Last week we kicked off new topics for the ADA Practice Transitions Coffee Talk webinar series with some fantastic advice from a pair of dental CPAs. Chris VanStraten and Andy McCarty of Baker Tilly, founding member of ADCPA, walked us through some of the ways that COVID-19 is changing dental practice sales.
During the webinar, Chris and Andy explored:
- Which policies and documents you need to evaluate – and potentially update – before you consider selling
- How to approach practice valuation when staffing and active patient counts may be in flux
- Strategies to insulate yourself from risk and uncertainty
We had amazing attendance with lots of great questions – so many that we ran out of time! Luckily, Chris and our Dr. Suzanne Ebert were happy to continue the conversation. See below for their additional thoughts.
I now have to spend $10-20K on aerosol prevention equipment. Can I can recoup that when I sell my practice?
Chris VanStraten: Any equipment purchased will be handled as any other equipment is handled – as a depreciable asset. There may be some tax implications depending on what, if anything, the government decides as incentives for small businesses to update facilities or to account for COVID-related purchases. Make sure you consult your accountant so you do not miss out.
Can you clarify what the capitalization rate is? How do you know which % to use for a particular practice?
Chris VanStraten: The capitalization rate is dependent on practice location, profitability etc. For a sole practice, we would generally use a capitalization rate of 4-5 of excess owner’s compensation over their “associate” reasonable salary.
Supply and demand will play a role in this, and what it looks like may be high or low risk to a buyer. A rural location where it is difficult to recruit will generally have a lower cap rate and therefore a lower price. Other factors that could impact cap rate may be owner financing, asset vs. stock sale type structure, or tax ramifications of a transaction. These can all play a role in coming up with a determined price.
How would you evaluate a practice that is 80% Medicaid based on your patient record model?
Chris VanStraten: We would likely be looking at a lower per-patient value. This would also depend on other factors in the transaction.
Generally we would see this as a very high volume practice, in order to be successful needing more active patients coming through and good systems in place for an efficient model.
We are uncertain how this may be impacted in the post-COVID era, as I know some reimbursement requests for help are being made. In order to sustain, I suspect there will need to be governmental support for reimbursement allowances for PPE due to the lower margins. This will be a greater challenge to maintain without some other potential assistance.
If we sell the practice but have to work for the buyer, it basically means they earn the profit and we are doing the work for them to make the loan payments. Why not stay another few years, keep the profit and then sell the practice clean and walk away?
Dr. Ebert: Take into account your individual situation – if you are wanting to get away from the day-to-day responsibility of ownership, and you have found the right buyer, this may be a great way to transition the practice. If you really just want to walk away (for health issues or not wanting to deal with COVID-related business problems), the current market may mean you have to consider lowering the price to entice a buyer. If you are good to continue practice ownership and all that is involved, delaying retirement may be the best option for you.
Chris VanStraten: We take care to make sure the seller is prepared to make this decision financially and hopefully is not very financially dependent on the sale proceeds for retirement. If the seller is not really ready financially or personally to share that profit and give up control, we think waiting is possibly a better decision. Too many times we see this as the reason for failed associate transitions or recruitment.
Please comment on selling a percentage of the practice. For example, selling 50% or 30% of the practice to an incoming associate.
Dr. Ebert: This is a partnership scenario. When entering into this type of agreement, make sure to consider the following, and write everything down!
- Who will have decision making control – if the junior doc does not have operational control, will they request a lowered practice buy in price to reflect a “lack of control”?
- Most associate buy-ins are owner-financed, since the banks will require the practice’s or owner guaranty as security. (Chris VanStraten adds: We many times see a hybrid of this work successfully with a bank involved for the down payment portion/stock /partnership interest portion, not necessarily 100% owner compensation financed.)
- What happens if the partnership fails?
- You will want to have an attorney who has extensive knowledge of this type of arrangement to help walk you through all the details
- Due to all the nuances of this type of arrangement, make sure you have a dentist who shares your philosophy of care! (Chris VanStraten adds: And goals for practice growth or technology investments etc.)
- Chris VanStraten: We see this path as a good way to retain an associate as well, if a solid plan for future transition can be made.
- Before You Buy: The Financial Side of a Practice Transition – May 29
- How ADA Practice Transitions Makes the Process More Predictable – And Successful – June 12
- How to Manage & Retain Staff During a Practice Transition – June 26