Post on 30-Sep-2020
9/13/2018
1
Practice Transitions 101
Patrick Johnston, MHA Tom Guglielmo, DDS Brannon Moncrief
Phone: 281-362-1707 Email: houston@dentaltransitions.com
SLIDE TITLE GOES HEREAbout McLerran & Associates
• Started in 1987 by Paul McLerran, DDS
• Specialize in practice appraisals,
practice sales & transition consulting
• Offices in Austin, Houston, San Antonio
& South Texas (DFW coming in 2019)
• Largest Practice Brokerage Firm in Texas
9/13/2018
2
SLIDE TITLE GOES HEREDental Off ice Space Advisor
Tenant Representative
Drew Smith
Vice President
Cell: 512-573-4363Office: 713-300-1863Email: drew.smith@syncoremedical.com
www.syncoremedical.com
SLIDE TITLE GOES HEREDental Lender
9/13/2018
3
Healthcare Transaction Attorney
Hieu Huynh, DDS, JD
Managing Partner
Huynh & Huynh, PLLC
Phone: 713-622-1111Email: hieu@huynhandhuynh.com Website: www.huynhandhuynh.com
SLIDE TITLE GOES HERECurrent Market Condit ions
• High Demand + Limited Number of Practices
on the Market = Seller’s Market
• 100% Financing is Readily Available, Interest
Rates Near Historical Lows
• Dentistry is Changing: Downward pressure on
pricing (from PPO plans), upward pressure on
overhead, increase in competition, burden of
management is growing
9/13/2018
4
SLIDE TITLE GOES HERECurrent Market Condit ions
• Millennials – The mindset of buyers is changing.
• Rapid consolidation driven by the growth of DSO’s
• Smaller, antiquated practices are more difficult to sell
• Larger, updated practices are becoming more valuable
• In the coming years … Rising Interest Rates + Increase in Available Practices = Potential Decline in Practice Values
SLIDE TITLE GOES HEREMaking the Decis ion to Sel l
• Reason for Selling
• Timeframe
• Are you financially ready?
• Are you emotionally ready?
• Choosing a Transition Strategy
9/13/2018
5
SLIDE TITLE GOES HEREPractice Transition Strategies
• 100% Practice Sale to a Private Buyer
• 100% or Majority Practice Sale to a DSO/Private Equity Buyer
• Merger
• Associate to Purchase (more complex)
• Partnership (not so simple)
SLIDE TITLE GOES HERE100% Practice Sale to a
Private Buyer
• Why they are successful …
• Simplest method for transitioning a practice
• Largest pool of potential buyers
• Typically receive 100% cash at closing
• Seller can walk away at closing OR possibly
continue working as an associate in the
practice after the sale depending on the size of
the practice and the buyer’s situation
9/13/2018
6
SLIDE TITLE GOES HERESelling to a DSO
• DSO – Dental Service Organization
- Doctor entity that owns the clinical
assets/patient records
- Another corporate entity owns the non-
clinical assets, equipment, furniture, fixtures,
lease, etc.
- There may be a third entity that has a professional
services agreement with the other entities
• May pay a premium of 10% - 20% for practices with
annual revenue in excess of $1.2 million (compared to a
private buyer)
SLIDE TITLE GOES HEREDSO Buyers (cont.)
• Price based upon a multiple of EBITDA
EBITDA = Revenue
Less Overhead
Less Doctor Compensation
• Practices with EBITDA of less than $500,000 typically sell in the
range of 3-5 times EBITDA
• Practices with EBITDA in the range of $500,000 to $1,000,000
typically sell in the range of 4-7 times EBITDA
• Practices with EBITDA of $1,000,000+ typically sell in the range of
7-10 times EBITDA
9/13/2018
7
SLIDE TITLE GOES HEREDSO Buyers (cont.)
• Allows the seller to cash out all or most of the
practice value and continue working as an associate
indefinitely without the burden of management
• Offer typically features a seller note or holdback
provision contingent upon the seller’s post-closing
employment and or the performance of the
practice
• Some DSO’s require the seller to maintain a
minority ownership interest in the practice
SLIDE TITLE GOES HEREDSO Buyers (cont.)
• Due Diligence Process can be exhaustive
• Potential loss of autonomy and shift in practice
culture/philosophy
• Crucial to shop the practice to multiple DSO
buyers and have proper representation to vet
buyers, find the best fit , and negotiate the
most favorable terms possible
9/13/2018
8
SLIDE TITLE GOES HEREWorking as an Associate in
Your Former Practice
• Are you prepared to adopt an “associate” mentality?
• You are no longer in control
• “AT WILL” Employment by both parties
SLIDE TITLE GOES HEREAssociate to Purchase
A few notes before we get started:
• If you currently have an associate, he/she must have an
assignable employment agreement with a covenant
not-to-compete.
• If you are planning to sell your practice to your associate
doctor, NOW is the time to discuss the terms of the sale.
• If you have already identified your buyer, McLerran &
Associates will charge a reduced commission to walk the
parties through the process.
9/13/2018
9
SLIDE TITLE GOES HEREAssociate to Purchase (cont.)
This transition strategy is designed to:
• Allow the seller to reduce their work
schedule while retaining control
• Maintain production & practice value
• Lock in your exit strategy
• Smooth transition for all parties
SLIDE TITLE GOES HEREAssociate to Purchase (cont.)
Front End Decisions
1. Establish timeframe for selling –typically not more than 1-2 years
2. Establish purchase price OR method for determining purchase price
3. Establish length of “honeymoon period” and how many days per week the potential buyer/associate doctor will work during that period
9/13/2018
10
SLIDE TITLE GOES HEREAssociate to Purchase (cont.)
• Practice Valuation
• Market the opportunity to potential buyers/associate
doctors while clearly communicating expectations up
front
• Negotiate Letter of Intent
• Hire buyer/associate doctor to join the practice
part-time with the expectation that he/she will
purchase the practice at a predetermined price and
date (agreed upon in the LOI)
SLIDE TITLE GOES HEREAssociate to Purchase (cont.)
• 90-120 day non-binding “honeymoon” period
• Negotiate Asset Purchase Agreement following
completion of honeymoon period (at the terms
agreed upon in the LOI)
• Smooth transition for everyone involved (seller,
buyer, staff, and patients)
• Seller may reverse roles with the buyer and become
the part-time associate following the sale
9/13/2018
11
SLIDE TITLE GOES HEREPartnership
• Viable transition strategy if the seller is planning to
practice for 5+ years following the initial buy-in
• Crucial to find a partner who is the right fit –
personality, practice philosophy, work ethic, etc.
• Equal Ownership is a fundamental foundation for a
successful partnership
• Requires DETAILED Partnership/Operating Agreement:
Compensation Structure, Dissolution Agreement, Buy-
Out Clause, Death/Disability Provisions, etc.
SLIDE TITLE GOES HEREPartnership (cont.)
• Doctor compensation and profit sharing must
be equitable – Each doctor paid a wage based
on a % of their individual net production with
remaining profit after overhead and doctor
wages split according to ownership %
• Lender will require a lien on the entire practice
• Can cause substantial damage to the practice if
the partnership fails
9/13/2018
12
SLIDE TITLE GOES HERE
Keys to Maximizing
Practice Value
SLIDE TITLE GOES HEREBuyer Hot Buttons
• Curb Appeal
• Location: Urban vs. Rural
Retail/Free Standing Building (good visibility) vs. Professional Building
• Equipment/Technology – # Ops, Digital Radiography, Pano, Computers in Ops, Paperless Charts, Age of Equipment, etc.
• Cash Flow – Ability to obtain financing and make a living
9/13/2018
13
SLIDE TITLE GOES HEREBuyer Hot Buttons (cont.)
• # Active Patients and # New
Patients/Month
• Type of Patient Base
• Upside Potential
• Seller’s Personality, Skill Set & Practice
Philosophy
SLIDE TITLE GOES HEREStart Planning Your
Transition in Advance
• Evaluate options and choose a transition
strategy that meets your individual needs
• Have a practice valuation completed early on
• Make changes to enhance practice value and
marketability
• Avoid mistakes that reduce practice value and
marketability
9/13/2018
14
SLIDE TITLE GOES HEREMaintain / Increase Revenue
• Dental practices typically sell for 60%-80% of the most recent year’s revenue
• An increasing revenue trend can substantially enhance the value and marketability of your practice
• Despite historical revenue levels, a decreasing or erratic revenue trend leading up to a sale will cause a decline in practice value and concern among buyers, their advisors, and lenders
• Regularly increase your UCR fee schedule (~ 3% per year), negotiate PPO fee schedules, and hire an associate to maintain production if you are planning to reduce your work schedule
SLIDE TITLE GOES HEREControl / Increase Profitabil ity
• Profitability is a prerequisite for value
• Cash flow is a major focus for buyers and a dental lender’s primary concern when evaluating your practice
• Are your major overhead expenses in line with industry benchmarks? If not, it may be time to make some changes.
• Reduce discretionary/personal write-offs in the years leading up to a practice sale
9/13/2018
15
SLIDE TITLE GOES HEREIncrease # Active Patients &
New Patient Flow
• Buyer’s perceive # of active patients (seen in the past 2 years) and # of new patients/month to be leading indicators of the health of a practice
• Increase new patient flow by utilizing cost effective marketing initiatives such as internal marketing and reputation marketing (Yelp & Google reviews). Consider investing in website/SEO/Google Ads & social media marketing.
• Improve hygiene recall/production (every 200 active patients = 1 hygiene day per week) and enhance your New Patient Experience
SLIDE TITLE GOES HEREConsider Updating
Equipment & Decor
Perception is Reality
9/13/2018
16
SLIDE TITLE GOES HEREConsider Updating
Equipment & Décor (cont .)
• Increase case acceptance, patient
retention, practice value, and marketability
• Must evaluate return on investment
• May be able to negotiate a tenant
improvement allowance when renewing
your lease
SLIDE TITLE GOES HEREClean Up A/R & Credit Balances
• Total Accounts Receivable should not be more greater than 45-60 days of collections
• A Large > 90 Days Accounts Receivable Balance may indicate there is an issue with collection rates/policies
• Sellers are typically required to write the buyer a check for credit balances as of the closing date
• Clean up these balances and revise collection policies if necessary
9/13/2018
17
SLIDE TITLE GOES HEREWork With a Local , Reputable
Pract ice Broker
• Develop a transition strategy to meet your
individual needs
• Ensure your practice is valued properly
• Protect the confidentiality of the sale
• Find a buyer who is the right fit for your
practice (this is only about 25% of the job)
• Provide an organized process and manage
communication between all parties
SLIDE TITLE GOES HEREWork With a Local , Reputable
Pract ice Broker (cont. )
• Serve as a buffer between the seller and buyer
to preserve goodwill
• Work with an advisor who represents your best
interest throughout the process
• Minimize stress, effort, and time involved with
the sale
• Beware of Dual Representation
9/13/2018
18
SLIDE TITLE GOES HEREThe Transition Process
• Make the decision to sell
• Build you team of advisors
• Choose a transition strategy
• Gather information
• Determine the practice value
• Market the practice to potential buyers
SLIDE TITLE GOES HEREThe Transit ion Process (cont . )
• Letter of Intent
• Due Diligence
• Financing
• PPO Credentialing
• Asset Purchase Agreement –
address seller’s post-closing involvement
• New Lease OR Lease Assignment*
9/13/2018
19
SLIDE TITLE GOES HEREThe Transit ion Process (cont . )
• Staff Introduction
• Transition Letter
• Accounts Receivable & Credit Balances
• Work in Process
• Transfer/Establish Vendor Accounts
• Loan Closing
SLIDE TITLE GOES HERELegal Considerations
• Asset Purchase Agreement
• Seller Representations & Warranties
• Redo Work
• Covenant Not to Compete
• Lease Assignment – Seller may have post-closing liability for the lease should the buyer default
9/13/2018
20
Thank You!
Phone: 281-362-1707 Email: houston@dentaltransitions.com