IS IT TIME FOR AN ASSOCIATE?
This may be the most frequently asked question PARAGON consultants encounter. Dentistry must be the most associate-active of profession of all health-care professions. Dentists seem to always be considering bringing an associate into the practice. Unfortunately, however, very few dentists bring in an associate at the right time or for the right reason. In fact, many dentists go through numerous associates without ever knowing the real reason relationship does not work out as planned.
There is a right time and a right situation to consider an associate. But first let’s discuss the wrong reasons we encounter over and over.
The most common reason that dentists bring in an associate is because they are just not busy enough. As strange as this may sound it is true! As the dentist begins to examine the problem he realizes that he is no longer getting as many new patients as he once did. Further examination reveals that his overall patient base is getting older and older each year and these patients need less dental work – the dentist has already done the bulk of the work. He also soon realizes that the lack of new patients is a direct result of not getting the younger patients he once was getting.
The established dentist decides that if he brings in a younger associate dentist then the younger patients will start coming back into the practice. This is really a logical thought. A patient base often does grow older as the dentist grows older. The bulk of most dentist’s patients are within 10 years either side of the dentist’s age. It is logical that that lost generation may indeed come back into the practice if a younger dentist is available. After all, the new dentist is also from that same lost generation.
But the question is if this is really a valid reason for an established practice to bring in an associate? No, and in fact, this associateship arrangement is almost always doomed to fail. The problem is that the patients are coming to the practice to see the younger associate and if the associate leaves the practice more than likely the patients will follow the associate. Statistically, in over 90% of the cases we have encountered since 1988, an associate will eventually leave the practice to set up his or her own practice or get involved in another associateship!
Why? Because sooner or later the associate will discover that he is building a practice within a practice and that he really does not need the host dentist like he or she once thought. These young dentists begin to wonder why they should allow a host dentist to earn 50% or 60% of their collected production when they could enjoy 100%?
Another common reason that dentists hire associates is to fully utilize their facility. The established dentist in this situation may only be working 4 days a week and never in the evenings or weekends. The established dentist figures that a hungry associate will be agreeable to working Fridays, Saturdays and some evenings. The facility would then be fully utilized. Good idea?
It will work for awhile but not in the long run. Why? The associate eventually discovers that he or she is building a practice within a practice and will leave to set up his or her own practice. When the associate leaves he or she often takes some staff and patients with them. This scenario happens frequently and is often very costly to the established dentist. Fro example, we know of an associate who married the host’s hygienist and took the front office person to his new practice. The result was that the host dentist lost more than $150,000 in annual gross practice revenues in addition to what the associate had been producing. It was financially devastating.
A third common reason associates enter practices is because the host dentist is anticipating selling his practice and wants to see if the new doctor can handle it. This is a valid reason to bring in an associate, but unfortunately, it is rarely structured properly. This is typically a totally ambiguous relationship of “lets see how we like each other and then if everything works out OK you can buy me out”. There is hardly ever a contract and if there is a contract it is typically inadequate with little to no protection for either the established dentist or the associate. The host dentist is tired and wanting to slow down, but since there is no commitment by either party, he does not usually slow down at all during this ambiguous “look see” period. The established dentist will rarely refer patients to the associate so the associate is frequently not very busy. Even if the intention was to see if the associate can handle the practice, the associate hardly ever gets a chance to prove he or she can. These relationships begin on a lack of trust by both parties and generally end ugly.
There are only TWO valid scenarios for bringing an associate into your practice.
First scenario: you need an associate because you are entirely too busy! You have more patients than you can handle. You are booked so far out that you are losing patients because they can’t get into the practice in a reasonable amount of time. You need another pair of doctor hands just to keep up with your work load! In this scenario the associate will be busy right away!
or
Second scenario: you are ready to start slowing down and phasing out toward retirement. Maybe because you are tired or maybe because you have accomplished your financial goals. Whatever the reason you need another pair of doctor hands to handle the patients you are ready (right now) to pass on to the associate. In this scenario the associate will be busy right away!
There is only ONE right way to bring an associate into your practice – a fully committed equity associateship arrangement.
In the equity associate structure, the established dentist and the associate are both contractually committed to the eventual transfer of practice ownership. The equity associateship arrangement can be structured as either a Deferred PreSale (seller will remain with the practice as the buyer’s associate after the sale), or a Deferred Sale (seller will leave the practice after the sale), or a Deferred Co-Ownership Program (host and associate eventually become equal co-owners in the practice).
Regardless of the desired structure, the plan must have a clearly defined method of allowing “sweat equity” credit to the associate for what he or she contributes in practice growth over and above what the practice was producing when the associate entered the practice. There must be a comprehensive contract protecting the interests of both the established dentist and the new associate. The exact deferral period (time lag to the buy-in or buy-out date) must be clearly defined in the contract (however, it is not unusual for the host and associate to accelerate the buy-in or buy-out date in these transactions). The exact formula for determining the buy-in or buy-out price is pre-determined and defined in the contract. The exact terms of the buy-in or buy-out are pre-determined and defined in the contract. The contract clearly defines the working relationship of the parties after the buy-in or buy-out, etc., etc.
Get the point? There is nothing left to the imagination in these critical relationships. Everything is clearly defined and pre-determined by contract. The success rate of PARAGON’s various deferred transition programs is virtually 100% as opposed to the 90% to 95% failure rate of standard associateship arrangements.
An associateship definitely has its place in the dental community, but only if the relationship is structured properly. Don’t become a statistic… and please, please don’t jeopardize your largest asset. Call PARAGON for professional guidance on successful practice transitions!
Paragon, Inc. All rights reserved. For more information on this or other PARAGON articles contact PARAGON at 1.866.898.1867 or via email info@paragon.us.com. Other articles are available for review on PARAGON’s website: www.paragon.us.com.
Thursday, January 21, 2010
Wednesday, January 6, 2010
Procrastinators Beware!!!
PROCRASTINATORS BEWARE!
“Time is of the essence.” I am sure you have heard this common saying before and it may have never been so meaningful as it is TODAY! The aging baby-boomers coupled with decreasing dental school attendance have created a solid buyer’s market for practice transitions.
Simply put, “If you snooze you WILL lose!” And when we say lose we mean a significant financial loss. Waiting just one more year to sell your practice could cost you several hundred thousand dollars… and the shame is that the loss is totally unnecessary and completely preventable!
Don’t let this happen to you…
A few years ago a seller and buyer were about to sign the final contracts when the seller abruptly backed out of the transaction. The seller caught a severe case of seller’s remorse caused by a sudden and substantial downturn in the stock market. The seller (a very aggressive investor who was invested primarily in a single security) lost nearly $250,000 of his retirement funds in less than a week. He decided that he could not afford to sell his practice. The buyer had already been approved for the financing to pay the seller a complete cash-out of $450,000 for the practice. The buyer was acquiring this practice for merger (he already owned a practice in the area) and desired to have the seller continue to work full-time for as long as the seller wished to work. The seller would be paid 40% of his collected production as the buyer’s “associate”. The buyer was also merging the two practices into the seller’s building and had agreed to a 5-year lease with $2,300 monthly rent to the seller.
So to set the story, the seller was to receive a cash payment of $450,000 PLUS an estimated $160,000 per year to continue to do the doctor production PLUS $27,600 in annual facility rent (total annual income to the seller of $187,600). As a point of reference, the seller’s practice was grossing approximately $525,000 ($400,000 doctor and $125,000 hygiene) with a 62% overhead for an approximate annual income of $200,000. The seller had convinced himself to not take the cash payment of $450,000 because he could not afford to reduce his annual income by $12,400 ($200,000 he presently earns less the $187,600 annual income he would continue to receive after the sale)… now that’s letting your emotions overload your logic!
Every effort was made to convince the seller that he was making a mistake but he was confident that he should maintain ownership and try to increase his practice value and annual income to offset his retirement fund losses. He increased his workdays from 4 days a week to 4.5 days and week and did see his practice production increase to $560,000 over the next 12 months. His annual income increased to $215,000 (his overhead also increased because he had to add some part-time staff to accommodate the extra half day a week he was now working).
But after about a year of working harder, he finally decided that it would have been best to sell. Unfortunately the original buyer had already acquired another practice in the area and was no longer interested in the seller’s practice. The seller had talked with a young doctor who had approached him a couple of months earlier but at the time the seller was still determined to keep working for a few more years. He knew the young doctor was now practicing as an associate in another practice close by so he contacted him. Much to his chagrin, he discovered that the young doctor was not the associate but had actually purchased the practice.
The seller tried for nearly 2 years to sell his practice with no luck at all. Finally the practice sold to a young doctor fresh out of dental school. But even though the practice was producing more now than a few years ago, the changing market conditions forced the seller to accept a price of $325,000 and a contractual commitment that the seller would only work 2 days a week for 1 year. The buyer did pay a 50% down payment even though he originally would only agree to pay 20%. The seller financed the balance at 10% for 10 years. The buyer also leased the seller’s building but would only agree to a 2-year lease (with an option to renew) at $2,200 per month.
Be aware that dental practice prices are falling! Practices that sold in the 85% of gross annual production range just 5 short years ago are currently selling in the 70% to 75% range. The baby boomers have overloaded the market and there is every reason to believe that this buyer’s market trend will continue, if not get more imbalanced in favor of the buyer, over the next decade or so.
It made absolutely no sense for the seller receiving $450,000 to back out of the sale of his practice. He had worked out the ultimate program that allowed him to continue working as long as he desired. He was receiving top value for his practice. The hard part of a transition was already done. Everything was on track for a smooth transition until an emotional event caused him to have a completely illogical reaction… a very costly reaction.
Don’t create excuses to procrastinate. The costs are just too great! Dispel your illogical excuses for not selling while the market still allows you an opportunity to profit. Who knows what next year may bring? What we do know for sure is the combination of more sellers and fewer young dentists will not make it any better than it is today.
Below are a few of the more common excuses we hear:
• I lost too much money in the stock market to sell now. Stop thinking emotionally and start thinking logically. In most practice sale scenarios, you can continue to work for as long as you desire. It is merely a contractual condition of the sale. If your practice is located in an area that has numerous competitive dentists, a transition can be structured so you can maintain your current income at its present level. In any case you will be converting your practice equity to cash to immediately replenish your lost funds.
• I can’t handle not being the boss anymore. The receptionist will book your desired schedule as she has for years. Your patients will not transition to the buyer until you are ready to transition them. You will decide what procedures you will do and you will decide what treatment is right for your patients. There are some slight adjustments but basically the “pecking order” is the same as it was before you sold.
• I can’t get a high enough earnings rate on my investments. If you are willing to finance a portion of the sale, we can contractually guarantee an interest rate of 10% on the financed portion. That is quite attractive in today’s market. But even if you want all cash and can only get a 5% earnings rate… it is far better than watching your equity diminish due to market conditions that are completely out of your control. For example, the seller described above would have been much better off with $450,000 invested at 5% than the $325,000 he accepted some 3 years later. Heck, he would have been better off with the $450,000 in a jar in his back yard earning no interest at all!
• I can’t work with another doctor. That’s ridiculous! To prevent the loss of hundreds of thousands of dollars I am sure you could learn to work with just about anyone for a few years! But it typically is not a problem. PARAGON is aware that a dental practice takes on the general personality of the owner (YOU). We are seeking a buyer who fits into the practice environment you created! A proper match is better for all concerned: the buyer; the staff; the patients; and, of course, better for you!
• I think my practice will be worth more in a few years. Market conditions are only getting worse for sellers. In fact, some sellers will never sell their practice just because there are simply no buyers for their particular market area! Don’t be naive! This is simply a lame excuse. You are taking a huge risk by not selling and no risk at all if you do sell in a properly structured transaction.
• I will have to pay too much in income taxes if I sell. Actually the taxes on a practice sale have never been better. A PARAGON orchestrated practice sale is structured to allow 80% of the sales price to be taxed to the seller at favorable capital gains rates (a maximum tax rate of 20%). And if you finance a portion of the sale you can defer much of the taxes into future years and may even gain the benefit of a lower capital gains rate if such rates were to fall during the term of your promissory note.
When your practice is at peak value (as yours almost assuredly is or you would not be reading this article), there is every good reason to sell and no reason (that we can determine) to delay selling. The current trend is for practice values to continue to fall. Don’t be foolish with your hard-earned practice equity or your valuable options! Call PARAGON today for a free consultation. No obligation… just a very worthwhile education!
Paragon, Inc. All rights reserved. For more information on this or other PARAGON products contact PARAGON at 1.866.898.1867 or via email info@paragon.us.com. Other articles are available for review on PARAGON’s website: www.paragon.us.com.
“Time is of the essence.” I am sure you have heard this common saying before and it may have never been so meaningful as it is TODAY! The aging baby-boomers coupled with decreasing dental school attendance have created a solid buyer’s market for practice transitions.
Simply put, “If you snooze you WILL lose!” And when we say lose we mean a significant financial loss. Waiting just one more year to sell your practice could cost you several hundred thousand dollars… and the shame is that the loss is totally unnecessary and completely preventable!
Don’t let this happen to you…
A few years ago a seller and buyer were about to sign the final contracts when the seller abruptly backed out of the transaction. The seller caught a severe case of seller’s remorse caused by a sudden and substantial downturn in the stock market. The seller (a very aggressive investor who was invested primarily in a single security) lost nearly $250,000 of his retirement funds in less than a week. He decided that he could not afford to sell his practice. The buyer had already been approved for the financing to pay the seller a complete cash-out of $450,000 for the practice. The buyer was acquiring this practice for merger (he already owned a practice in the area) and desired to have the seller continue to work full-time for as long as the seller wished to work. The seller would be paid 40% of his collected production as the buyer’s “associate”. The buyer was also merging the two practices into the seller’s building and had agreed to a 5-year lease with $2,300 monthly rent to the seller.
So to set the story, the seller was to receive a cash payment of $450,000 PLUS an estimated $160,000 per year to continue to do the doctor production PLUS $27,600 in annual facility rent (total annual income to the seller of $187,600). As a point of reference, the seller’s practice was grossing approximately $525,000 ($400,000 doctor and $125,000 hygiene) with a 62% overhead for an approximate annual income of $200,000. The seller had convinced himself to not take the cash payment of $450,000 because he could not afford to reduce his annual income by $12,400 ($200,000 he presently earns less the $187,600 annual income he would continue to receive after the sale)… now that’s letting your emotions overload your logic!
Every effort was made to convince the seller that he was making a mistake but he was confident that he should maintain ownership and try to increase his practice value and annual income to offset his retirement fund losses. He increased his workdays from 4 days a week to 4.5 days and week and did see his practice production increase to $560,000 over the next 12 months. His annual income increased to $215,000 (his overhead also increased because he had to add some part-time staff to accommodate the extra half day a week he was now working).
But after about a year of working harder, he finally decided that it would have been best to sell. Unfortunately the original buyer had already acquired another practice in the area and was no longer interested in the seller’s practice. The seller had talked with a young doctor who had approached him a couple of months earlier but at the time the seller was still determined to keep working for a few more years. He knew the young doctor was now practicing as an associate in another practice close by so he contacted him. Much to his chagrin, he discovered that the young doctor was not the associate but had actually purchased the practice.
The seller tried for nearly 2 years to sell his practice with no luck at all. Finally the practice sold to a young doctor fresh out of dental school. But even though the practice was producing more now than a few years ago, the changing market conditions forced the seller to accept a price of $325,000 and a contractual commitment that the seller would only work 2 days a week for 1 year. The buyer did pay a 50% down payment even though he originally would only agree to pay 20%. The seller financed the balance at 10% for 10 years. The buyer also leased the seller’s building but would only agree to a 2-year lease (with an option to renew) at $2,200 per month.
Be aware that dental practice prices are falling! Practices that sold in the 85% of gross annual production range just 5 short years ago are currently selling in the 70% to 75% range. The baby boomers have overloaded the market and there is every reason to believe that this buyer’s market trend will continue, if not get more imbalanced in favor of the buyer, over the next decade or so.
It made absolutely no sense for the seller receiving $450,000 to back out of the sale of his practice. He had worked out the ultimate program that allowed him to continue working as long as he desired. He was receiving top value for his practice. The hard part of a transition was already done. Everything was on track for a smooth transition until an emotional event caused him to have a completely illogical reaction… a very costly reaction.
Don’t create excuses to procrastinate. The costs are just too great! Dispel your illogical excuses for not selling while the market still allows you an opportunity to profit. Who knows what next year may bring? What we do know for sure is the combination of more sellers and fewer young dentists will not make it any better than it is today.
Below are a few of the more common excuses we hear:
• I lost too much money in the stock market to sell now. Stop thinking emotionally and start thinking logically. In most practice sale scenarios, you can continue to work for as long as you desire. It is merely a contractual condition of the sale. If your practice is located in an area that has numerous competitive dentists, a transition can be structured so you can maintain your current income at its present level. In any case you will be converting your practice equity to cash to immediately replenish your lost funds.
• I can’t handle not being the boss anymore. The receptionist will book your desired schedule as she has for years. Your patients will not transition to the buyer until you are ready to transition them. You will decide what procedures you will do and you will decide what treatment is right for your patients. There are some slight adjustments but basically the “pecking order” is the same as it was before you sold.
• I can’t get a high enough earnings rate on my investments. If you are willing to finance a portion of the sale, we can contractually guarantee an interest rate of 10% on the financed portion. That is quite attractive in today’s market. But even if you want all cash and can only get a 5% earnings rate… it is far better than watching your equity diminish due to market conditions that are completely out of your control. For example, the seller described above would have been much better off with $450,000 invested at 5% than the $325,000 he accepted some 3 years later. Heck, he would have been better off with the $450,000 in a jar in his back yard earning no interest at all!
• I can’t work with another doctor. That’s ridiculous! To prevent the loss of hundreds of thousands of dollars I am sure you could learn to work with just about anyone for a few years! But it typically is not a problem. PARAGON is aware that a dental practice takes on the general personality of the owner (YOU). We are seeking a buyer who fits into the practice environment you created! A proper match is better for all concerned: the buyer; the staff; the patients; and, of course, better for you!
• I think my practice will be worth more in a few years. Market conditions are only getting worse for sellers. In fact, some sellers will never sell their practice just because there are simply no buyers for their particular market area! Don’t be naive! This is simply a lame excuse. You are taking a huge risk by not selling and no risk at all if you do sell in a properly structured transaction.
• I will have to pay too much in income taxes if I sell. Actually the taxes on a practice sale have never been better. A PARAGON orchestrated practice sale is structured to allow 80% of the sales price to be taxed to the seller at favorable capital gains rates (a maximum tax rate of 20%). And if you finance a portion of the sale you can defer much of the taxes into future years and may even gain the benefit of a lower capital gains rate if such rates were to fall during the term of your promissory note.
When your practice is at peak value (as yours almost assuredly is or you would not be reading this article), there is every good reason to sell and no reason (that we can determine) to delay selling. The current trend is for practice values to continue to fall. Don’t be foolish with your hard-earned practice equity or your valuable options! Call PARAGON today for a free consultation. No obligation… just a very worthwhile education!
Paragon, Inc. All rights reserved. For more information on this or other PARAGON products contact PARAGON at 1.866.898.1867 or via email info@paragon.us.com. Other articles are available for review on PARAGON’s website: www.paragon.us.com.
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