We’re always saying that our clients need to have a good, solid “board of directors,” which should be all of your important contacts: attorney, lender, marketer, et cetera. We also know firsthand that it can be hard to get there when you’re wearing every hat you possibly can and making every decision by Google. In the long run, though, it has to be done. It’s important to focus on what you do best and outsource your weaknesses. After all, you can’t be everything if you’re going to become a true business owner and create an enterprise!
When you’re starting your own practice, or acquiring a practice, you can access many great educational resources out there, like podcasts, webinars, blogs, and social media, but there’s really no substitute for working with somebody that has done what you’re about to do thousands of times. It’s always good to learn, but DIYing a practice acquisition without professional legal services is dangerous.
The Current Climate
The impact of the virus, and even more so the governmental response to the virus, has had an effect on deals. Some sellers still aren’t willing to recognize where we are. For example, sometimes we see very unrealistic expectations in that they assume we’re going to close quickly and the numbers are going to be what they were before, at the same purchase price.
Then they ask, “Why, buyer, is your bank asking me for interim 2020 financial statements and numbers?”
It’s because the bank wants to know that this is still a thing. Most of the value in a dental acquisition is attributable and allocated toward goodwill, and if the practice isn’t open and it’s not seeing patients in a meaningful way, or to the extent that they were prior to COVID-19, then it’s not as valuable, for the most part.
A Note for First-Time Buyers
If you’re the potential buyer, it’s really important to have the mindset that you don’t have to buy this particular practice. If you fall in love with a deal too soon, you may not see the red flags and other issues and keep going full steam ahead into a bad deal. And the thing about a bad deal is that it takes a long time to unravel a bad deal, and it puts you in a tough spot.
You can’t overpay for a practice or buy something that you don’t like and then turn around in a year or so and say, “Well, you know what? I’ll just sell it.” At that point, it’s not worth what you paid for it and you owe the bank what you paid for it. It’s not like the whole housing crisis where you could just check out and do a short sale on your house and tell the bank like, “Hey, sorry, it’s not worth what I owe, so you’re going to have to take less, bank.”
Dental lenders don’t want to hear that, so once you do a bad deal, you’re stuck with it. That’s just one more reason that it’s so critical to surround yourself with the right advisors so you can succeed. At the same time, listen to them! When seasoned pros are telling you, “Red flags, be careful, turn away, don’t do this,” take their advice and don’t keep forging ahead.
Even if you are excited about a deal — especially if you are excited about a deal — it’s important to try to be as objective as possible and have that mindset that you don’t have to do this deal.
Red Flags and Goodwill
If you’re preparing to acquire a practice, then it’s important to look out for the red flags. Most times, the red flags fall on the seller, but it could be as simple as the practice isn’t a good fit for you. Some common red flags we see are:
- If what they’re saying is different from what they’re trying to put in a document, then that’s probably not a deal you want to make.
- If there’s an unstable real estate situation where there are problems with the lease, the landlord, or the property.
- If the current state of the practice doesn’t line up with what you want in a practice and you’d have to make too many fundamental changes for it to meet your vision.
There’s a reason why dental practice sales and purchases are referred to as transitions and not just practice sales and acquisitions. You sell a liquor store, you sell a gas station, you transition a dental practice — whatever it may be, it’s all about transitioning the goodwill from the seller to the buyer. And the less of that goodwill that you’re going to capture, the less it’s worth or the riskier the deal could be.
Leave It to Your Lawyer
If you’re even thinking about acquiring a practice, that’s the time to get linked up with a dental lawyer. A practice may seem like a good idea, but a lawyer can help you determine if it really is by learning what your vision is, what you’re looking for, who you’re working with, and helping you understand who needs to be on your “board of directors” to ensure your success.
There’s a lot of discussion where people say, “Hey, letters of intent are not binding, so don’t worry, you don’t need to show it to a lawyer.” Well, there are things that need to be in an LOI if you’re going to get it in the deal, in the lease, or in the asset purchase agreement. Similarly, if there are things that are in the LOI that really shouldn’t be, it’s hard to get them out or to change them at the next stage.
While an LOI isn’t legally enforceable (somebody can’t sue the other person for not following through with the deal), it becomes the 10 commandments of the deal, and if you try to deviate from them, everybody jumps up and down and says, “Well, it wasn’t in the LOI, or the LOI said something else.”
Your lawyer can be the buffer, the fall guy, and have those difficult conversations, especially if you’re in a situation where you’re doing a buy-in to a practice where you associate. It’s not like you’re going to sit down at lunch and start having these difficult conversations and hammering out a deal, or doing it at the end of the day. If you do, then you put yourself in a position where you have this tense conversation about a particular sticking point in the deal and then the next day you have to show up and work together again. It can be tough, so it’s generally not a good idea to do that.
Your lawyer should say, “Hey, part of what we are is a buffer for you. You can hide behind us a little bit and you can blame things on us. That’s okay. And you can tell them, ‘Hey, I realize this may seem a little heavy handed, but this is what my lawyer’s asking me to do.’” And that’s okay. It’s your lawyer doing it! So that doesn’t cause this personal dissension or acrimony between the buyer and the seller, especially if they’re already working together on a day-to-day basis.
Even in a situation where the buyer doesn’t associate with the practice, you should be looking to transition to goodwill. You can’t really afford to have this long, drawn out, difficult battle of a negotiation with the seller and then expect that they’re going to go around the community and say, “Well, Dr. Jones is a great dentist. I think you should go see her.” You may have burned that bridge and harmed some of your ability to transition some of that goodwill.
The Danger of DIY
In many DIY deals, whether it’s an acquisition or a startup, people try to do too much themselves because they’re being overly cheap. That doesn’t really work since certain dollars need to be spent in certain ways, in certain things that have good return on the investment. Cutting corners with consultants, CPAs, lawyers, marketers — it’s not a good idea. There are some things you need to do to put yourself in the position to succeed. Cutting corners and trying to DIY too many things is not the way if you want long-term success.
As a dentist, you won’t make money — real money — off the sale of your practice someday. You make money year in, year out being a dentist. At the end of the day, that’s cashflow, and that’s what matters. The only real way you can go astray is in failing to recognize that. Again, that’s why it matters so much that you work with the right professionals (your “board of directors”) to guide you through the process and toward success in every stage of your career.
A Successful Venture
If you’re currently looking at practice ownership or practice acquisition, there are a couple of things you can do to gain momentum and get to a place where you can start or acquire that practice. First, it’s really important to find mentorship. Get out there, meet people in the industry.
Along the same lines, take advantage of all the good, free content that’s out there. When you talk to and hear from the leaders in the industry, you can internalize that and go about your business the way they’ve gone about building their successful businesses. In doing this, you’ll set yourself up for success.
At Duckett Ladd, we know you want to successfully run your practice and achieve your ideal quality of life. Our accounting, tax planning, and business strategy services can help you do it. To find the fastest solution to your business challenges, get in touch with our team today!
Duckett Ladd, LLP does not provide tax, legal, or accounting advice. This content has been prepared for informational purposes only and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Also, tax law is ever-changing and every effort should be made to seek out the most current information. Make sure to check the date of published content to ensure the most current information.