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.