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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

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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

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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*

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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

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Thank You!

Phone: 281-362-1707 Email: houston@dentaltransitions.com