Before any big game, football coaches play and replay films of the opposing team. They learn the weak and strong points of their adversary before they even walk out on the field. They understand that there has never been “just another game” if winning is where you plan to end up. In that vein, let’s take a look at the assemblage of experts that each of us should take advantage of before you step onto the field of purchasing that practice for multiples of profit in just the first to second year. Keep in mind that we have first time owners as well as seasoned owners looking to add a practice. As strange as it may seem, even the long-time owner fails to plan and execute at the level it will take to ensure profitable success in the shortest time possible. The reason for mentioning this is so each of you do not assume anything. Take the time to dot the “I” and cross the “t” in each and every step you take on this journey. There are no free lunches or short cuts to success. Master the basics and reap a new and better financial future.
Each of you will need a qualified CPA. When I say “qualified”, I have a tendency to admit that any CPA understands spreadsheets and most tax implications. On the other hand, few, and I mean almost none of the CPAs I run into, have an intimate knowledge of what can make a dental practice remarkable in the eyes of the consumer and profitable in any economic situation or location. It is this disconnect of not understanding the business of dentistry that cripples the advice you might get from your CPA, and for most of you, they don’t offer any advice. With this in mind, I would take the necessary time and shop for a “qualified dental CPA”. Not only proficient in taxes and GAAP (Generally Accepted Accounting Principles) documents but possessing the depth of specific knowledge in the dental field to actually act as a consulting advisor on all things dental. This type of CPA will partner with you in your journey to profitability. They will also go far beyond the traditional relationship you might find from most CPAs. If you have not found one, start your search. They are difficult to find. Lose the myth that they need to be down the street from you. In actuality, these special experts are few and far between and it does not matter where their office is physically located. If you have no idea where to begin, allow me to give you an endorsement and suggestion of one of the best groups I know. Duckett & Ladd Dental CPA and Advisors, 417.883.6390, [email protected], [email protected]. You will not be disappointed.
Next, an attorney. Like CPAs, most attorneys are competent. But few are experts in the dental field. As many of you know, I was the first male in 6 generations not to be an attorney in my family. Even my brother and daughter are attorneys. Most attorneys are very familiar with contract law, much like a dentist is familiar with biology and chemistry. We have studied them a lot, understand a lot, and know where to go to find something that we have forgotten. With this in mind, I have yet to meet an attorney that didn’t think they could draft a great contract of sale, operating agreements, stock documents, and corporate papers. So, most attorneys are knowledgeable, but few are experts in the field of dentistry and healthcare in general. This makes a difference in that anything an attorney drafts in the form of a contract, must be reviewed with the idea of whether or not it has addressed any possible issue or occurrence in the future. Similar to a will, (that really isn’t tested until you die) a contract isn’t really tested until something bad happens. It is not until it meets a challenge and survives that we really know whether or not we had a true expert draft exactly what we needed. Great contracts create remedy for any future challenge. This is where we separate the good from the great. An attorney is only as good as his/her understanding of the business he/she is trying to protect. So, once again, find a great attorney for your dental needs. We will continue to revisit this topic when we actually purchase the practice, create corporate papers, and draft employment contracts.
Next, and in some circumstances maybe one of the most important people we need to find, is our banker. Every business deal comes down to a final, show me the money moment. Without great relationships with your bank, the deals will not happen for most of you. Please consider that your banking relations tend to circumnavigate your entire life. While we are talking about a practice purchase and perhaps some real estate, finding a great bank, along with a trusted loan officer, committee on loans in the bank, and an intelligent business mentor, is key to successful practice and long-term financial advice. One more time, let me remind you that I am writing this to existing practices that are expanding as well as first time purchasers and dental students still in school. Once again, we will revisit the details of this relationship with a banker but let me remind everyone of a few facts in the lending segment of banking. Each and every one of you will be put under a microscope because any bank considering a loan will look at a few standard issues to qualify you for the loan amount. In fact, each of you need to know how much money a bank is willing to loan in a practice purchase. It will be sort of like looking for a new home. Why would you look for $750,000 homes when, based on many factors, you only can qualify for a $400,000 home loan? I can’t count the times that some doctor has sent me data on a purchase, only for me to discover that the doctor has no idea whether or not he or she might be able to get that size of loan. Here are a few things the bank and you will and should consider.
- Debt to income ratios. In relation to debt from student loans, every bank wants to know you have a plan to repay or, are repaying your student debt. They are looking at every expense you have to determine if you will be able to service the debt of a practice purchase. Currently I see most students with student loans of $325,000 to $500,000 plus. This amount, along with how you plan to service debt, is right at the top of most banks interest in determining what type and amount of loan you might qualify for.
- Personal financial history. This would be the cars, homes, credit cards, and any other loan history you have accumulated. Basically, your traditional “life suck” expenditures. What habits have you formed as well as how well do you budget expenditures and savings? (You do have a substantial amount of money in savings, right?)
- Assets, indebtedness, and liquidity. Not all assets and debt are the same. In fact, most, if not all banks will look for your ability to supply collateral for the loans. This generally comes in the form of paid off assets that have market value, or a cosigner that is willing to pledge assets against the note to ensure, in the bank’s mind, that they have limited their risk and ensured you can service the debt. Banks always, always, always, have a ceiling on what they will loan based on the facts of the purchase and your financial where-with-all.
- A business plan. Gone are days that you can call your banker and just ask for money. They want to know why you want or need the money as well as what are your plans for this new venture. Most banks have gotten burned enough that they have their own internal appraisers, protocols on various types of loans, and their own financial limitations based on the timing of the loan, amount, and risk level for the type of loan you are asking for. In fact, there isn’t one bank that will ever look at an appraisal from a broker or appraiser on a dental practice. They understand the numbers and will always find and follow their own appraisal of a deal regardless of what the so-called experts say. Don’t be surprised at the time it takes for them to commit, the range of interest rates they are willing to offer, as well as there being a ceiling limit on the amount as well as a limitation on how quickly they can commit and deliver the funds. This is not something that you research after finding a practice. In fact, most brokers will, in the case of new buyers, want to see a letter from your bank that you can qualify for a particular level of investment for a practice sale before they will send you a package for the sale of a particular practice. As we move through this journey, I will revisit what your bank and seller will need from you during the purchase of this practice.
- A Broker. This is a tough one for me to discuss. Many of you will approach a broker in the process of locating a sale. From my perspective the broker offers little to the buyer and in most cases is an impediment to a quick purchase. Keep in mind that most brokers are receiving a 10% commission from the seller. In other words, their interest is not your interest, and their primary concern is closing the deal as quickly as possible. They are not your friend in this negotiation process and many times are more of a hindrance. The broker will never want to speak directly with the seller. Seems strange, but I get push back every time I try to go directly to the owner. These folks are many times just a necessary evil on the road to finding a practice. We as dentists don’t really need a middle guy who skims the profits from the seller and in some ways is only there because he has a seller, a twelve month contract to perform, and a lead on someone that wants to sell. A better way would be a website that acted as a multi-listing service with every number, photo, data, and history you would need to make an offer on the practice. Sadly, that is rarely the case. With this said, I will show you how to find practices, cut out the broker, and close deals in a matter of weeks and have both the purchaser and seller happy about the transaction. I am 100% sure that I will get hundreds of texts, emails, calls, and Facebook posts on how wrong I am about the saintly “broker”. Don’t bother, it will not change my mind or my aversion to working with them on a sale. I will say there are some exceptions, but like real estate agents and consultants that were sheet rockers and high-powered salespeople yesterday only to magically turn into the latest greatest consultant, broker, advisor, and mentor today, I would just as soon not have encountered them in my business dealings.
- A mentor. If you live long enough, you will have collected many coaches and mentors. Many were people that you never really knew but were models for successful changes in your life. Finding a dental practice, creating a culture, becoming a leader, and creating a profitable business all lend themselves to using a mentor or coach. Many of these mentors are not dentists and not even in the dental field because you will find that any business that is successful and driven by consumerism is a candidate for you to watch, learn from, and “dentasize” their success so that bits and pieces are added to you own practice.
Last time I gave you a link to our proprietary Growth Analysis Spreadsheet. We will take an example next time and show you how to start the search. For those that already own a practice, it would be great for you to fill out this sheet on your existing practice as you go through looking at the example, I will show next time. This should allow you to self-diagnose your own practice while you learn the meaning of each data point that we will use to find the upside and downside of purchasing a great “for profit” new practice.
Michael Abernathy DDS