26: Practice Transitions

Chapter 26

Practice Transitions

For many people a job is more than an income—it’s an important part of who we are. So a career transition of any sort is one of the most unsettling experiences you can face in your life.

Paul Clitheroe


Objectives
At the completion of this chapter, the student will be able to:
1. Differentiate between a buy-in, a buy-out, and a cold start.
2. Describe the types of buy-in arrangements.
3. Describe the types of dental practices that are typically for sale.
4. Describe factors in locating a new dental practice.
5. Describe various methods of financing the practice transfer option.
6. Describe transfer considerations for each type of practice transfer option.
7. Describe tax implications for each type of practice transfer option.
8. Describe the typical process for each of the practice transfer options.
9. Describe the typical process that banks go through when evaluating a loan application.
10. Describe the information that loan officers will require for loan processing.
11. Define the more important factors used in evaluation of the economic state of a community.
12. Describe the typical series of events in negotiating a practice transition.


Key Terms
bank financing
cold start
depreciation recapture
immediate buy-in
intrafamily transfers
sweat equity
walk-away sale


Goal
This chapter will provide guidelines for the dentist to use when deciding practice options. Factors that affect a practice’s transfer will also be discussed.

Life transitions are a difficult, confusing, and exciting time for people. Most dentists now make several transitions in their professional careers. Often these are moves from one employment situation to another. This chapter looks at the transitions involved in changing practice ownership: starting a practice, buying an entire practice, or buying into a practice becoming a partner.

Selecting among these ownership transitions is in part a financial decision and in part a management decision. The buyer’s quandary is, do I set up a practice or buy an existing practice? If I buy a practice, I buy an ongoing business with existing staff, location, patient base, and cash flow. If I set up a practice, I have complete control over site and location, new equipment, and a facility that is what I want. I have to hire staff and generate patients, but both will be the ones I want. I will need to borrow additionally for working capital, but I am not paying fro patient base. From a purely financial perspective, spreadsheets can be developed that purport to show the outcome of the buy or start-up decision. These are based on the assumptions that the spreadsheet creator uses. They can show either outcome as superior. Generally, in more competitive dental marketplaces, purchasing a practice comes out ahead financially because of the built-in patient base and resulting immediate cash flow. In a less competitive area where the dentist can be busy from the first day, he or she does not need the additional cost of ­buying patient base. It becomes less expensive to ­establish a practice.

Most dentists will hire a consultant to help with the valuation, purchase, and transfer of a practice. A dentist may do this once or twice in his or her lifetime. A transition consultant does it many times each year. Usually the seller will hire a broker to value, advertise, and sell the practice. Most brokers charge a percentage of the sale price to the seller as a commission. (Some charge a flat fee.) Some brokers claim to work for both sides in a transfer. It is difficult to represent both sides when one side is paying the broker and the other is not. The buyer has a different advisor work with him or her. Although an added expense, it is worth it (financially and emotionally) to have someone looking out for the buyer’s interests in the process.

Starting a Dental Practice (Cold Start)

Advantages

Starting a practice is often called a cold start because the person is, literally, starting from the beginning. The advantages of a cold start relate to the fact that the dentist can make the dental practice exactly what he or she wants it to be. It is his or her practice, including business systems, practice philosophy, and managed care participation. The location, the design of the office, and the staff all will be what the dentist wants, not what a previous owner wanted. New offices and equipment need less maintenance and repair. New practices may be less expensive than comparable existing practices because the dentist is paying someone else for any “goodwill.” If the area chosen is in a high need of dentists, then the newcomer does not need to buy goodwill. If a dentist can be relatively busy from the beginning and grow at an acceptable rate, then he or she should not pay someone else for a patient pool.

The dentist controls the regional and specific site location of the practice. He or she may want to buy into a practice in a certain area, but if no dentists are ­interested, then he or she obviously can not buy in. Not so with a practice set up. Similarly, a dentist’s office design and equipment selection fits his or her individual criteria, not what is existing in the facility.

When a dentist starts a practice, he or she can grow professionally with the patient pool. Initially, the clinical speed will not be as great as later. (Clinical speed comes from decisions making, not just hand skills.) So clinical speed increases as patient pool and practice “busyness” increase.

Disadvantages

On the down side, starting an office from scratch can be more expensive because a dentist is are generally buying new equipment and supplies. Establishing a new practice takes time, often as much as 6 months from the idea to the first patient visit. If a dentist is not working or in school during this time, he or she has lost a half year’s income, adding to the expense. New offices take much time, effort, and headaches to develop.

A new practice has a lack of patient base. Depending on the area, it may be easy or difficult to market and build a patient base. Because of this, new dental practices generally have cash flow problems. New practitioners must borrow additional working capital (often about 3 months’ expenses) to weather this problem. Insurance plan participation currently drives dental marketing in many areas. These plans result in lower income from plan-fee requirements. This leads to lower cash flow and lower profit in new practices in these areas. Because of this, bankers are more wary of financing a practice that does not have a demonstrated cash flow.

Locating the Practice

The first problem a dentist faces is finding a location for a new practice. This is really two separate problems. The first is finding a general region. The second is ­finding a specific site.

Regional Location

Many new dentists have already decided when they entered dental school where they plan to practice. They are from a specific town or area and have always wanted to return to that area to practice. Their decision is easy. The tougher decision is for the dentist who has no ­pre-established region to move into. He or she has to examine his or her own desires and then do a lot of homework to find an area that meets his or her needs.

Site Location

Once a region, or general area in which to practice, is selected the next decision involves picking a specific site for the practice. Marketing gurus say that there are only three factors to consider in developing a successful business: location, location, and location. Although this is an oversimplification, it points to the importance of the specific site selection in practice development.

Visibility

The dental office should be easily seen by as many ­people as possible. The dentist should try to find a busy street or major thoroughfare to place the office. He or she wants to be seen often enough that he or she lies in the back of people’s minds. When people decide to look for a dentist, that dentist that they have passed by ­frequently is one of the first names that pop up. People have to know where the dentist is.

The dentist should invest in a good sign. He or she wants the sign to “cut through the clutter” of the other signs that compete for people’s attention. That is not to say that the dentist’s sign has to be the biggest, but it has to be as large as the others. That also does not say that he or she needs a flashing neon sign, unless the office is found on the strip in Las Vegas. Here a dentist would need flashing neon simply to be noticed. Signage is even more important if the office is tucked into a retail center or an office building. In these cases, the sign is the ­dentist’s drive-by visibility.

Accessibility

The dental office must be easy to get to. The dentist should imagine how a receptionist telling people how to find the office. He or she should be able to describe the location in fifteen words or less. “Right across from the hospital in the Doctor’ Park Office Building, Suite 221” is easy for most people to find. “Take Main Street south to the third light; right on Oak for 2 blocks, then down the alley on the left for 200 feet” is not easy. The dentist should be sure there are adequate parking and easy entrance and exit from the street. (Adequate parking is simply expected by modern dental patients.) If a dentist will practice in an urban area, he or she consider the location of public transportation. The dentist should also be sure that there are no physical barriers to entry (e.g., steps without a handicapped accessible ramp). In a new office, the dentist must meet building codes regarding disabled accessibility. The architect or designer will know the codes.

Table 26.1 Types of Locations for Dental Offices

Location Set-up Cost Lease Cost
Strip Mall Medium High
Major Mall High Very High
Medical Office Building High High
Individual Office Building Very High High
Leased Building Medium Low

Type of Site

There are many types of locations for dental offices, each with pros and cons (Table 26.1). Freestanding buildings, either owned or leased, are becoming less common as commercial real estate becomes more expensive. Medical office buildings are easy for the public to find, have ample parking, and lend an air of professionalism. The ­landlords are used to the specific needs of professionals, which can be helpful. These sites are expensive. Many of these are condominium-type arrangements, in which a dentist purchases the office and then pays a fee to the condominium association for maintenance and repairs to the building. Strip-type shopping centers have adequate parking and are generally on a major road, giving high visibility. They are relatively expensive. The landlord is usually responsible for snow removal and other common maintenance items, although the landlord generally charge the lessee (dentist) a maintenance fee to cover these items. The ­lessee usually must purchase and maintain heating and air-conditioning units. The dentist should check the types of businesses to which the landlord caters. The dentist probably does not want a pawn broker, tattoo parlor, or head shop opening next to his or her office. Large shopping malls are the highest cost location. Set-up costs are high because most retail space is not set up for plumbing, electrical, and other dental office improvements. Malls often charge high rent and sometimes a percentage of gross sales. The dentist should try to negotiate this out of the lease. Like strip centers, the dentist is usually responsible for utility upkeep. General office buildings may be the least expensive alternative. Location and parking may or may not be optimal. The advantages of these sites are on a case-by-case basis.

Zoning

Before a dentist signs for any property, he or she should be sure that the zoning will allow a dental office in the site. The dentist should take care, particularly in residential areas, that he or she has the go-ahead before committing any money. Zoning changes do not always go as expected. Legal fees can mount quickly if a citizen’s action group or another developer wants to challenge a zoning request.

Developing the Facility

Once a location has been decided on, the dentist must develop the facility in which he or she will practice.

Lease versus Buy

Most dentists today lease space for their office. Many who do own are owners in a condominium ­arrangement. Many owners believe that owning their own building insulates them from problems of landlords. That is true, but it brings the problems of ownership. When the plumbing breaks down, the dentist is responsible for ­fixing it. Tax laws have been change to reduce the value of ownership.

If a dentist is going to lease, he or she should be aware that most commercial property is priced on a square-foot-per-year basis. “Thirteen dollars a foot” for a 1,000-square foot office is $13,000 a year, or $1,083 per month. Depending on the state of commercial real estate in the area, the dentist can negotiate specific clauses into the lease. He or she wants the landlord to pay as many ancillary costs as can be negotiated. These include ­general maintenance, plumbing, heating and air ­conditioning, snow removal (if appropriate), and cleaning of the common areas. Leasehold improvements (improvements that the dentist makes to the landlord’s property) are expensive for a dental office. This is largely because of the extensive plumbing needs. (Each ­operatory requires hot and cold water, waste, air, vacuum, nitrous, oxygen, and electrical outlets.) Many dentists have negotiated a given amount (e.g., $10,000) for leasehold improvements. Others have gotten several months free rent while the improvements are being ­completed. When a dentist negotiates any of these items, he or she should be sure that these items are written into the lease. The landlord may be noble and true. However, if the landlord sells to another party, there is no record of verbal agreements. Many landlords want a professional office in their space. Dentists are excellent, high-class, long-term tenants. So the dentist does have some bargaining leverage.

Designing the Office

The dentist should get a book on dental office design and visit as many offices as possible, asking the dentists for suggestions to improving their space. The dentist is going to have to live in the space for many years to come, so he or she should make it a place with which he or she is comfortable. The dentist should consult an interior decorator or designer to assist with color and wallpaper selection.

If the dentist is building a freestanding building (shell) from scratch, he or she should probably will use an architect or construction engineer that is familiar with the needs of dental office construction. Most full-service dealers have one or more people on staff who are familiar with dental office design. Most will work with the dentist and do the design free (or a nominal cost) with the understanding that the dentist is going to buy the equipment from that dealer. These dealers may also help a dentist find space. They know the building codes related to dental offices and the requirements for inspection and certification for a particular state. They may even have several general contractors who they have used that are familiar with dental practice construction.

The dentist should let the designer know what he or she wants in an office design. The designer will probably bring a couple of preliminary design for review. The dentist should study the designs to find the features of each that he or she does and does not like. The dentist should then take suggestions back to the designer. The dentist should continue doing this until he or she is happy with the design. Once construction begins, changes become very expensive. The dentist will probably want a general contractor if he or she is making substantial changes to an existing office space. The equipment dealer can help the dentist find one.

General Design Decisions

There are special design criteria for operatories and X-ray areas. The dentist should decide if he or she wants open operatories or closed rooms. Either one works, depending on the dentist’s style. Pass-through X-ray heads save costs, if they can be designed to reach chairs in both operatories. They often can not. The type of equipment that a dentist buys may determine, in part, the design of the operatories and support areas. Traffic patterns should be made convenient for patients, staff, and the dentist. The dentist should be sure to place high traffic areas near the front, making patient traffic ­patterns as short as possible. This also relieves congestion in hallways. The hygienist probably will see more patients a day than the dentist. Therefore, the hygienist’s operatory should be nearer to the patient reception area.

The dentist should have a centrally located ­sterilization area. He or she will need a large counter space for breaking down trays and cassettes; a deep double sink is used to wash instruments; another counter is used for packaging and autoclaving; and more counter space is needed for preparing and storing sterile trays and ­cassettes for use in the operatories. A dentist will need a minimum of 10 to 12 feet of counter space for efficient instrument sterilization. If the dentist has cabinets below and above the counter space, he or she should have enough space for office sterilization procedures. Many people use the lab for this space. Separate areas, ­however, are a better idea.

Some areas are low-use areas. These should be kept away from high-traffic areas. Staff lounge areas and mechanical room are often noisy and smelly; those should be kept away from patient treatment and traffic areas. Private offices are luxuries and should be kept out of the traffic flow as well. If a dentist is in a stand-alone building or a freestanding office, he or she needs public restrooms. These restrooms should be near the patient waiting room but under control of the staff. (It is ­amazing what kids try to flush down the toilet.)

Most designs do not have a large enough business office area. A dentist needs significant counter space for electronic gadgets, such as a computer, printer, fax, copier, answering machine, and maybe an old-fashioned typewriter. The more storage, the better off a dentist will be. As patient chart numbers increase, so do storage requirements. Front office personnel should not make collection or other private patient calls within hearing of patients in the reception room or treatment areas. The dentist should have a separate room, near the business office but closed off with a door, for making these telephone contacts. There should be a counter, at elbow height near but out of the patient flow, for patients to write checks. It should also include a pen.

The reception area should be just that. Patients should be received there, not made to wait there. If the dentist and patients are both on time, there is minimal waiting. Rural practices and practices that see many children will often have family members waiting for the patient receiving treatment. In these cases, a larger waiting room is useful. The dentist is the best judge of the practice area. The lab is a seldom used area, and so should be put in a peripheral, low use area. The same goes for the private office. If a dentist is sitting at a desk, he or she is not seeing patients or generating any money. The office should be a low-priority, low-use area as well. Many dentists like a consultation area for patient treatment plan presentation and financial arrangements. If the dentist wants one, it should be a ­separate room near the patient traffic flow area.

Ordering Equipment and Supplies

If a dentist purchases new operatory equipment, he or she should be sure to order it at least 2 months before it is needed. Most of the equipment will be in stock, but there may be one critical piece (like a compressor) that is back ordered. The equipment supplier will help the dentist by providing lists of instruments and materials. The dentist will also need to order business office ­equipment and supplies, including accounting packages (peg board or computer), patient records, and office stationery.

Staffing the Office

The dentist should begin to staff the office at least 6 weeks before opening. This assumes that it will take him or her 3 weeks to find the right people, 2 weeks before they can come to work, and a week of training and ­preparation. Friends and family should be used to have mock patient visits and phone calls to prepare for the first day of patients.

The dentist should try to find an experienced front office person at the beginning of practice. An ­experienced person can help to set up the office systems and remember forms and procedures that the dentist does not know. Eventually the person may leave, but by then, the office will be functioning smoothly and the dentist will be much more knowledgeable of how he or she wants to operate.

Financing the Office

Most banks and finance companies will qualify a dentist for a line of credit. The dentist then taps into this line any time a bill comes due. The dentist should be sure to establish a line of credit for working capital as well. As a rule, he or she should plan on 3 months’ expenses as needs for working capital.

If a dentist is going to own his or her own building, he or she will probably need to arrange financing. Banks are generally willing to lend 80 to 90 percent of the cost of appraised real estate. The dentist will need to come up with the remainder as a down payment. If he or she is also buying a practice or equipping an office, the dentist may be entering more debt than the banks will allow. The mortgage is generally paid off in 20 years and the building depreciates over 30 years. The dentist will proportion the cost of land and building. Building is depreciable. Land is not.

Buying an Existing Practicing (Buy-out)

Types of Practices for Sale

Dentists who sell their practice typically fall into one of six groups. Understanding these groups is important so that the buyer can negotiate more effectively for the practice.

Retiring Dentists

Retiring dentists make the first group. These older dentists are usually more concerned with finding the right person to care for their beloved patient pool than in getting an excellent price. Depending on their personal practice style, they may have a large portion of the patient pool that needs advanced periodontal and restorative needs. The new owner–dentist will need to continue carefully with these patients to introduce them to the advantages of modern dentistry without appearing to insult the former dentist as providing out-of-date dentistry.

Young Dentists Changing Career Paths

Many dentists who have been in practice for several years decide to change their career paths. This often involves going for specialty training or may involve moving to the military or public health career options. Depending on the history and price of these practices, they can be an excellent opportunity. The buyer should be careful if the practice has shown good growth and profitability bec/>

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Jan 4, 2015 | Posted by in General Dentistry | Comments Off on 26: Practice Transitions
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