Sell now or build to sell? Sell for present value or sell for future value? Commit now, but defer the actual sale until later? Take cash or fund your pension plan with the value of your practice? These are just a few important considerations for a dentist who is thinking and planning for the future. See More

Sell now or build to sell? Sell for present value or sell for future value? Commit now, but defer the actual sale until later? Take cash or fund your pension plan with the value of your practice? These are just a few important considerations for a dentist who is thinking and planning for the future.

Listed below are some of the issues that should be considered by every dentist who is trying to decide whether to sell immediately or locate a committed purchaser but defer the sale until the practice has reached its peak fair market value. Analysis and planning is the key that can make a huge difference during your post-retirement years.

Immediate Sale if:
1. Your practice is already running at peak performance (annual collections of $750 + per patient).
2. You would like to fund your pension plan with the present value of your practice.
3. You want tax-deferred compound interest on your practice value to begin now.
4. You want to maximize your “Quality of Life” now.
5. You would prefer not to continue with the responsibility of managing the practice.
6. You are burned out on clinical dentistry.

Deferred Sale if:
1. Your practice has a lot of untapped potential (see #1 above).
2. You have a substantial amount of practice debt.
3. You are not burned out on clinical dentistry.
4. You don’t mind the responsibility of managing the practice for another 2 to 3 years.
5. You are willing to do what it takes to maximize your practice value over the next 2 to 3 years.
6. The potential future value of your practice can add more money to your pension plan than the immediate effect of tax-deferred compound interest on your present practice value.

AFTCO programs are specially designed to allow a dentist to complete an immediate or a deferred sale, quit practicing immediately or continue to practice for years following the closing, and structure a totally tax-deferred sale (and even tax free if your start early enough).
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No, never! See More

You should never sign an offer to purchase that contains a clause with an "exclusive negotiating period" for 30 or 60 days following the date it was signed. Only an unscrupulous broker would ever present such an offer to purchase containing such a clause because it ties up the practice by preventing the seller from considering other offers while the purchaser decides whether or not he wants to go through with the purchase. It ties up the seller and the purchaser can walk away from it anytime he/she wants. This clause means you agree not to negotiate with any other candidate for 30 or 60 days, and accepting an offer from another dentist during that period would be a breach of contract and you could get sued by that unscrupulous broker. This is totally unfair and you should stay away from any broker who is trying to convince you to sign such a clause.
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There are many different reasons for what seems like a perfect transaction to go bad. See More

People have asked us what makes a seemingly perfectly good transaction go bad. There are many different reasons, but the following causes are the most common:

* Let the purchaser start working in your office before the closing has been finalized. Since the purchaser is not yet fully committed to buy your practice, you can’t turn patients over to him, so his/her schedule is slow. The purchaser comes to the conclusiong that the practice is not busy enough and changes his mind about buying it.

* Begin to “negotiate” the terms of the agreement. Although the transaction is structured fairly, see if you can win some points that give you an advantage over the other person in the transaction. Once the other party realizes you do not intend to be fair, he begins to unilaterally negotiate with you, or just changes his mind about going through with the transaction.

* Talk business and negotiate with the other party. When the other party avoids AFTCO to talk directly with you about the terms of the agreement, etc., you’ll end up talking yourself out of a fair transaction in no time at all.

* Make unreasonable demands. Tell the other party that “your attorney wants it” whether it is fair or not. That will drive the other party away in no time.

* Let someone else make your decisions for you. Advisors are there to advise, not to make the decisions for you. Well-meaning advisors oftentimes have a unilateral perspective that can easily dispatch the best of transactions.

* Talk about the transaction to well-meaning, but uninformed friends who are unfamiliar with your business. Let them advise you and/or compare your transaction with other deals they've "negotiated."

Don't let these things happen to you! Keep control of your transaction and think for yourself. When it comes to advisors, you should remember this old Chinese proverb, “A man with two watches never knows the time!”

A dentist with two advisors... never knows the truth!
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Absolutely. The best thing the owner of a practice can do when he wants to sell his practice (and has an associate with no contract working in the practice) is to offer to pay $5000 or $10,000 to the associate as consideration for a restrictive covenant that can be transferred to a new purchaser. See More

Absolutely. The best thing the owner of a practice can do when he wants to sell his practice (and has an associate with no contract working in the practice) is to offer to pay $5000 or $10,000 to the associate as consideration for a restrictive covenant that can be transferred to a new purchaser. The point is that by having the seller buy a transferable R/C from the associate and conveying that to the purchaser will allow the seller to be paid for the full value of the practice instead of it being highly discounted because the associate has no contract and could compete with the practice after it is sold. See Less

Absolutely. Goodwill is the relationship between the doctor and the patient. Practice ownership is not an issue. The patients don't go to a doctor because that doctor owns or does not own the practice. See More

Q: Can a doctor who has been an associate with one practice his entire career (at the time, 18 years) possess and own his own goodwill and be able to sell it?
A:
Absolutely. Goodwill is the relationship between the doctor and the patient. Practice ownership is not an issue. The patients don't go to a doctor because that doctor owns or does not own the practice.

If the associate has no restrictive covenant and non-solicitation agreement in place, then the associate "owns" his/her own goodwill. That's the reason why we subtract the collections of an associate (who is working without a contract) from the total gross revenues of the practice that we list for sale.

If the associate can go down the street and solicit those patients, then the practice owner does not own that goodwill and it should never be included in the practice appraisal.
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Just read the following letter sent to us by a dentist who chose to work with a unilateral, seller broker and see his results... See More

A broker convinced me that he would save me money by not charging me any purchaser fees... boy, was he wrong!

First, I did a lot of running around to look at a large number of practices that were not even right for me. This broker made no attempt to find out what I wanted, he had practices to sell, and he wanted me to just buy any one of them, it did not matter. He even had some practices that had real problems and could have been financial disasters, but he showed them to me anyway.

It cost me a lot of time (and money) to look at all these practices (time off from work and travel expenses), but finally I found one that I felt was worth buying. Then the real problems started. The broker refused to give me any financial information about the practice until I made an offer to buy. I wasn’t going to offer to buy a practice until I saw the financial information. After days of arguing, he finally gave me copies of the tax returns. The broker did not have a computerized income and expense proforma for the practice. He did not even know what an adjusted income statement was so that I could determine “real” from “creative” expenses in the practice.

I did not know what to make of it all. I had to hire an accountant just to get an idea of the value of this practice and how the transaction needed to be structured. The accountant ran up a large bill for “investigating” the practice and reviewing and organizing the financial information. He discouraged me from buying the practice, but he couldn’t give me any real reasons not to.

I found out later that this was only the second practice that the accountant had ever investigated, so he actually knew less about the business of dentistry than I did. I decided to move ahead and made an offer to buy the practice in spite of these problems.

After weeks of difficult negotiations, the seller and I finally agreed on a purchase price. I then had to hire an attorney to get a contract drafted. I hired an “expert” attorney (I found out later that this was only the third practice transaction that he’d been involved with) and he began the lengthy and expensive contract process. He spent hours “researching” and drafting an agreement. My attorney then sent the contract to the seller’s attorney, who in turn "redrafted" it and started the process all over again!

The attorneys could not agree on anything. However, they kept the clock running while they went back and forth, changing the terms and then redrafting the contract every other week. After months of fruitless “negotiations,” the seller changed his mind and backed out of the deal. We both had spent thousands of dollars for nothing.

The broker was anxious to show me more practices, but I’d had enough. I called AFTCO... I wanted to do it right this time! See Less

When you recognize the clinical and management compensation as an overhead expense, the overhead percentage should be 80% to 85% of annual gross collections for a well run general dental practice. See More

Overhead expenses should be 50% to 55% of annual gross collections for a well run general dental practice if you do not include the doctor's clinical and management compensation. Too many profit and loss reports fail to recognize the practice owner's clinical compensation which should be 25% of annual gross collections (which is what it would cost if you had to hire an associate to do all of the clinical work in a practice); then you should add another 5% of annual gross collections as management compensation (which is what it would cost if you hired a manager to operate the practice). When you recognize the clinical and management compensation as an overhead expense, the overhead percentage should be 80% to 85% of annual gross collections for a well run general dental practice. This leaves a 15% to 20% passive profit margin for this practice, which would be considered ideal. See Less

When you recognize the clinical and management compensation as an overhead expense, the overhead percentage should be 80% to 85% of annual gross collections for a well run general dental practice. See More

Overhead expenses should be 50% to 55% of annual gross collections for a well run general dental practice if you do not include the doctor's clinical pensation and management compensation. Too many doctors fail to recognize the practice owner's clinical compensation which should be 25% of annual gross collections (which is what it would cost if you had to hire an associate to do all of the clinical work in a practice); then you should add another 5% of annual gross collections as management compensation (which is what it would cost if you hired a manager to operate the practice). When you recognize the clinical and management compensation as an overhead expense, the overhead percentage should be 80% to 85% of annual gross collections for a well run general dental practice. See Less

Laboratory expenses are very telling as to what is being done in a practice and what is not... See More

Laboratory expenses should be approximately 8% of annual gross collections for an average, but well-run, fee-for-service general dental practice. A low percentage such as the 4% of annual gross revenues you asked about indicates that this seller probably has so many active patients in this practice that he is working too hard just to keep up with this high patient count and he does not take the time to offer more comprehensive services to those patients. This type of practice would be considered a "Diamond in the Rough" and would be considered a great buy if it is located in an area that you find desireable. There will be a lot of work that can be done in this practice (as a rule) for the purchaser with good case presentation skills.

On the other extreme, if you are looking at a general dental practice with laboratory expenses in the 10% to 12% range, you are most likely dealing with a lower active patient count whereby most (if not all) of the comprehensive dentisry has already been completed on those patients. This is usually a beautiful office and is visually desirable and located in a high-end demographic market, but you should approach this practice with great caution. It might be a good buy for a prosthodontist or someone who has completed some Panky or LVI courses, but the doctor taking over a practice like this will need extraordinary clinical and case presentation skills in order to make a living.

So remember, the lower the laboratory percentage, the greater the opportunity is as a practice acquisition; the higher the laboratory percentage, the greater the clinical and case presentation skills will be needed by the purchaser. This is just one of many considerations to review when considering acquiring a general dental practice. See Less

Office rent should be in the area of 4% of gross practice gross revenues... See More

Ideally, office rent should account for 4% - 5% of the gross revenues for a general dental practice (+ or - 1%). If the rent is less than 4% then the current owner either (i) owns the building and has not kept the rent up with other rents in the same area, or (ii) it is a sub-prime location that may require moving the practice to another location if this practice is under consideration for acquisition, or (iii) this is a rural practice where rents tend to be much lower than in metro areas.

On the other hand, if the office rent percentage is more than 8% of gross collections, then (i) this office is either too large for this practice, or (ii) this office is over improved and the leasehold improvement costs are included in the rent, or (iii) the building is owned by the practice owner and this owner is charging an artificially high rent in order to justify paying off this expensive property.

If you are considering purchasing a practice whereby the current rent is high, then it is possible that only a practice merger (where an existing practice in the same area would be merged into this office) should be the primary consideration since it would not work well for a new purchaser (unless this practice is greatly underproducing).
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