Transitions Gone Bad by Drs. Bill and Christina Blatchford

For many dentists, the sale of a practice will be the largest transaction of their lives—it concerns not just their own financial success but also the well-being of their teams and the care of the patients they've served for years. It's also the greatest purchase for younger dentists. Yet, some dental transitions wreak havoc for both parties. Learn from these examples we've heard of during our years of advising dentists on the sale and purchase of practices.

Let's start with the fact that a selling doctor usually employs a broker, who earns closing fees for the sale. Brokers are friendly people, and many times purchasing doctors feel like the broker's looking out for them in this sale as well. Not so! The broker is employed by the seller, and so will be working toward a successful sale for the seller. Purchasing doctors also benefit from representation in these transactions; their broker deals directly with the seller's broker.

Scenario A
A dentist isn't certain he wants to sell his practice entirely, but selling half of it looks like a good solution—he's tired of doing all the work and could use the extra cash. A younger dentist purchases half the practice.

Some important questions for the selling doctor:

• Are you really ready to sell?
• Are you counting on the sale of the practice to fund your retirement?
• Are you ready to step out of producing dentistry?
• Are you ready to retire? What are you retiring to?
• Is your spouse ready for you to retire?
• Are you ready to give up being Dr. Whitecoat?

We've seen situations where the selling doctor, aware of his standing as the solo owner, introduces the new partner to his team and patients as his "associate." You can see where this is going: The new doctor expects to own half the hygiene patients and half the production, while the selling partner expects only to mentor the new dentist as he builds his own practice.

Let's look at this partnership financially: The selling doctor has been producing $1 million with a net of $300,000. The new doctor purchased half for $300,000; his principal payment is $30,000 for 10 years, with annual interest of $7,500. His net will be $150,000 and taxes are $50,000, which leaves the new partner $63,000 annually to live.

As the purchasing doctor, could you see the fallacy of this partnership? Where is half the net and production of this practice? It is a single-doctor practice and there is no room for a partner. Yet, the young purchaser borrowed $300,000 to be a real partner.

Is the selling partner willing to give up half the net to a new partner? What is the expectation for both?

Lesson 1: The purchasing doctor probably did not have representation and assumed the selling doctor was his friend. New doctors need to ask the selling dentists: "What part of your net are you willing to give up to have me as a partner? Are you currently turning patients away?"

Lesson 2: Compensation for both was not discussed, which needs to happen before signing a sale. Some of the most important details include:

• What exactly is the new doctor purchasing—is he or she (rightfully) expecting half the hygiene production and half the collection?
• What is the expectation of the selling doctor as to how many more years he or she will be practicing?
• Also, how will the partnership work financially for each? Who will be the leader in the practice? To whom is the team loyal? What is the long-term plan for the selling doctor?

Scenario B
In another real example, a selling doctor who was tired of leading a practice decided to sell it but continue to practice dentistry. The younger dentist who purchased the practice saw the selling doctor as a gift to help him meet the new patients and mentor him.

After several months, however, the new owner discovered the extra capital he borrowed was gone and expenses were very tight. Production was fabulous at $1 million, but not his production; the former owner was gathering 35 percent of undefined production, usually doing all the larger cases with no set limit.

We've seen many situations like the above in which the younger dentist realized he couldn't afford the older, and had to discuss the financial realities. But the selling doctor said he needed to continue practicing so he could earn $40,000 a month. "These are my patients and they need me," he said. "I know I have a covenant not to compete, but I'm not moving."

Lesson 3: This was a single-doctor practice, but before the purchase no budget had been determined to indicate how much the new doctor should be spending on his team (including the selling doctor, who had become the most expensive member of that team). Before purchase, selling dentists should be asked about financial expectations for income—not a percentage, but an actual figure. At the same time, new owners need to figure out how much they can afford to pay an earning team member. And do they really need the former owner to continue to work in the practice?

Scenario C
The parent who's a dentist is so proud of a son or daughter in dental school, and very much wants the two to practice together. Yet, what does it take for a single-doctor practice to become a viable two-doctor practice?

Lesson 4: The parent has four years while his or her child is in dental school to prepare a plan of marketing, skill enhancement and capital expenditures that will work when the new dentist comes aboard. Relationships go sour when money is stretched too tightly—but with the right planning, most of these situations could have been avoided.

Scenario D
A dentist's skill set was not matched with the purchase. If a general dentist does IV sedation and implants, you can't afford to pay the selling doctor to do that major treatment. The insurance profile also needs to be examined.

Lesson 5: Before purchase, check the skill set to see if it is a match. Also, check referral sources. If there is one major referral source, will that continue for you?

Buyers need to check out everything before they purchase a practice. As the buyer, they're in the driver's seat. Do your due diligence—and have a broker to represent you vigilantly.

Catch Dr. Bill Blatchford's podcast
Dr. Bill Blatchford discusses more about transitions, referrals and closing up shop every August in his Dentistry Uncensored with Howard Farran podcast. To stream the audio, watch the video or read a transcript, click here.