Purtzki Transitions

Selling

Purtzki Transitions offers an extensive array of dental practice transition services, delivered by highly experienced transition consultants who personally guide clients through the multitude of issues encountered during any transition. From new practice acquisitions, to associate integration practice mergers and full dense, Purtzki Transitions offer expert advice and help clients navigate dental practice transitions of all kinds. Whether you need help hiring your first associate, enhancing your dental practice performance for future sale, or designing a strong exit strategy, Purtzki has the knowledge and tools to simplify the process.

1. Planning your Exit Strategy

If your bucket list is overflowing with things to do and places to see, it may be a sign that you should seriously start planning your practice transition. Saying goodbye to a rewarding career of looking after patients is not easy. Many practice sales are aborted at the last minute, not because of buyer’s remorse, but because the seller was just not able and/or ready to relinquish practicing as a dentist.

A client in his late fifties called me a couple of years ago to list his practice for sale. When I asked why he wanted to sell his thriving practice, he conceded that while he loved dentistry he could no longer handle the stress of dealing with a dysfunctional staff, which prompted his decision to sell the practice in the first place. We discussed how to resolve the staff issue, making it easier for him to continue practicing until he was ready to retire. “How do I know when I am ready to quit”, he asked. I suggested he use the “mirror” test, where you stand in front of the mirror each morning and ask yourself: “If I had only a few days left on this earth, would I go the office today?” If the answer is “No” five mornings in a row, you are ready to transition to retirement without regret. I was reminded of our conversation a couple of weeks ago when he called to tell me that he passed the mirror test and is now ready to retire from dentistry.

Ideally, you should start planning your transition five years in advance. The most important task is to maximize the sales value of your practice by upgrading your business systems. In the new dental economy, running the practice like a business is the foundation of financial success. In our practice management division, we analyze our clients’ practice and help them implement systems to boost practice revenues and reduce overhead.

The goal of upgrading business systems is to create a system of productivity and accountability, and provide an inspiring work climate that will attract the best and brightest staff members. The results will amaze you. With 75% of dental practices in urban areas experiencing declining revenues, purchasers will flock to purchase well-run, growing practices and – best of all – they are eager to pay a premium for them. To illustrate, if the gross revenue of your practice has been stagnant at $1 million with a 60% overhead, your practice may be worth $1 million. However, if you increase the revenue to $1.5 million over the next three years and reduce the overhead to 50%, a purchaser will likely pay $1.8 million for your practice.

The next step in planning your retirement is to speak to your accountant to make sure you maximize the after-tax sales proceeds. Dentists crawl over broken glass to get access to the coveted capital gains exemption for each shareholder. Many dentists miss out on this tax gift because they fail to plan the sale ahead of time. To benefit from the exemption, you need to “purify “your dental corporation. This means that you have to transfer any investments – or non-dental assets – to a holding company at least 24 months prior to a sale. Your financial planner can also assist you in determining if you are indeed monetarily ready to retire. As a rule of thumb, you need to have savings equal to 20 times your desired after-tax income. Investments of $2 million should give you $100,000 per year after tax for the rest of your life, starting at age 65.

Below are a number of additional steps you may consider implementing to boost the value of your dental practice.

  1. If you have an associate, ensure that you have a solid associate agreement, specifically regarding the restrictive covenant and a non-solicitation of patients and staff.
  2. Ideally, the purchaser wants to be able to practice in the location for 15 to 20 years. If your lease is less than 15 years, obtain the landlord’s consent for additional renewal periods. Also, demolition clauses can be potential deal breakers, so make sure to review these provisions with your lawyer.
  3. Prior to the sale, give your practice a makeover to enhance the curb appeal, including recovering chairs, new carpets etc.

Even if you are in your mid-50s and still passionate about practicing dentistry, it is not too late to start planning for your retirement and look for ways of how to best optimize your financial gain on the eventual sale of your practice.

1. Thinking of selling?

When you start thinking about the practice succession and bringing another dentist into your practice, you must have a solid transition plan in place. This plan not only helps you spell out your financial and retirement goals but also provides a roadmap for the dentist joining a practice. It is important to share your transition plan with the new dentist. Do you want the new dentist to start as an associate and become a co-owner of your practice in a few years hence? There are many options to consider, and you must spell out what your vision and set a timetable. You need to find a successor who shares your goals and vision otherwise the transition is doomed from the start. You must create a win-win situation, and by laying your entire transition plan on the table, you create the right negotiating climate needed for a successful deal.

The reason most selling dentists do not share their transition plan is because they don’t have one. In one situation, where both parties were ready to ink the deal after months of negotiations, the seller got cold feet and was ready to back out of the sale, unless he was guaranteed to work for another five years as a full-time associate. This of course was unacceptable, as the practice could only support one full-time dentist. The selling dentist realized that he didn’t have enough funds put aside for retirement so he needed to keep working. A dentist who pulls the plug on a deal after months of negotiations loses total credibility. Make sure you have a solid transition plan in place before you put up your practice for sale.

If are thinking about transition, think of PURTZKI TRANSITIONS. Over the last 25 years many dentists have called us to quarterback their practice transition. We take a business approach to practice transition: practical, no-nonsense, creative and cost efficient.

Creating a win-win transition is not a cliché for us:
It is our purpose

2. Planning a successful transition

Transitioning a dental practice is not just for the 65-year-old dentist ready to retire to Palm Springs. Planning a transition occurs at various stages in the career of a dentist:

  • a busy dentist who is working to capacity and is looking for a colleague as a part owner to maintain the practice growth and to cash in some of the practice equity;
  • a dentist wishes to pursue a specialty within his practice and is looking for another dentist to join the practice to provide more general dentistry to the existing patients.

Like most of us, dentists are caught up in the whirlwind of daily activities, of caring for patients and managing the office to have precious little time to plan for important events such as transitioning of the practice. For many dentists, the practice represents the most significant financial asset. A well executed transition not only ensures the continuity of patients and staff, but also helps you realize a greater value of your practice. For most dentists selling their practice is a once-in-a-lifetime event. Therefore you cannot afford to make mistakes. Here are some practical tips of how to plan for a successful transition.

  1. Know what you want. Be specific of your goals and analyze how a practice transition will help you achieve them. Transitioning out of your practice is a long-term proposition. It will have a huge impact on your daily life, the relationship with your spouse, and your future financial well-being. I have witnessed many selling dentists pulling out of the sales process often at the last minute at a great cost and disruption of the office, because they were not ready, emotionally or financially, to leave their practices. Analyze your goals and prepare yourself for the journey before you commit yourself to a sale.
  2. Analyze the needs of your family. Analyze the effect the proposed transition would have on your family. Perhaps your spouse does not share your goal of retirement in five years. Or if you bring in a new dentist into your practice which may place extra demands on your time and energy ask yourself how will these demands affect the time I have available for my spouse and children.
  3. Give yourself lots of time. Have a transition plan in place well ahead of your planned retirement date. Plan about three years ahead for a rural-and about one year for a city practice. Even the most passionate baby boomer dentist will retire, and if you think you can enjoy dentistry until you are ready for the nursing home, you should have at least a transition plan in place by age 60. If your practice has reached the stage where you need to add another dentist to your practice, take the time to plan for the transition from a solo to a group practice as it gives you the luxury of searching for compatible partner rather than taken the first licensed dentist you meet.

3. Finding the right transition model

The biggest stumbling block for many dentists is finding the right transition model to help them reach their specific objectives. Your objectives may include:

  • Maximizing the after-tax proceeds of a practice sale
  • Increasing practice income through cost-sharing
  • Sharing the daily burden of practice management
  • Focusing more on your preferred area of dentistry
  • Taking more time off for personal and/or professional reasons
  • Growing your practice
  • Increasing the value of your practice

Often, the transition concept that the dentist has in mind is not the most appropriate for his or her needs. During initial discussions, your transition advisors will help you develop the best strategies for a successful transition, taking into account your unique financial and practice circumstances. These preliminary discussions will ensure that your objectives are realized at the conclusion of the transition process.

Here are some of the questions you need to ask yourself when building your transition model:

  1. When do I want to quit dentistry? If you are planning to retire within the next three years, you will most likely consider a straight retirement sale. Under the traditional model, you sell your practice for cash and only stay on after the sale for a short time to ensure a smooth patient and staffing transition. A full practice sale allows you to take advantage of a tax-free share sale in most circumstances.
  2. Do I have the patient volume and physical capacity to add another dentist? If your practice grosses less than $650,000, a transition that involves a partial sale and the introduction of a cost-sharing partner will likely not work. Also, office size and the number of operatories may not provide sufficient space for another dentist. Split shifts may be a temporary solution.
  3. Would I like to spend more time specializing? After many years of working in the dentistry trenches, even the keenest practitioner can show signs of battle fatigue. Many dentists are looking for an associate to take over the bulk of the general practice so that they can spend more time practicing in their preferred specialty.
  4. What is the size of my retirement nest egg? If you can’t afford to retire for at least another five years, you need to consider transition models that will help you maximize practice income and, at the same time, keep up production levels so that you maintain the value of the practice when you sell.

The critical step in your practice transition process is to find the transition model you think will work best for you. Your transition model can be compared to the recipe for baking a cake. No matter how good the ingredients are or how much time you spend mixing, the cake will not turn out to your satisfaction if you have the wrong recipe.

There are many transition models to consider. Here are some basic structures.

1. The Retirement Sale

This is the most common option, where you find a buyer for your entire practice. This option is ideal if you are planning to retire from dentistry within two to three years. You maintain full management control of your practice, and you do not have to work with another dentist.

By selling the entire practice, you can obtain the benefit of selling the shares of your corporation and receiving the entire sales proceeds tax-free. This is a huge benefit.

This retirement sale model works well when the purchase price is affordable. On the other hand, if the gross billings of your practice exceed $800,000 and the asking price is more than $400,000, the practice may be beyond the financial reach of most prospects.

If a purchaser can only afford $400,000, it becomes irrelevant that the practice may be valued at $600,000. If you want to maximize the sales proceeds at full practice value, then you have to consider a transition model of selling a partial interest in your practice.

2. The Phase-In Sale

This is a variation of the retirement sale. Instead of waiting until you are close to retirement, you can choose a buyer now, and have the new dentist work in your practice until you retire.

All purchase and sale arrangements have been made in advance and the formula for the purchase price is established. There is no longer a need for further negotiations. There may be some adjustments to the purchase price, depending on the level of production during the intervening period.

Sometimes there is not enough office practice volume to support two dentists and often the new dentist supplements his income through locums in other offices.

The phase-in sale usually does not exceed five years. Knowing the price and the time of the change of ownership provides security for the purchasing dentist. This option also provides the same financial security for the seller who can now plan his retirement according to the proposed timetable.

One potential drawback is that the established dentist has to work with another colleague in the practice.

3. The Phase-Out Sale

Under this model, the new dentist typically purchases the practice after the initial associateship.
As the vendor, you will stay on in an associate capacity after the sale.

This option works well if the transition exceeds five years and you want to keep full control of the practice until the sale.

Ending your dental career as an associate has definite benefits. You are supplementing your retirement income, you don’t have to carry the burden of managing the practice, and you have the flexibility of leaving the practice according to your timetable.

4. The Cost-Sharing Arrangement

If you have a large practice and would like to see its value turn to hard cash, then selling a partial interest under a cost-sharing arrangement may be the only option. This scenario is ideal if you do not just consider being a dentist a calling but also enjoy the business aspect of dentistry.

This transition is ideal if your planning horizon is five years or longer. You will have to spend more time managing the enlarged group practice, but you are also getting top dollar for the practice.

4. How you can increase the value of your practice

If you want to maximize the sales proceeds from your dental practice, there are a number of steps you need to implement starting well in advance of the actual sale date.

1. Obtain tax advice (3 years prior to sale).
Every dentist strives to sell the shares of the dental corporation, instead of the dental assets in order to access the life time capital gains exemption. The $750,000 capital gains exemption is worth $164,000 in personal tax savings in BC. The exemption is available to each individual shareholder, including each beneficiary of a family trust. To be eligible for the exemption you must meet these three criteria:

  1. At the time of sale, 90% of the fair market value of the corporate assets must be used in the dental practice. The eligible dental assets include working capital (cash and accounts receivable), equipment, leaseholds, and goodwill.
  2. During the 24 months period prior to the sale, the fair market value of the dental assets must exceed the value of the non-dental, or investment assets. This often requires a reorganization , at least two years prior to the sale, to move the non-dental assets from the dental corporation to a holding company. This “purification” process can be structured without tax consequences.
  3. The shares of the dental corporation must be held by the individual for at least two years. However, there is an exemption for an unincorporated dentist who can transfer the dental assets on a tax-free basis to a newly formed corporation, and then sell the shares immediately.
    In planning for the tax free sale of your dental practice, you need to discuss the contemplated sale with your accountant at least three years prior to the sale.

2. Keep up your production (3 years prior to sale)
Nothing will decrease the practice value more than a trend of declining office billings. When the future profitability of the practice is being questioned, most prospective purchasers will look elsewhere or ask for a deep discount to compensate for the increased risk. The No. 1 advice of transition experts is: Don’t slow down, and do not work fewer days.

3. Review the facility lease (1 year prior to sale)
The ideal lease arrangement is for the purchaser to assume a 15-20 year lease term including lease renewals. If your lease is less than 15 years, obtain the consent of the landlord for additional renewal periods. Many leases have a demolition clauses, which is a potential deal breaker. Typically the landlord will not remove such a clause, but you can often get a commitment that the building will not be demolished for a specified number of years.

4. Upgrade your office(<1 year prior)
Do not make any large capital expenditures such as dental chairs, cabinetry, computer equipment, unless absolutely necessary. It is unlikely, that the purchaser will reimburse you fully for the capital cost.
On the basis of that “you will never get a second chance to make a good first impression”, you should enhance the curb appeal of the practice, including recovering chairs, new carpets, a freshly painted facility, landscaping etc.

5. Stick to basic dentistry
Established family practices fetch the highest price, because they are the lowest risk and patients are easily transitioned to the new dentist. A predominantly cosmetic and implant practice is worth less, because of the personal goodwill and specific training of the vendor, which cannot easily be transferred to the purchaser. It is tough to grow a “high-end” practice in the current economic climate, when many patients are feeling the pinch.

6. Have a strong team.
Dedicated and experienced staff is the key asset in the eyes of the purchaser. The key staff members who helped you create the practice goodwill will transfer the goodwill to the new dentist. To have a strong team, you need to remove these employees who are not peak performers. Strengthen your team by clearly communicating your vision so that you keep them motivated to support you in the practice transition.

7. Document procedures and systems
Are your systems well documented? Does every staff member know what to do, and how to do it? Put together some how-to guides, such as the front desk procedures for billings and collections, and hygiene appointment and recall procedures. You should have a job description for each position. There always is the chance that an employee may leave when the new dentist takes over, and the well documented systems will help to get a new employee up to speed quickly, so that the new dentist can focus on the transition.

5. Recruiting an associate as a future owner.

To grow practice revenues, reduce clinic overhead, or execute their transition plan, many practice owners are considering bringing in an associate into the practice.
The most common types of practice models are the Solo-Group and Transition-Ownership.

Solo Group
When mid-career dentists work to maximum capacity and have reached a plateau in terms of production and professional challenge, they often will seriously explore the opportunity of bringing another dentist into the practice. Retirement transition is not the desired objective, but rather achieving such goals as reducing the practice time commitment, pursuing a specialty which would require another dentist to look after the general dentistry, or simply cashing in a portion of the practice equity.

The incoming dentist often joins the practice as an Associate and, once he/she is established and has developed a patient base, the sale of the practice interest is consummated. In the end, there are two independent practices operating in the facility, with very little sharing of staff and expenses. There is no sharing of production. The two dentists may have a buy-out agreement in case of death or disability, but there is no intention that one dentist purchase the dentist’s practice on retirement.

Transition-Ownership
The transition-ownership arises when a dentist, approaching the end of the career, looks for a dentist to implement the retirement transition. While the two dentists may work as two separate legal entities, mainly for tax purposes, they share many common expenses and even some practice income. The key element of the co-ownership is to execute the exit strategy for the retiring dentist.

Here are 5 tips to make sure your “Associate to Owner” transition is successful.

  1. Select a compatible candidate.
    Determine the new dentist’s practice philosophy, work ethic, integrity and the desire to put the patients’ well-being first. You must be prepared to create a mentoring relationship with the new dentist. Involve your senior staff members in the hiring process.
  2. A written agreement.
    Make sure that there is a written agreement in place before the new dentist sees any patients. The agreement should cover the initial associate period and address all phases of the transition process.
  3. A good faith deposit.
    The fact that the new dentist is committed to the practice means nothing unless the commitment is backed up by cash. If the issue of the deposit becomes a deal breaker, break the deal! Never enter into a transition arrangement without receiving a sizeable non-refundable deposit
  4. Assist in developing the patient base.
    Assist in building the new dentist’s revenue sources, such as extending the practice hours to evenings and weekends to accommodate working families.
  5. Have a flexible buy-in date
    The new dentist who works as an associate in the practice can only proceed with the purchase of the partial interest when the practice generates sufficient income to pay for the clinic expenses and service the bank debt. Consider making the closing date flexible, e.g. when the new dentist reaches a monthly production of $60,000.

The reason most selling dentists do not share their transition plan is because they don’t have one. In one situation, where both parties were ready to ink the deal after months of negotiations, the seller got cold feet and was ready to back out of the sale, unless he was guaranteed to work for another five years as a full-time associate. This of course was unacceptable, as the practice could only support one full-time dentist. The selling dentist realized that he didn’t have enough funds put aside for retirement so he needed to keep working. A dentist who pulls the plug on a deal after months of negotiations loses total credibility. Make sure you have a solid transition plan in place before you put up your practice for sale.

If are thinking about transition, give us a call. Over the last 25 years many dentists have called us to quarterback their practice transition. We take a business approach to practice transition: practical, no-nonsense, creative and cost efficient.

6. Problem: Declining income! Solution: Get a partner!

When a business loses market share, and feels the profit squeeze, a common solution is to sell a portion of the business to a working partner in exchange for much needed capital and business expertise to help reverse the declining fortunes of the company.
The same rationale applies to the dental practice as well: To find a compatible colleague to join the practice as a co-owner, who contributes needed capital to pay for the overhead costs, to invest in up-to-date technology and business systems to increase new patient flow. As an additional bonus, the selling dentist will also realize a portion of the practice value at today’s top prices.
The prospective purchaser of a fractional share in a practice must have a “scratch-start” mentality. Since he or she cannot expect any existing patients, the new dentist must be proactive in helping to bring in new patients. Improving the internal marketing functions, and extending the office hours to evenings and weekends can boost the new patient count quickly. The fractional sale model is opposite to the more common “associate buy-in”. In the latter concept, the dentist joins the practice as an associate and treats mostly the existing patients. At some time in the future, the associate purchases a portion of the practice, including patient goodwill. In a fractional sale, the new dentist does not pay for patient goodwill and makes the commitment to purchase after a short trial period.
Because of the sharing of ownership and control, it takes two committed dentists to make the relationship work. Historically the shared ownership model had a reputation of failing too often, due to incompatibility and lack of planning.
The key to a successful group practice is the sharing of the practice philosophies, and a written plan which expresses the expectation of the dentists, in terms of sharing revenues and costs, and the legal obligations regarding the management of the practice and the exit options.

Here the components of a successful fractional sale plan.

Consultation with the dentist and getting the decision to proceed.
Establishing the fractional value of the practice.
Preparing the clinic for the addition of new dentist
Searching for the ideal candidate
Preparing letter of Intent: purchase price, ownership arrangement, management, cost/ revenue sharing, buy-out provisions
Getting acquainted trial period (e.g. 3 months)
New dentist commitment after trial period: signing legal documents, deposit.
Full payment of purchase price once new dentist can afford the debt servicing (“buy-in point”).

The Buy-in point

Before the new dentist can pay the purchase price, he or she must generate sufficient income to service the debt, pay for the monthly overhead share, and also cover the personal and living expenses.

Generally, the trigger point is reached when the income earned as a part owner is equal to income earned as the associate in the previous year.
Illustration:
Collections for the year $500,000

Share of clinic expenses. (250,000)
Debt servicing. (50,000)
Net income before tax. $ 200,000

Previous associate income $200,000

The buy-in point is a gross production of $500,000. Once the new dentist reaches the $500,000 mark, he or she will be required to complete the purchase.

The income earned by the new dentist prior to triggering the purchase will be in form of an associate compensation, e.g. a percentage of collections.

The deposit will only be refundable to the new dentist, if the existing dentist cancels the deal prior to the payment of the purchase price. A typical provision in the contract is that the new dentist must trigger the purchase within two years.

The fractional sale model is a bit more complex than a total practice sale. However the rewards are great. It is a very effective solution to start a practice growing again.

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