TRANSITIONS How Not to Sell a Dental Practice by JIM ACKERMAN L
et me introduce you to Dr. Fred who turned 72 last July. He’s a nice, affable guy and a good clinical dentist. His practice has been in the
same location for the last 38 years. I received a call from him about five years ago. He wanted to talk about finding an associate. At the time, I told him that his practice was too small, both physically and in collections, to support an associate. We would be happy to come out to his office and talk to him about his practice and his plans. He disappeared.
Five years later, he called again. I asked him what was on his mind. He said that he want- ed to retire in another two to three years, and he wanted to find an associate to help grow the practice and then purchase the practice when he was ready to retire. This time he took us up on the offer for a visit to the prac- tice, and a chance to sit down and chat.
Dr. Fred’s practice was in a nice part of town, but a bad location. It was a house converted to a dental practice. It sat high up on a hill, back from the main street. Even though the street had a lot of traffic, it was difficult to see the practice, as it was hidden behind a large billboard. The inside of the practice, while tidy, was dark and dated. The floor squeaked as you walked throughout the building and the ops were cramped and had low ceilings. However, Dr. Fred beamed with excitement, the ops had all brand-new beautiful equip- ment—more on that later.
When I spoke with Dr. Fred, five years ago, he said he was grossing around $400,000. If hygiene is producing 20 percent of the total production, or $80,000, that means the doctor was producing (collecting) $320,000. If in order to be competitive Dr. Fred needs to offer the associate 30 percent of their production, then that would be $320,000 x 30 percent or $96,000. The problem is that Dr. Fred is doing $320,000 in production, so
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either Dr. Fred can work, or the associate can work, but not both. As I told Dr. Fred earlier, it’s a one-man office, but he said to me, “but wait, if I can get an associate, they can have all the new patients and we can grow the of- fice together.” What he is asking the associate to do is to build a practice within a practice. The associate is going to take all the risk, not make any money until “his” patient base is built up and “his” patients really belong to Dr. Fred’s practice. No thanks!
Then Dr. Fred’s tone changed. He started telling us his story. At one time, the practice had been thriving, with gross collections in excess of $800,000. Then one of the major area employers closed. The practice took a hit, but after a few years, it recovered, kind of. Over the years, as he lost patients, the collections trended down annually. After our conversation a few years back, contrary to my advice, Dr. Fred went out and found that associate he wanted so badly. Dr. Fred had been talking to his banker, who told him that in order to attract an associate, he needed to buy all new equipment for his operatories to make it attractive to a young dentist. In fact, that banker was all too happy to help him finance these purchases. His dental supply house mirrored the banker’s advice.
So, with declining revenues and increasing debt, Dr. Fred called a transition company recommend by his dental supply rep in order to find him an associate. They told Dr. Fred that is should be no problem … sign the listing agreement and pay an up-front fee of several thousand dollars to value the practice. They found one person who came in, asked some questions and was never heard from again. Discouraged, Dr. Fred waited out the expiration of the listing contract and decided he was going to do this himself—and he did find someone willing to work as an associ- ate. Dr. Fred had this young dentist sign an
associate contract that Dr. Fred downloaded from the Internet.
Now, six months later, Dr. Fred called me to come in and sit down and meet with him. He was desperate and he needed to do some- thing quickly. He handed me his tax returns for the last three years, and the current P&L statement. Dr. Fred really wasn’t doing $400,000 a year (like he told me previously); it was more like $350,000. Then I looked at the YTD collections, which had recently fall- en off a cliff! What in the world happened?
The plot thickens. Dr. Fred’s young associ- ate stayed about three months before he figured out there were not enough patients for Dr. Fred, yet alone a second doctor. Dr. Fred didn’t think to have his associate sign a non-compete covenant—he didn’t even know what that was. The Associate opened a scratch-start practice two blocks down the street. It was in a strip center right off the same high-traffic street, but with great visibility and flashy, modern advertising. The associate also took Dr. Fred’s long-term hygienist with him. She knew all the patients, so they followed her. Dr. Fred was beside himself. He confided with his office manager that the walls were closing in. Collections were down, and he had huge debts piling up from the remodel and the equipment pur- chases. He told her that he would have to put the practice up for sale and was going to call a practice broker (me). The office manager left the following Monday. The classified read: Dental Practice for Sale: Grossing $180k in 4 ops, no staff, no patients, but all new digital equipment and a Cerec. Call Dr. Fred at … f
Jim Ackerman, an accountant by trade, has worked with ADS Midwest for eight years, during which he has completed more than 50 transitions. ADS Midwest and ADS MidAmerica are endorsed by the MDA. Contact him at
jim@adsmidwest.com
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