A Transition Too Far
As is often the case, a great strategy can become a disaster if you don’t understand the consequences and risks. I received a call from a young doctor who wanted to buy an existing practice just 3 miles down the road from him. So far so good: Practice acquisitions can be a fast track to increased patients and production, and when done correctly, is a no brainer.
Here are the facts. The doctor in question had purchased a practice a couple of years back and is doing well. He is increasing his new patients, building a good staff, and improving his systems.
The practice that this young doctor is looking to purchase is just 3 miles away. The selling doctor is leaving for another state and wishes to sell everything. She has contacted and signed a contract with one of the big three transition companies and now the two of them are in the process of looking at the feasibility of making this work.
So far, this is a pretty simple situation. Now let’s look at how this can and probably will go sour quickly.
- The Broker Factor: Any practice being sold can be bought at a better price for both parties if not involving a third party broker. In this case, the broker relies on dual representation in order to maximize their own profits and manipulate the contracts for a quick sale. Problem with dual representation is that both parties pay. The seller is stuck with a 10% fee and a contract that limits their ability to get out of it or look for their own buyers. The buyer also pays a fixed fee. Coming from seven generations of attorneys, I can assure you that dual representation is frowned upon by the legal profession and is considered unethical. If you run into any broker suggesting that they can adequately represent both parties, run. So, the first problem is that we have a predatory broker pushing to maximize their commissions at the cost of their client’s best interests. Add to this that they have valued the practice at about 92% of the last 12 months production (unheard of and ridiculous) and are applying pressure to justify the value. I would love to help them see the error of their ways. Like real estate brokers, dental practice brokers are in this for the money. Plain and simple: They make promises they can’t keep at a price that is meant to benefit them more than either the seller or the buyer.
- The Halo affect: It doesn’t matter who you are or what you are considering buying, at some point it happens to us all. We have gotten so far into the process, we forget this is a decision best made based on facts and numbers. Once you fall in love with the process, you stop seeing the obvious pitfalls and dangers. In this case the young doctor had worked for the seller as an associate. Hopefully this article and the telephone conversation will center him enough to see the transaction as it truly is.
- Extenuating circumstances: In this particular case, the buyer (our client) has a nice office in a nice location with better signage and visibility than the seller’s office. Because of this, he wants only to purchase the patient records. The brokers response is to lower the price to only about 78% of the last 12 months production (again, ridiculous and over-valued).
- The Patient Factor: Forget everything else and consider the one asset you want most in this transaction: The Patient. If the patient doesn’t end up at your practice, you lose. Consider that this transaction is not a commodity purchase. You are not going down to the corner market to pick out 500 apples of equal quality, and pay the same price per apple, and take them home. The one person most important in this transaction will never be consulted. You strike a bargain assuming that like lost sheep, the patients will follow your wishes and walk blindly into an unknown situation with a mystery doctor and staff. Doesn’t happen that way. Patients vote with their feet, and a majority of them will resent the fact that they have been abandoned by their trusted doctor and relegated to a new office without being consulted. The average transition in which you buy a practice, move in, keep the staff, and maintain most of the systems and hours of the previous practice will be lucky if they retain 60 percent of the previous owner’s patients. Fact is that if you introduce any changes to the practice, that number will drop, along with losing most of the staff within the first year of the transition.
So what questions and concerns should you have before even considering this transition?
- Is your own practice in order and working at maximum efficiency and profitability?
- What is the value of the practice today? It doesn’t matter what the seller’s practice did three years ago. We are functioning today in a challenging economy and in this case an area where doctor to patient ratios are about 1:350 (it needs to be closer to 1:2000). The practice has been in a three-year decline in productivity and has increasing overhead costs with ever increasing competition. This will adversely affect what the practice is worth. Consider that most brokerage companies consider an “active” patient to be anybody who has shown up in the last 24 months, when a better benchmark would be in the last 12 months.
- What is the age difference in the buyer and seller? Like it or not, the sellers patients liked the seller as a doctor. Generally, a mature practice ages with its doctor. The age difference may tip toward not having as many patients actually transfer to the new doctor. Any age difference is going to cause the patients to question the prudence of transitioning to you.
- What is the operating overhead? Keep in mind that the selling doctor doesn’t have the overhead cost of a large note payment created by buying the seller’s patient base — but you (buyer) will. Never count on getting more than 60% of the patients to stay with you.
- Is there a difference in the gender of the doctors? Even the gender of one doctor to another is important. If the seller were a female and the buyer a male, you may find that the seller’s patients prefer to go to a female dentist. This means that the percentage of patients staying with you will diminish.
- What effect will there be when you buy the patients, but fail to keep the key staff or the location? Just buying the patients as opposed to buying and occupying the sellers practice means that you are losing a valuable asset in not keeping key staff from the seller’s office. This alone may diminish the number of patients transferring to the buyer’s practice by 20-30%. You need to consider that a number of patients will return to the old location only to find a new dentist and stay with them rather than move down the street three miles to your practice.
- Is there a better way of valuing and paying for the patients than a fixed amount due to an arbitrary valuation? One of the better ways of paying the seller is a reduced price for the patients along with about 10% of the treatment spent in the new office over a fixed period of time (12-24 months). In this way you have the selling doctor doing all they can to get the patients to move to the new location and continue to frequent you and your office in order to maximize the sale price. In other words, you both have a vested interest in this being a success when you both have something at risk.
- Is there a difference in the patient profile of the selling practice when compared to the buying practice, or the demographics of the area? If there is a difference in age, race of the general population, or gender of your existing practice and the sellers practice, you will find fewer patients wanting to transfer.
- Are there special services that the seller provides that the buyer is not trained to deliver? Ortho, sedation, implants…? Once patients come to expect a particular service, hours, or location, it is unlikely that they will settle for an office that comes up short. The more you are alike in systems, hours, and services, the more likely it will be that you will keep more of the seller’s patients. If you do find that the seller does 30% ortho but you do none, then consider breaking off the general practice by lowering the selling price to reflect the true value of the normal general service you would be offering.
- What is the type of practice you are buying compared with the practice you now own? Similar to number 8, it is unlikely that if one practice is managed care and the other fee for service, that the buyer and seller’s patients would be a good fit. It is unlikely that you will inspire the seller’s patients if the strategy or type of practice you have is not identical or close to the sellers practice style.
- Do the numbers add up even if 50% 0f the patients do not come over to the new practice? I wouldn’t even consider a transition unless you had 40-70 new patients per month now, with at least a 50% direct referral rate. If you fall short here, you will find that your inability to inspire your own patients will be magnified with the seller patients resulting in a dismal return on your investment. Don’t look for an external solution to an internal problem.
- What will happen if and when someone else buys the equipment and lease hold improvements and sets up to compete with you just 3 miles down the road? By buying only the patients, you can count on competition within a few months just down the street. Can you handle one more doctor to compete with in order to keep the patients you purchased?
Every possible scenario needs to be considered. This is a huge investment fraught with countless challenges. There should be a warning label on doing transitions like they have on TV shows with daring car races or stunts. “Don’t try this at home. All stunts were performed on a closed course by professional drivers.” Take the time to understand the nuances of transitions, hire the right people to advise you, and become an expert in order to always get a predictable, successful result.
Michael Abernathy, DDS