Mike McAninch is a Practice Integration Advisor with Buckingham Strategic Wealth, where he specializes in helping dentists connect their money and their values to realize their most important financial goals.
The three major mistakes to avoid when buying a practice — going it alone, seeking win/lose and paying too much.
Over the past 20 plus years, our Practice Integration Team has assisted dentists with hundreds of practice purchases. From these transitions, we have found three major mistakes dentists make when acquiring a practice.
Going It Alone
To be sure, buying a practice is an expensive transaction! From the acquiring dentist’s point of view, everyone seems to “have their hand out,” asking for fees. It is not surprising, then, that one might be tempted to go it alone and skip this expensive part of the transition. However, assembling the right kinds of experts to assist you in purchasing your practice can save you thousands of dollars in the long run.
I recommend the following professionals for your acquisition team:
Your accountant — He or she can help you avoid costly income tax mistakes and assist you in setting up your bookkeeping and payroll systems. A good accountant is worth his/her fee!
Your attorney — You need your attorney to review the practice sale documents to insure you are buying the practice while complying with all state and federal laws. A word of caution here: Make clear to your attorney that you are seeking their review of the practice sale documents, not a revision or rewrite. Along with your accountant, your attorney will assist you in selecting the business entity that is right for you (i.e., S corporation, C corporation, sole proprietorship). Then your attorney will draft the proper legal documents for your business.
Your financial advisor — Buying a practice is likely the largest purchase of your life. Your financial advisor can assist you in evaluating multiple candidates and determining how much cash your business will generate. He or she will help you negotiate a practice purchase loan. Most importantly, your advisor will help you maximize the value of your practice in order to achieve your long-term goals, such as the education of your children and your retirement.
Two final pieces of advice about selecting your team: It is vital that each member of your team has experience and expertise in dental practice acquisitions. And each advisor should provide you with a clear statement of their fees.
Seeking Win/Lose — The Power of Emotion
A popular myth today is that success in business requires you to win at all costs. To be sure, I have encountered practice buyers and sellers who initially take hard positions over seemingly small matters in order to demonstrate to the other party that they face a formidable adversary. However, in my experience, buying and selling a practice is not a zero-sum game. Instead, I have found that buyers and sellers negotiate the best deals when they consider the transaction from the other’s point of view (for example, a buyer who adjusts the terms of the sales contract because they understand the seller’s desire to save income taxes or a seller who agrees to fill in for the new owner when they take vacation). These types of financial and nonfinancial accommodations encourage buyer and seller to work toward a successful transition.
Paying Too Much — Not Understanding Future Cash Flows
In an earlier blog, my colleague, Tom Bodin, shared what the buyer actually purchases when acquiring a practice. Although not specifically mentioned in this blog (but certainly implied), the dentist is purchasing an opportunity. You are buying a franchise to serve your local market, but its ultimate success is up to you! It is vital that before buying a practice you clearly understand the level of net cash flow that can be generated by this business. For example, I’m working with a pediatric dentist who is buying a practice that generates about $100,000 annually in orthodontic production. She does not plan to offer these services. Consequently, she lowered her net cash flow projections and the price she was willing to pay for the practice.
Are you thinking about buying a practice? Please consider a Buckingham Practice-Integration Advisor to be a member of your team!