AFTER THE SALE (PART 2)
This is a continuation of last week’s post titled, After the Sale. We are discussing the email below received as a response to an earlier blog entitled The Associate Pay Myth.
Mike, Great article about associate pay. Could you write an article about retiring dentists who sell their practice and want to stay on as a part-time independent contractor for a couple of years. Compensation rule of thumb? 30-35% collections minus 30-35% of their lab bill? Also pay their own payroll taxes, malpractice insurance, retirement contributions, CE, etc.?????? Current overhead is 60%.
To recap, he has actually posed four questions concerning:
- Selling and staying on.
- Employee or Independent contractor status.
Let’s assume that this is the rarest of rare situations and none of last week’s blog applies. Question two suggests that a seller could work as an INDEPENDENT CONTRACTOR as opposed to an employee. In this case a general dentist working for another general dentist.
The IRS says you are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. You can’t supply an independent contractor with tools, fee schedule, determine their hours, provide staff, etc. If an employer-employee relationship exists regardless of what it is called, you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax. www.irs.gov Topic No. 762 Independent Contractor vs. Employee goes into great depth and should make it apparent that this classification for this type of situation will not stand the scrutiny of an IRS audit.
In this case, this doctor would have to work as an employee, with an employee contract as well as a pay formula, schedule, and staff sufficient to perform the duties of an associate dentist. This brings another question to mind. In most cases a selling older doctor does not have a huge or any debt left on their practice at the time of sale. On the other hand, the associate hoping to buy the practice will certainly have debt. If they borrowed $700,000 for a 10-year note at 5% the monthly payment would be $7,424.59. An average practice today typically has an overhead in the range of 67% to 75%. Even if the purchased practice was better than average and had a 60% overhead, based on $1,000,000 per year ($83,333 per month) that note payment of $7,424.59 represents an increase of 8.9% in overhead. So now instead of 60% we are up to 69% overhead and that’s if there are not any capital improvements needed after the acquisition or increases in any other overhead category (signage change, purchase practice management software, replace or add technology, line of credit for overhead expenses, etc.). Every penny counts and now we have to consider the wisdom of even bringing on an associate with this type of overhead.
If you read my article on the determination and pay of an associate (The Associate Pay Formula Myth), you already know where I am going. The selling doctor in his email suggested a range of pay percentages as well as benefits, lab, and other considerations. In the example in the previous paragraph we have a practice with at least a 69%+ overhead. Financially speaking, there should never be a situation when one would consider an associate if the overhead is 63% or higher. The numbers will never work. Not having at least 40-70 new patients per doctor would nix an associate as would any physical capacity limitations. Considering that Heartland pays 25% to their selling doctors, I would say that 30%-35% for a selling doctor who got a fair fee for their practice but decided to stay is unwise and undoable for the buying doctor. In this case the most this young buyer could pay and make a profit of even 5%-10% is about 21%-26% of Net Adjusted Collections (don’t forget the taxes, benefits, etc.). Considering what we discussed last week, none of this even borders on sound financial/business sense. I don’t know the practice, have not seen the numbers, or the sale contracts, but this would be a rare transition indeed if it made sense in any way to keep the senior doctor on.
The only way this would work is if the buyer was paying cash with no debt, the office was in “the best” location in the world, and there was the probability of unlimited new patients and growth. The seller (now employee) would only be given a day or two a week on the worst consumer day with the least talented assistant. I was joking here but not by much. Now think back on the first article about why the buyer would not want the seller to stick around. NOTE: Seller, if you are an employee, you can easily be terminated with or without cause with little or no notice depending on your state and your contract. If you go down this road as it was presented in the email, prepare for an early departure and the inability to simply remain a patient there due to the ill will that will likely occur.
How, if we had a magic wand, could we have improved the outcome for the selling doctor? The seller could have done a stock transfer for a majority but not all of the stock of his corporation (hope he was incorporated and not a C Corp.) with a maximum tax of 20%. You would give up control, but could guard your position and never be fired as an employee could. You could work on your own schedule, use the staff you chose to work with, and continue this for as long as you want. This would give you a greater “net in your pocket” sale, while insuring you could work until you wanted to quit. There are problems, and if I were the buyer, I wouldn’t like it, but there are options.
If any of you have questions about transitions for associates, strategies for partners or exit strategies, please direct them to me. This is how you Summit.
Michael Abernathy, DDS
PS. The Revised and Expanded 2nd Edition of The Super General Dental Practice book is now available. If you liked the original, you’ll really love this one. If you missed the original, you don’t want to miss this one. Order yours today by clicking on this link.