Frequently
Asked Questions
When
should I begin to find a buyer or find a practice to buy?
There are three phases in transferring practice ownership: finding the
buyer/seller; negotiation and documentation; transition. The "finding" phase
can take months to years, the second phase generally takes two to four
months (longer in a buy-in) and the transition phase can last weeks,
months or even years. Therefore, a seller should allow sufficient time
for each phase. For instance, in a general practice, the seller should
begin about one year before he wants to be out. In a more difficult sale
(a less desirable area, specialty practices or home offices), the seller
should begin a few years in advance. For buyers, it is quite simple.
You should begin when you are ready to own a practice. This typically
occurs about two to four years into practice.
How
do I find a buyer/seller?
There are numerous ways to find prospects: professional journals, suppliers,
newspapers, 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. If you decide not to use
a broker, 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; seller becomes the associate; delayed
buy-out; sale of a portion of a practice; merger; sale of charts. There
are pros and cons for each of these methods. The starting point is for
the seller to decide how much longer he plans on working and whether
he intends to cut back during that time frame. If the time frame is less
than two years, then in most cases the complete sale is the method of
choice.
Is
an associateship phase necessary?
The answer depends on a number of issues. If the situation is a general,
solo practice, the answer would be no in most cases. 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 be successfully
transferred without the buyer working in the practice beforehand. If
there is going to be an associateship phase, the details of the eventual
transaction should be negotiated upfront (preferably even before the
associateship begins).
How
long should the transition last?
Surprisingly, many transitions are quite short. The keys to a successful
transition are a good letter (introducing the new doctor which should
be sent right after settlement) and a staff who will carry over from
one doctor to the next. In many general practices, the transition lasts
only until the owner finishes the cases that were in progress as of settlement.
If the practice can afford more than one doctor and the seller would
like to stay on, then the transition can last however long as both doctors
agree to. In specialty practices, the transition may need to be longer
to allow time for the referring doctors to meet the new doctor.
What
is a practice worth?
The value of a practice has two components: tangible and intangible.
The tangible assets include equipment, furniture, supplies and instruments.
The intangible portion of the value (commonly referred to as goodwill)
is defined as value a buyer is willing to pay over and above the value
of the tangible assets. It is based on many factors, but most importantly
the cash flow and the desirability of that particular practice. A buyer
will evaluate many factors (e.g. location, patient base, staffing, fees,
etc.) and the more positive those factors are, the more he will be willing
to pay for a cash flow. As a general rule, the intangible portion of
the value is about two-thirds to three-quarters of the overall value.
Be very careful about trying to use a rule of thumb to value a practice.
There are many of them and none is sophisticated enough to value all
practices in all situations, other than to demonstrate averages rather
than specific values. It is advisable to have a professional who is knowledgeable
about the dental marketplace do an appraisal 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 bank. The seller should decide before the practice is put on the
market whether or not he wants to finance part of the sale. There are
both advantages and disadvantages to seller financing. In cases of a
complete sale, sellers are often reluctant to hold a note. If they do,
there should be a sufficient down payment along with appropriate legal
documents and insurance. In a buy-in, since the risk is significantly
less, the majority of the purchase price is frequently paid over time
to the original owner. 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 one to plus two. The better financial
condition the buyer is in, the better the terms he will get. The two
most critical issues the banks review are the credit rating of the buyer
and the cash flow of the practice. They need to be sure there is sufficient
revenue to pay the overhead, the debt service and the personal needs
of the buyer.
What
are the tax ramifications?
For the buyer, there are no taxes to be paid. The buyer is looking for
write offs. 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 as well) are
a fifteen year write off. Therefore, the objective of most buyers is
to classify as much of the price as possible into tangible assets. The
seller will pay taxes on any of the profit from the 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 tax advisor before proceeding
with any transaction.
Do
I need a lawyer?
Both seller and buyer each should have their own attorney. The seller's
attorney should prepare the initial set of documents which will be reviewed
by the buyer's attorney. In a complete sale, the primary document is
the Agreement of Sale (also referred to as an Asset Purchase Agreement).
In a buy-in, there may be five (on average) documents: Stock Purchase;
Stock Redemption; Shareholder's; Employment Contracts for each partner.
The attorneys generally should become involved once the business aspects
of the transaction have been agreed upon. Choose an attorney who has
some experience in dental practices (or at least in business sales).
The fee will be based upon an hourly rate and each transaction differs
in the amount of time it takes to be completed. Check with your accountant
and colleagues for referrals. If you are using a broker, he should be
able to refer you to an attorney.
How
is the office space handled?
If the seller owns the office space, it will either be sold or leased
to the buyer. Therefore, this will be an additional negotiation. Many
buyers would prefer to lease the space initially with either a right
of first refusal or option to purchase. It will be easier for them to
purchase the real estate once they have their feet on the ground in the
practice. If the building is sold at the same time as the practice, it
will take longer to complete the transaction and the buyer will probably
need some of his own money for a down payment on the real estate. If
the seller leases the space, he should talk with the landlord as soon
as the practice is put on the market to be sure there will be no problems
with a new doctor coming in. Lease complications with disinterested landlords
(they 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 an assignment of the lease or a new lease. Remember, if
a bank is involved, they will insist that the lease run at least the
length of the loan (initial term plus renewal options).
What
are the key ingredients in partnerships?
There are a number of key ingredients in negotiating a successful partnership.
Of course, the first assumption is that the doctors have been working
together for a while and are compatible. The ingredients include: the
percentage of the 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 an associate to pay for a buy-in. Generally, they
want a discount for the revenue they generate. In many cases, a price
reduction is done in order to complete a buy-in. The most important issue,
however, is not the price but the income splitting. There are numerous
methods of splitting the income. In many cases, the more successful methods
have two elements; production and percent ownership. Owners of practices
have dual roles: they are providers and should be compensated for their
efforts at chair side; they are also owners of a business and should
share with any other owners some of the residual profit in the practice.
Approximately 50% to 80% of the profit can be split by productivity and
the balance by percent ownership. Of course, during the buy-in period,
the cost to the new partner will need to be deducted from his share of
the profit (assuming the entire price was not paid up front). |
