should be prepared to answer questions about how the sale will affect the individual staff members. The staff will expect the new owner to answer job related questions, such as:
- How and when do I get paid?
- Will I work the same schedule?
- Can I work more hours?
- Will my salary/hourly salary change? Benefits? Vacation?
- Are any new employees joining us?
- Will you do my dentistry? My family?
- Will my job description stay the same?
- Can I still take my planned vacation?
- Can I still go to my scheduled continuing education seminar?
During the first days of ownership, schedule a meeting with the staff. The buyer should be able to describe how they would like the staff to handle the administrative and clinical aspects of the practice. We recommend that the buyer also describe their professional background, their treatment philosophy, the procedures they perform, the procedures they will send out, and many other clinic related topics to the staff.
This meeting is also an excellent opportunity for the buyer to get to know their new staff members. Ask the staff to share information about themselves, their dental background and why they chose dentistry. The new owner may also want to ask the staff if there were any new skills that they wanted to learn as an employee.
One of the best ways to ensure a smooth transition is to create a script for the staff to use when answering patient questions about the change in ownership. The buyer and seller should make their wishes clear about how they want the staff to explain the change in ownership to the patients. If the new owner does not tell the staff what they should say to patients about the sale, the result will be idle gossip and extrapolation that will waste time and squander an opportunity to secure patient loyalty. Here is a post sale sample script for your consideration:
Patient: What happened to Dr. Seller?
Staff: We were so fortunate to have Dr. Seller for so many years. We will miss him/her! We are also excited about the new doctor, Dr. Buyer. Dr. Buyer comes highly recommended, and other patients who have seen Dr. Buyer have been really pleased with the care they received from Dr. Buyer. Can I offer you some information about Dr. Buyer’s education and training?
A successful win-win practice transition requires a coordinated effort from the buyer and the seller. Following a well written transition plan for the staff, the patients, and the doctors, will help the buyer and seller succeed.
What Our Clients Have To Say About Us Matters
“Henry Hemmen & Associates gets things done. I had tried through various means to sell my practice for almost three and one-half years. After retaining Henry Hemmen & Associates, the practice was sold within five months at a price that both the purchaser and myself felt very comfortable with.”
– IL General DDS
The Emergence of DSOs: Myths vs. Facts
Recently, the dental community has been plagued with myths regarding dentists and their futures with dental service organizations (DSOs). However, the truth isn’t all that difficult to find if you compare the facts with the myths, dispelling those myths with truths about the future of dentistry.
Myth #1
“I can only sell my practice to a corporate (DSO) because what bank is going to lend to a dentist who is two years removed from dental school, has $345,000 of student loan debt, and a negative net worth, let alone offer 100% financing to purchase a dental office?”
FACT
Each year, over $4B in dental practice transitions occur. Yes, that is a “B”, as in billions! Approximately $3B of that is financed by the general institutional lenders. Lenders like Bank of America, Wells Fargo, US Bank, TD Bank, and PNC each have their own specialty small business dental divisions. Not to mention, the SBA and smaller local banks are willing to lend to the dental community. The TRUTH is, a newly minted doctor with student loan debt, good personal production, and some savings can qualify for 100% financing!
Myth #2
A first-time practice owner can’t afford to make their practice loan payments and pay expenses associated with the practice, their personal living expenses, student loan payments, and savings accounts if they purchase a practice.
FACT
A first-time owner can absolutely purchase a practice, cover all personal and business expenses, and still save money. Typically, dental specialty lenders offer 100% financing plus working capital to cover transition and operational expenses. Additionally, less than 1% of dental loans ever default, which means the doctors are performing in the practice, paying their bills, and saving money. In fact, funeral homes and veterinarian hospitals are the only industries that suffer fewer losses than the dental industry.
Myth #3
Running a dental practice is too complex and stressful, and a dentist will have an easier and better career working in corporate dentistry. The corporate dental model handles all aspects of the business that the doctor would rather not deal with, providing peace of mind.
FACT
To some, allowing someone else to handle the day-to-day business management might seem appealing, but what you don’t know is that you will pay handsomely for it. That “peace of mind” comes with an inflated cost.
Let’s look at the numbers:
Normal associate income as a W2 employee is based upon individual production only and ranges from 25%-30%, depending upon the corporate dental model. As the owner of a practice, a doctor will make 35%-40% of their personal production plus all hygiene profits and the tax benefits as the business owner. This equation can reach in excess of 50% of practice collections. So, for a practice that collects $1,000,000 in annual revenue, that could be a $200,000 difference per year!
Myth #4
“A DSO will buy my practice, so I won’t need a transition specialist.”
FACT
DSOs have requirements for the practices they buy; typically requiring $800,000 a year in collections, five operatories, you must work for them for 2-5 years as a W2 employee, and the practice has to be in an area where associate dentists are easy to find. As Sean Hudson, former President of the NAPB, says: “If you have all of those things, I will find a doctor to buy your practice!”
Myth #5
DSOs pay more for dental practices.
FACT
While it is true that they appear to pay a favorable percentage of gross collections, the truth is it requires inclusion of your accounts receivable and a work back requirement of 2-5 years. If they pay you 75% of collections but you must work as a W2 employee for them for 2 years, the amount you lose by being an employee in those 2 years really makes the sale price 37% of collections. A 3-year work back makes the true sale price 17%.
Thank you for reading. I hope your conversations on the future of dentistry just got more interesting. For more information, please email [email protected] and include “NAPB” in the subject line. The first 25 responses will receive a free gift, and the first 10 responses will earn a $500 credit for your next practice valuation from any NAPB member by December 31, 2019.