Dr. John Ward has over 40 years experience providing dental services in all phases of dentistry and all ages—ranging from 18 months to 99 years of age. When presented with an opportunity for selling a dental practice, he put his trust in ddsmatch Southwest. Below, Dr. Ward explains in his own words, why he trusts ddsmatch Southwest and why you should too.
How did you come about deciding it was time to sell your practice?
I’ve known Andy [Edmister] since he was in college, and he now has a daughter in college, so I’ve known Andy for a long time. Andy came into my office one afternoon, the Thursday before Labor Day of 2014. At the time, Andy was selling large dental equipment, so I thought Andy was coming in to talk to me about selling a quarter of a million dollar x-ray unit. Andy walked in, said, “Doc, can I talk to you?” I said, “Sure.” We walked back and he said, “I’ve been working with the sale of Dr. X—I’m not going to use her entire name—Dr. X’s practice, and she said you might be interested in selling your dental practice.
At the time I had two full-time jobs. I was working my dental practice, and then on weekends I was driving 200 miles to work in a federal prison in Pecos. My normal routine was Tuesday, Wednesday, Thursday, Friday until 1:00 in my practice, take an hour’s break, drive 200 miles and then work 50 hours over the next three days, three-and-a-half days, and then do that week after week after week.
I looked at Andy. He said, “I heard you were interested in selling your practice,” and I laughed. We had a calendar on the board, one of those permanent calendars you erase and mark in. What I remember was that Labor Day was September first. I had September, October, November. I pointed to the last Thursday in November and I said, “Andy, in the next three months, that is my day off. I have one day off, Thanksgiving, in the next 91 days.”
Andy said, “I have a young man who might be interested in purchasing your practice.” And I said, “Well, I have no interest in selling my practice, but I have no interest in not selling my practice.” He said, “Well, he’d like to take a look.” I said, “Okay, Andy.” I was going to be heading to my other job the next day, so I said, “Here are the keys. You’re welcome to come in, look around the practice, see what you want.” Because I knew Andy, so I didn’t have any problem with the trust issue. I said, “Talk to me later.”
As it turned out, about four or five days later Andy stopped back in and said, “The young man is interested in buying your practice.” At the time, I owned the practice and I owned the building. Andy said, “Are you interested in selling the practice?” I sat there, sitting in a room with Andy, and I said, “Okay, Andy. If I sell the practice I’m selling the building. I don’t want to be anyone’s landlord.” What I didn’t want was if someone bought the practice and six months later walks out and I’m stuck with it, or if someone wants some changes in the building, and then you’re arguing over whose issue this is and that is.
I said, “Andy, here’s my number. This is what I want to walk away with.” I said, “I want full price for the building because it’s in a great location and there’s no need for me to give a bargain on that.” But I said, “I’m going to give a bargain on the practice because the equipment, even though it’s great equipment, is older equipment, and in the next three to five years he’ll have to replace a certain amount of it. I don’t think it’s fair that he should pay top price when he’s going to have to do that.” Andy said, “Sounds good to me.”
I said to Andy, “Andy, I don’t care. I don’t know what your percentage is, I have no idea, but this is what my number is.” Andy said, “Okay.” Then, over the next eight weeks, Andy worked very hard to put the package together. There was some issues going on because, since I had not planned to sell the practice, I had not prepared all the financial stuff. When they went to the bank, the bank wanted certain stuff that I had not prepared because, as I said, it was not my original intent to sell the practice.
Andy worked very hard to get all that together to obtain that, to help me to put that whole package together, so that the buyer could go to the bank and present it. Once we knew what the bank wanted, it was very easy in putting the package together because it was a solid, profitable practice. Part of it was based on my tax statement. You get towards the end of the year, you’re thinking, “Okay, I’m going to pay this much in taxes, so I need to buy this and do this so that I lower my tax liability.” The bank was looking at some of that thinking, “How could you be so profitable and have this tax setup?” Because I’m smart enough to know that I don’t want to pay taxes. Andy worked with me to get all the correct numbers so that when it went to the bank, it was an easy flow.
I then sold the practice on the first Monday of November. This went from essentially the beginning of September to the beginning of November, which was a two-month timeframe. Andy put this whole package together. When I left the practice, I then was working only in the prison, and that was pretty nice because now I had a pretty sweet job, only working one job.
Then at the end of July of 2017, the prison closed, and now I’m in East Texas, in Longview, Texas, working in a very busy fast-paced practice. Andy has come to me a number of times and said to me, “Doc, if you’re looking for any positions, I have positions open. I have positions available, and you know that I’d be tickled pink to move you into one of those.” I said, “Andy, right now I’m in a great position.” Andy has always been very, very supportive, very thorough, very proactive. I thoroughly, thoroughly enjoyed the process. He made it easy for me, and I couldn’t think of a better person looking in retrospect to have handled that than Andy. I give him all the kudos in the world because he handled that with smoothness, with grace, with intelligence. It was handled very, very well.
It sounds like you would definitely recommend them ddsmatch Southwest for selling a dental practice.
Oh, I would definitely recommend, definitely.
As a seller, what do you think are the main reasons that someone should choose ddsmatch Southwest?
Andy handled everything on a very personal level. Your issues were his issues. He did a really good job of balancing the concerns of the buyer versus the concerns of the seller. I know in my case he picked out a young man whose desires were very compatible with my practice. He helped the young man when the young man was running into some barriers because of what I supplied being much more rudimentary than most people would need. I will tell you that he’s not going to let anyone else get away with what I did, but Andy knew me on a personal level. Andy handled it from both sides in order to make it easy for the young man to be able to obtain the loan and for me not to have to get overwhelmed with all kinds of paperwork and bureaucracy.
It sounds like Andy is pretty patient and that working with him was very comfortable.
Very comfortable, very comfortable.
What kind of advice would you give to people thinking of selling a dental practice? Looking back, is there anything you wish you would’ve known?
Like I say, I was very lucky because Andy handled this for me. The funny thing was that I had known Andy for years and Andy was a friend. I don’t think I appreciated that, and it’s not a bad thing. Let’s put it this way, looking in retrospect, I appreciate more how hard he worked and how he was in my corner looking out for me, because I really had no idea on anything. Mine was, okay, all of a sudden one day I’m working and the next day I’m selling my practice. I just happened to find someone … and this is the way Andy is.
Like I say, I’ve known Andy for years. He’s an honest, straight shooting, very heartfelt person. He’s looking out for your best interest and he did that with me. On the other hand, he looked out for the best interest of the young man who bought the practice. I don’t think the young man who bought the practice appreciated that until he had the practice for a couple of years. I think it finally occurred to him, especially as he started talking to friends of his who had purchased other practices and who had used other brokers and realized those people weren’t looking out for my best interest. Andy did a great job of the balancing act and looking out for both the buyer and the seller.
As I said, the thing that was amazing with me was that I absolutely knew nothing, but absolutely had an amazing experience, and that’s because Andy took good care of me. Looking back, I wouldn’t know … Like I said, because it was handled so well, the experience was a totally positive experience.
He’s a good guy. He looks out for his clientele.
Selling a Dental Practice is Better with ddsmatch Southwest
Just as with Dr. Ward, ddsmatch Southwest can help you both prepare for your practice transition, and throughout the transition itself. First, we offer a free, no-obligation Practice Transition Assessment. If you are considering transitioning in the next five years, we’ll meet with you, look at your practice, and discuss what you should be thinking about with your specific market and whether there are investments or improvements that will get you the most out of your sale.
Second, we’ve assisted hundreds of dentists from across the country transition their practices. We’ve taken that experience and created a Trusted Transition Process—a clear, consistent path to selling a dental practice while maintaining the legacy you’ve worked so hard to build.
https://www.ddsmatchsouthwest.com/wp-content/uploads/2018/10/3-selling-a-dental-practice_HERO.jpg6281200adminhttps://www.ddsmatchsouthwest.com/wp-content/uploads/2018/06/DDSMatch-buy-a-dental-practice-sell-a-dental-practice.pngadmin2018-10-17 05:00:532018-10-31 18:46:49One Dentist on How ddsmatch Southwest Came Through in Selling a Dental Practice
RK: Randy Kinnison with ddsmatch Southwest, just wanted to thank you for being with us today and answering a few questions that we’d like to share with our potential clients and customers. If you would just please introduce yourself and kind of describe the relationship that ddsmatch has with Blue & Co. and the business valuations that you guys prepare for us.
MH: Good morning Randy, and thank you for the time. I’m Matt Howard with Blue & Co. I lead our business valuation team. We do approximately over a hundred dental evaluations a year for ddsmatch and other dental needs. We’ve just really carved out a nice niche in it and have a lot of fun with it. I am a dental CPA and also an accredited business valuator and a certified valuation analyst. So, I have certain credentials that are specific to valuation. Our relationship with ddsmatch Southwest is, we are the third-party, non-biased valuator that comes in and gives you a true market test for what your practice is worth at the date of our valuation. We’ll be looking at the practice from an industry perspective trying to help both seller and buyer know what a true fair market value price is for the practice.
RK: Thank You, Matt. Just describe a little bit about the BV [business valuation] and what it entails. I know the first part of the business valuation always has the historical numbers of the practice as well as the performance. So, if you would just tell us a little bit more about the BV and what it entails.
MH: Certainly. With any small business or personal service company, the biggest noise in the practice would be the owner’s noise. What I mean by that is anything that’s inside the practice that is not necessarily operational or is basically something that the owner has decided to do at the practice that doesn’t exactly reflect the operations of the practice. A lot of times a seller will own the building, and in owning the building, they’ll pay themselves a lease rate for that building. Sometimes, that isn’t a market rate. And sometimes, it’s a little bit above; sometimes, it’s a little bit lower. Our job in this process is to really work through the practice to make sure it shows the historical financial statements. Basically, we help sanitize or normalize the numbers as we see them and as the true operations of the practice are reflected. So, our part in the valuation process is we will collect data. We’ll go through the data. We’ll enter it into our models. We’ll ask very specific questions about that data about maybe aberrations and the financial performance over time. Sometimes, a dental supply category jumps ten percent over a year. We want to really understand everything that’s going on inside the practice. Then as we go through it, we would release a draft document for discussion with the seller. That document would be completely … a conversation piece to talk about the variables that we took into consideration, the market effects that impacted the valuation price to really just helped you understand exactly how we came up with that number. And then after that conversation, with any input from the seller, we’ll move it to a final, and then that will be the piece to share with any potential buyers as they consider the practice.
AE: That’s great, Matt. Hey Matt, Andy Edmister here jumping on the call with you. I have a few more questions. Thanks for joining us today. Matt, when would you recommend a dentist start preparing for a sale? And, why would you recommend him at that time?
MH: Yeah, a great question. I wish it’s a question that a lot more sellers kind of investigated not the year before they’re considering the sale. So, some things to take into consideration is knowing yourself and knowing what your aspirations or your goals are for the practice transition. What I mean by that is, a lot of dentists will wait until they’ve slowed down some, and we have something called a decreasing revenue stream, that’s where the collections slowly over time have started to decrease. That’s just basically reflective of the seller or the owner wanting to start to slow down. There’s nothing wrong with that if that’s an intentional decision you want to make. Unfortunately, when we see that in an evaluation, and even when banks see that in our evaluations as they consider financing this for a buyer, it does have to be taken into consideration. So, a decreasing revenue stream in the valuation world is not exactly ideal. More of what we like to see is if they’re an immature practice that’s either consistently growing by inflation or at least steady in the collection perspective. So, as you understand who you are and what your goals are, I do think it’s an important thing to consider when to sell and maybe selling before we start decreasing your output or decreasing your hours. That’s the first key. I would say anywhere from five, maybe even a little bit over five years, would be a good time to meet with your ddsmatch Southwest broker and start discussing what you want to do in the future and what does that look like in your mind from an ideal perspective taking all the different desires that you have into consideration. They’ll be able to help you walk through when may be a good time to even bring in an associate; or maybe when it’s a good time to think about something; maybe a couple of years before you thought you would; just so that we don’t run into that decreasing revenue stream which would impact the valuation price.
AE: Okay, that’s great advice. Basically, to sum it up, keep your foot on the gas until you get through the evaluation and the transition of the practice to maximize the value of the dentist’s practice.
MH: Precisely, I couldn’t have said it better myself. Yes, trying not to minimize the fact that yes, you want to slow down; however, you also want a good price for your practice. Obviously, those two things go hand in hand.
AE: Okay, well, thank you. I’m gonna move on to another question. The question pertains to purchasing in a practice or doing a de novo or startup practice on your own. What do you see is the benefits of each or the cons of each; and what would you recommend to a new dentist client of yours.
MH: A great question. And, a question that comes up quite often. As a person coming out of school, the ideal part of buying a practice is the fact that you’re walking into cash flow day-one. What I mean by that is, you are paying a fair market value price for the practice; and then, you’re making money. You’re walking into, hopefully, a three hundred, four hundred, five hundred, and up thousand dollar collection practice which helps pay your bills day-one. That’s an obvious benefit of buying a practice. The problem with starting a practice is this: it’s a three to sometimes seven-year journey to maturity or average collections of a de novo. So basically, the first year you’re probably going to feed the business as in bring money to the table to keep it going as you build up that collection stream. The second year, you might break even or maybe pay yourself a little bit but definitely not up to industry standards. The third year, between the second and third years, during these startups is where we see you making some progress towards paying yourself a reasonable wage. Still probably not what you could get out being an associate at another practice. But you’re on your way. And then, that fourth, fifth, six, maybe up to seven years could get you, hopefully, up to average. An average is somewhere around nine hundred thousand dollars of collections, hopefully, dropping somewhere about to two hundred and fifty to three hundred thousand dollars bottom line. These are all guesses. Every marketplace is a little bit different. Every geography is a little bit different, but that’s just in general.
AE: Okay, well, good answer, thank you. I’m sure that will be useful for a lot of people watching. Next question. When would you recommend or what do you think is the best time for a dentist who is where he wants to be, but he’s not sure if he’s ready to bring on a new associate. What would a dentist do to say, “hey am I ready, or am I not ready to bring on the associate.”
MH: Again, a great question enough, and a complicated one sometimes. Every practice has a limited amount of resources, of ops, of time for the staff to not hit over time. So, there’s a lot of variables that play here. Typically, we like to see over a 1.2 million dollar collection practice, in general, that way there’s plenty of room for an associate to come in, inherit some of that revenue stream as the seller wants to back off a bit and transfer some of their patient-base over to the associate. Let’s just look at this from both angles. A seller wants to have an associate for the benefit of growing and continuing to serve the patient-base well. If you’re booked two to three months out, that’s not a very good patient-service quality for your patient. So, you need to come up with a constructive way to service them quicker and have a better overall experience for your patients. A lot of times that’s where an associate will come in. Therefore, you can help address the backlog and give to the associates. From the other angle, the associate has the ability to make money day one, not build up a new business inside of a practice. They might get some sort of guarantee the first year, but you’re gonna move them to some sort of production or collection-based compensation after the first couple of months or even maybe after a year at the most. It’s important that it’s a formula that doesn’t only work for the seller, but it also makes economic sense to the buyer. Typically, buyers these days have quite a bit of student loans that they need to address, so they need to make a certain amount inside the practice. Associateships work great if there are enough collections and the seller wants to slow down a little bit and maybe back off a day, and open up some collections to the associate. And then obviously, there’s a lot of other variables, but those are just some general thoughts.
AE: Okay, well that’s great. What kind of tools could you offer as part of ddsmatch Southwest? What could you provide to help dentists decide if they are ready for an associate or not on an analytical side just on the numbers besides a gut feeling and wanting to slow down.
MH: Yeah, that’s also something that we’ve seen over and over again coming up is, “am I a good candidate for an associateship? Does it make sense for my practice to do this?” So, what we’ve come up with is an associate IQ or quotient that helps walk you systematically through the practice with about ten different areas that we look at to make sure that it makes sense for the practice to bring this on. Does it make sense from the owner side? Does it make sense from the associate side? Some things we’ll look at is if you only have three ops, and you want to bring in two dentists a day, that does not make a lot of sense. After looking at a bunch of these different variables and intricacies of the practice, we will come up with a quotient of how you rate on a scale of 0-100 for being a good candidate for how many associates. We’ll walk you through the entire process. Does that answer your question, Andy?
AE: Yeah, I think that’s great, in that way, they can make an educated decision on where they’re at currently and if their business can support another dentist. But also, it shows them what they would need to do to grow to get to that point.
MH: Exactly, the last thing that anybody wants, and we run into this occasionally as well because people jump into associateships, is after a year the associate goes away. We’re stuck holding the bag here–of all the attorney fees and the professional fees to get that to happen, and then have that asset, have that partner walk away. That’s really tough for a practice, especially, if you’ve grown it significantly and can’t keep up with all the work coming in the door. It’s very important that an owner of a practice considers all the variables in play as they consider this major decision that can affect the valuation of the practice and can affect your stress levels as well.
RK: Very good Matt, thank You. Randy again. We have another question. We get a lot from dentists that are preparing to sell their practice, and even if they are a few years out, they ask a question, “should I invest in any major equipment purchases? Or, what should I do to make the practice more attractive to a buyer?” What does that do, normally, to evaluation? Does that help evaluation or not?
MH: Yeah, you’re absolutely right. That question comes up quite often. I’ll use a house as an illustration here. There’s a couple of different types of upgrades for remodeling that we can take into consideration. When you’re buying a house, you fully expect the roof to be leak proof. That’s just part of the standard price of the house. It doesn’t add anything if you find out the roof has all sorts of problems that need to be replaced before I pay you the price that you quoted. So, with that kind of consideration inside of a dental practice, certain things like x-ray heads, chairs, and normal standard-of-care type assets at the practice, you absolutely need. If you redo them a year before selling the practice, it’s not really gonna make a significant difference in the value of the practice. Some things that would make a significant difference in the practice, let’s say two months before you sell your practice, is adding a cerec machine or something that’s not been in the practice previously that hasn’t affected the income or the collections of the practice. There’s a couple of different things to consider, to remodel the practice. If you still have shag carpet in the practice, it probably needs to go before you start marketing it. So, those types of considerations and things that will bring it up to a higher standard-of-care could make it more valuable. However, you’re probably not going to get a one-for-one pay back on your investment. I guess my end-all be-all recommendation is five years before the practice sale, unless you’re really making your practice digital or doing something that’s bringing it up to standard-of-care, any other significant remodels at that point would probably not be a complete one-for-one return on your money. Does that make sense?
RK: Yes, that makes great sense. Thank you for that clarification and answer. One other question we’d like to ask you, Matt, once we get down the road matching a buyer and seller together and negotiating the asset purchase agreement, there’s always the question of asset allocation which plays a pretty important part for both sides. Do you mind touching on that a little bit?
MH: Yes, so what we’re talking about here is let’s say we come up with a price, and the price is one million dollars for the practice. The practice price is set, and we’ve negotiated that. At the end of the day though for both parties at play, really even more acutely to the seller is, it’s not just the price, it’s the overall deal that makes it a good or bad deal for you. What I mean by that is this, the million dollar price is great; however, it’s not about what the price is. It’s about what you keep. Obviously, what I’m referring to here is taxation. As you come up with the purchase price, and it’s an asset sale, inside that sale you would have two different buckets to place things in that the IRS expects you to fill out on a certain form. How much of the price is going to be assets? And, how much of the price is going to be goodwill? Those two buckets are very important. For the goodwill side on the seller’s side, amount that is going to be potentially subject to capital gains. Capital gains is a big deal because the difference between that and ordinary income can be significant. We can talk about over ten percent difference here. That’s a big deal for a million dollar price. Ten percent is a hundred thousand dollars. It could be that important. The asset side is anything that’s called an asset in the sale. That would be more advantageous to the buyer. That means they can depreciate those assets quicker than goodwill. Goodwill they can amortize over fifteen years as under current law. To the seller, goodwill is important. To the buyer, assets are important. It’s a little bit more important to a seller though. To a seller, that difference between capital gains and ordinary income can be quite significant. To the buyer, it’s a difference of when can I depreciate something; when do I get the tax write-off for this asset or goodwill. It’s the difference between five years to 15 years. They still get it. It’s just a question of when. For a seller, it’s a one-time deal. It’s either goodwill or it’s either assets. The more that’s goodwill, the better for the seller. And really, that is just subject to negotiations. It’s not really mandated by the IRS in any way. It’s based on what are the negotiated rates allocated to each bucket.
AE: What would you advise a young dentist in an associate for a couple of years, or two to five years out of school, paying off debt? They came to you saying, “I think I’m ready to look at purchasing my first practice.” What would you review with that dentist and how would you prepare him to be ready to engage with Randy and myself to find him a practice?
MH: Some of the first things here is have you spent the time clinically to get your hand speed up, to make sure, that whatever you’re looking at buying, you can actually do or can you document that you can do that in the that new practice? Something else or the bank will be looking at is have they been able to produce at the levels of the practice that they’re buying. That’s one important element. The second important element is taking a look at what does their world look like. Have they gotten in a couple years out of school. Have they been able to create some sort of emergency fund? Do they have some sort of margin in their life? That sounds very logical but a lot of times a buyer is not a good candidate because they don’t have any kind of safety net in their life. So, the third thing that I would talk about is do you know what you’re looking for? Do you know a geography? Have you really studied what area you want to be in and what that practice might look like? Having a clear direction and intentionality about the practice that you’re buying I think is an important thing for a dentist to address to a broker at ddsmatch Southwest because they really need to know that you’re fully vested in buying in a certain area, for a specific purpose, with a certain clinical skill set. Does that answer your question?
AE: Yeah, Absolutely I think that’s great. There’s a lot of young dentists out there that are just kind of on the edge, “am I ready?” It’s scary to start your own business.
MH: No doubt about it. I walk through maybe twenty buyers a year. and Some of the same elements that you’re just discussing here come up often. It can be a terrifying thing. You just need a really good board of directors to walk you through. I mean a great CPA like myself and a great attorney to help you understand the logistics of the transaction and how to structure it. Beyond that, if you have the right people on your team as advisors, we’ve been through this a hundred plus times just helping you through that is part of what we do.
AE: Well, thank you very much, and again we appreciate you taking the time today. You’ve been a huge partner and a huge help not only for us but especially for our clients, so thank you, very much, Matt.
MH: I think that this has been a great conversation and great questions. I think these are key elements to any transaction as these will come up at some point in the process. It’s nice to have a heads up for your sellers or even the buyers out there to understand the dynamics at play. Again, ddsmatch Southwest is a great brokerage. They really walk their clients through everything. It’s an open process. They invite your advisors in to help you through it. I’m a big fan.
https://www.ddsmatchsouthwest.com/wp-content/uploads/2018/06/DDSMatch-buy-a-dental-practice-sell-a-dental-practice.png00adminhttps://www.ddsmatchsouthwest.com/wp-content/uploads/2018/06/DDSMatch-buy-a-dental-practice-sell-a-dental-practice.pngadmin2018-05-15 05:00:062018-10-05 22:07:42Dental Accounting Webinar: What to Consider when Buying, Selling, or Starting a Dental Practice