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Orthodontic Practice Lease Considerations – Part 1

Whenever dealing with a practice sale or transition, the buying and selling orthodontists have a lot to consider throughout the process, such as purchase price, length of the doctors working together before and after the sale, staffing issues, etc. However, we often see that one of the most important issues takes a back seat in the transition negotiations – the office lease! Whether the office is owned by the selling doctor or by an unrelated third party, we have seen numerous transactions be delayed due to lease issues not being resolved timely.

In the case where the selling doctor owns the real estate, the selling doctor often does not know what the fair market rental rate of the property is. The selling orthodontist often sets the lease rate he/she pays to himself/herself based on tax considerations or mortgage payments, which may be significantly higher or lower than fair market rental rates. We often have sellers tell us during the valuation process or transition negotiations that the rental rate should be $XX per square without really knowing the market, getting advice from a real estate expert, or understanding if this is a gross or net lease rate (“gross” meaning that the landlord pays most or all expenses, such as real estate taxes, insurances, maintenance, and “net” meaning that the tenant pays such expenses). The buyer, often inexperienced in these types of transactions, is generally advised to get the opinion of a local real estate expert to help evaluate the lease rate. The problems arise when the buyer’s expert says the rental rate should be significantly lower than the seller’s expectations. After much more time and research by the seller, it may be discovered that the rental rate he/she can receive from an actual tenant is much less than what he/she initially thought would be paid (or, often worse, if the seller realizes that the lease rate should be increased, which, if requested by the seller, creates other trust issues for the buyer). This situation can create a stumbling block in the transition negotiations and delay the closing of the transition.

The seller doctor, acting as the landlord of the property, has to understand that most buyers will do some research on what the fair market rental rate should be for similar spaces in the area. So, ultimately, the seller has to be reasonable and agree to lease the office at (or very close to) fair market rental rates. Otherwise, it may mean that the seller has to go through negotiations with multiple buyers to either: (1) find the buyer willing to pay a higher than reasonable rental rate, or (2) eventually understand that qualified buyers demand a reasonable rental rate and the rent must be set at market rates. Unfortunately, the latter often occurs after one or more qualified buyers have walked away.

Our advice to selling orthodontists that own the real estate is to do some research on the fair market rental rate for their office spaces when they first begin to consider selling their practices. The sooner these rates are established and supported by actual market research, the smoother and quicker the transition negotiations will go. It also helps in the valuation of the practice because the practice’s value is largely dependent on the income/profit accruing to the owner. If the income/profit used in the valuation is not correct (due to incorrect lease rates), the buyers may also challenge the valuation.

In our next blog post, we will review lease issues that can arise when the office is owned by a third party rather than the selling orthodontist.

Who Should Perform Your Practice Appraisal?

At some point in the life of your orthodontic career, there will most likely come a time to have your practice valued. This process usually occurs only once for most practitioners, but more in some cases. The reasons for having an orthodontic practice valued vary, but by far the most likely reason is the contemplation of a change in ownership. If you plan to retire and sell your practice, a practice valuation is highly suggested as one of the first steps in the process. When the time arises, do you know who should perform your orthodontic practice appraisal?

The AAO provides its members with a list of companies or individuals that offer valuation/evaluation services to the orthodontic community. If the purpose of the valuation is for an ownership change, it is strongly suggested you select a firm that specializes in orthodontic valuation and transition services rather than using your local CPA or accounting firm. Bentson Clark & Copple, LLC, provides valuation services and appears on the AAO’s listing, as do several other well-respected companies.

Most Certified Public Accountants who have been involved in the sale of various businesses can likewise prepare some type of valuation report for your practice. For reliability purposes, the report should follow accepted valuation methodology. It should be completed and signed by someone who holds nationally recognized valuation credentials (such as CVA, AVA, ASA, etc.).

What is An Orthodontic Practice Valuation?

Bentson Clark & Copple specializes in orthodontic valuations and transitions, but what does this really mean and involve? We are in the business of helping orthodontists during the pivotal points within their careers. We perform practice valuations, provide partner location services, offer practice sales and marketing services and help negotiate practice transactions.

Let’s focus on practice valuation. You are more than likely aware of the concept of business valuation, but may question how orthodontic practice valuations work. When an orthodontist is ready to find out what their practice is worth, they come to us. We then provide them with an information request document. This multiple page form requests the doctor’s personal information, and general information about the practice, including, the staff, hours of operation, leasing arrangements, number of locations and referral sources, among other items. After this information is collected, we then accumulate statistical and operational information. We inquire about the practice’s fees, the number of start cases and case completions, contracts receivable balance, number of active and recall patients and information on all active patients with paid in full balances.

Besides the on-site practice visit, perhaps the most important part of the valuation is collecting the practices’ financial information. We ask doctors to provide the past three years’ profit and loss statements and the most current interim profit and loss statement. We also obtain the most recent tax year-end and month-end balance sheets and a fixed assets listing. Lastly, doctors need to submit tax returns for the past three years including any other supporting statements. (Generally, we find that practices that employ practice consultants have a good grasp on key operational metrics and systems compared to practices that do not use practice consultants.)

We take all this information and determine a fair market value of a practice through a valuation report. The report briefly explains the various general valuation approaches and the valuation approach used by Bentson Clark & Copple. Through a variety of charts, graphs and statements, we explain how the value is calculated. The report includes a practitioner biography, the practice history, state and local demographics and an industry profile.

For more information regarding orthodontic practice valuations, please contact our office.

Dental Practice Management Firm Shares Tips on Finding the Right Partner

The most important decision for many orthodontists after buying an orthodontic practice is finding a partner to share the workload in a growing business. Bentson Clark & Copple specialize in dental practice management, and are experts in matching orthodontists for the best fit when entering a practice.

Doctors from across the United States approach the firm when they have an orthodontic practice for sale. The American Association of Orthodontists can also provide seekers with a wide range of practice opportunities.

Shannon Patterson, Director of Practice Opportunities at Bentson Clark & Copple, oversees the orthodontic resident and selling doctor matching database, a matching assistance program focused on assisting doctors in finding opportunities based on their geographical location and personal preferences.

Patterson, who gives consultation on buying an orthodontic practice, now advises that there are four main factors to remember when looking for a future partner.

1. Have your office undergo a practice valuation
Generally it is ill advised for orthodontists seeking a future equity interest to join a practice that does not have a comprehensive practice valuation. A written practice valuation allows for complete transparency of the financial and operational health of the business. It also gives selling orthodontists a specific idea of what their practice is worth. Make sure the practice is financially ready to take on a partner and has a plan for adding another doctor.

2. Get the word out
Contact orthodontic training programs or individuals in the military to help determine if any interest exists for your practice. Try every possible approach to identifying potential associates/buyers, which may include advertising in industry journals. Bentson Clark & Copple also maintains a well-developed database of orthodontic residents, military personnel, and practicing orthodontists interested in relocating and purchasing a practice. Consider registering for the AAO Practice Opportunities JobBank, a fully automated, secure website that is ideal for doctors who are seeking to add a partner or transition a practice.

3. Personal visit
Once the selection pool has been vetted to a couple of qualified doctors, meet with the candidates one-on-one. Invite the potential orthodontist(s) to visit the practice. If you are comfortable with allowing your staff to be involved in the process, include them. If not, simply plan to meet with them and their spouse outside office hours over dinner and then visit the practice.

4. Consider all the details
Be willing to invest enough in the importance of this transaction to seek the advice of knowledgeable legal and financial professionals that specialize in practice transition. Do not have a potential associate/partner enter your practice merely on a handshake. Become as knowledgeable with the transition process as possible.

Remembering these tips will ensure a good doctor/ practice relationship has been formed and new doctors will merge seamlessly into the practice with the staff. Following these guidelines will ensure doctors help their practice by finding the best candidate that will continue to make the practice profitable and successful.

Call today to learn more about orthodontic practice sales or to receive a free 30-minute consultation.

© 2011 Master Google and Bentson Clark & Copple, LLC. Authorization to post is granted, with the stipulation that Bentson Clark & Copple, LLC and Master Google, an expert in Google and online SEO, are credited as sole source. Linking to other sites from this document is strictly prohibited, with the exception of herein imbedded links.

Buying a Practice Should Be Smooth Sailing

After residency, orthodontists are faced with a major decision: where to practice their trade. When a location is identified, the next big decision is whether to work as an employee, start-up, or buy an orthodontic practice.

Compared to starting a practice from scratch, a pre-existing practice typically offers an established patient and referral base, which increases the chances of success and provides credibility with patients. Pre-existing practices also provide residents with a mentor to work with during their first years as a professional orthodontist.

Bentson Clark & Copple, LLC work to match each orthodontic buyer with the right office for sale through their practice location services. Their valuation and transition work across the U.S. provides the firm a wide range of opportunities to present to the orthodontic community. Bentson Clark & Copple’s orthodontic practice location services are free to doctors seeking a practice opportunity.

Whether choosing to buy a practice or join as a partner, Chris Bentson, president of Bentson Clark & Copple and the Bentson Clark reSource, an orthodontic newsletter, suggests that purchasing equity is often the fastest track to paying off educational debt and building personal wealth.

Transitioning into an orthodontic practice can be summed up in five steps:

1. Once a practice has been identified, review the potential practice’s financial information and their orthodontic practice valuation. The seller of the practice will request you sign a non-disclosure agreement before releasing this information.

2. Review the seller’s practice valuation report with your advisor and discuss the purchase price. If the practice does not have a valuation report, urge them to have one completed, as it will spell out the value of the practice and critical practice operational information.

3. While searching for buying an orthodontic practice, maintain contact with any interested selling doctors and keep your eyes open for other options.

4. Once the buyer, seller and their respective advisers have established a transition plan, projections of future cash flows and financing schedules should be reviewed. A letter of intent will be prepared to outline future definitive legal documents after each party is comfortable with the financial impact the transition will have.

5. An attorney will create binding legal documents for the seller and buyer to review with their advisors. The buy-in/buy-out can begin once both parties have agreed to price, terms and conditions.

Keep in mind finding the right practice, going through paperwork and finalizing a sale takes at least several months, so start the process as early as possible in your residency, says Bentson.

It’s important that you make sure your goals are flexible and negotiable enough to achieve them, and all details are in writing before you enter the practice, if possible, he says.

These preparatory steps will help ensure any major problems are tackled early on so the transition process goes as smoothly as possible for the buyer and seller.

© 2012 Master Google and Bentson Clark & Copple, LLC. Authorization to post is granted, with the stipulation that Bentson Clark & Copple, LLC and Master Google, an Internet business marketing company, are credited as sole source. Linking to other sites from this document is strictly prohibited, with the exception of herein imbedded links.

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