There are changes, trends, and opportunities in the field of practice transitions that create unique situations which can be of great benefit to those who truly understand what a practice transition is, what it affords those who take advantage of it, and those who are willing to act on the opportunity. A practice transition is a process that can be of benefit to all practitioners at any stage in their career. It essentially allows the following potential benefits:
- Receiving equity from your practice
- Converting your practice from a non interest bearing asset into an interest bearing asset
- Maintaining or increasing personal income
- Decreasing the time to financial independence or increasing the amount of funds at retirement
- Reduction of management responsibilities
- Security for you and your family
- Improved quality of life.
The use of creative programs such as “Mergernomics”, “Incremental Practice Sales”, “Deferred Practice Sales”, “Leveraged Buy-Outs (LBO)”, allow for the above benefits.
It is more important than ever for dentists to secure stability in their practices, the business of dentistry, and in their personal lives. Practice transitions today are not the typical event of the past where a 60+ year old dentist brought in an associate or sold a practice. Practice transitions today are for the 30 – 45 year old dentist to acquire an additional practice(s) through mergers, for the 45 – 60 year old dentist to incrementally transition a practice, and for all dentists to achieve personal financial stability through planning. Practice transitions today are not simply buying or selling dental practices, but rather involve the determination of the dentists’ needs, the opportunity sought or offered, and the location of the complimentary party. Although space limitations here preclude detailed analysis and exploration of the intricate strategies involved in the transition process, it is possible to at least summarize some of the benefits.
As dentists, what is it that we are best informed of? Of course, the answer is dentistry, and thus, that should be our first area of investments – dentistry, not real estate, stocks, etc. When executed properly, mergers are a great way to increase your patient base and increase cash flow. In a typical merger, it is likely that you can earn between 12 – 60% ROI, often times without ever touching a hand piece on any of the acquired patients! Thus, if you are seeking investment returns of 20, 30, 40% or more, consider a practice merger!
Historically, dentists would not consider a practice transition until late in their careers, at which time they would sell and walk off into the sunset. However, by starting the process in their mid – late forties, a dentist can work less, decrease management responsibilities, maintain or increase current earnings, and transition their practice with net proceeds of around 2.5 times the amount received in the traditional walk away sale. There is no need to wait until late in your career to start enjoying the benefits of a transition. This is accomplished through the process of an Incremental Deferred Pre Sale Transition. If you enjoy dentistry, why not sell part of your practice in increments, reap the benefits, and keep working as long as you want? Do you realize that through creative transition programs that you can even sell your practice for 120% of a year’s gross income?
We are likely to see more and more involvement by Private Equity Investors utilizing the concept of the Leveraged Buy Out, in which they acquire a practice utilizing the concept of “equity” (the money which you receive as a down payment), and “debt” (the balance of the purchase price which is still owed to you, or possibly stock in lieu of a promissory note), and in which they then sell your practice (along with other acquired practices) in a period of three – five years. Creative and strategic planning in this manner may result in the sale of this group of practices for many multiples of revenues. For instance, today a practice will sell for typically 70 – 90% of one year of gross collections. With the LBO concept, a Private Equity firm may acquire 40 – 50 practices, and sell them at 10 times net earnings, equating to 250 – 300% of a years gross receipts! Many dentists are now investing in practices other than their own in an effort to duplicate this concept on a much smaller scale.
There is a window of opportunity to achieve economic independence through planned practice transitions. Everyone who reads this blog article should be thinking of practice transitions as a vehicle allowing you to retire earlier, if that is your goal, or allowing you to retire with much more in your retirement funds than you would without a planned transition. As dentists, we have great jobs, but we often fall short of our individual goals and expectations by not properly planning for transitions during our careers. Unfortunately we all know dentists who were forced to retire early due to unexpected health considerations or dentists who financially cannot afford to retire even though they are mentally and emotionally ready. By proper planning, you can achieve the aforementioned benefits and avoid the potential for disaster.
There is not necessarily a right or wrong decision regarding practice transitions, but rather a decision based upon what is best for you and your family. The purpose of this article, however, is to motivate you to seek the counsel and guidance of experienced transition consultants, ones who can creatively show you the benefits, opportunities, and strategies to achieve both financial independence as well as improved quality of life!
Written by Ronald Prokes, D.D.S.