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How Long Will My Orthodontic Practice Transition Negotiations Take?

In the world of orthodontics, timelines are extremely important.  From day one, patients ask, “How long will I have to wear my braces?” As a doctor you provide your best estimation, stating if all things go as planned AND you are compliant, things should stay on time.

In the world of practice valuation and transitions, the second question asked by many doctors (after the total cost of the transaction) is: “How long will my orthodontic practice transition negotiations take?” At Bentson Clark & Copple we tell orthodontists to allow about 6 months, 90 days for a valuation study and another 60 to 90 days for any negotiations and documents.

You’ve identified the candidate; they have reviewed the prepared practice valuation and physically visited the practice. You want to move forward. You have likely discussed the transaction on a high level, and you are now delivering the terms of the proposed transaction to your candidate. The terms are typically delivered in a document called a “term sheet” or “letter-of-intent.” This is usually a five-to-seven page document that outlines the asset allocation of the purchase price (for tax purposes), association periods and compensation for both doctors before and after closing, remedies for breach, non-competes or liquidated damages, how retreatment issues will be addressed, real estate matters, financing terms, and certain representations and warranties by both buyer and seller. This document will be the road map for the attorney to draft legal, definitive documents. Typically, a cash-flow pro-forma is presented in conjunction with the terms so that both parties have a financial illustration of how the transaction relates to their expected income over a period of years.

An open, back-and-forth dialogue between both parties is expected as terms are agreed upon. We suggest that both parties have knowledgeable representation during this stage of the transaction. There are companies that encourage the idea of representing both parties, but Bentson Clark & Copple suggests that both parties seek separate counsel, as there are definite financial conflicts on almost each deal point in a transaction.

However, be aware of pitfalls during this process.  A “my way or the highway” attitude is likely not practical. The fairest spot or win-win most commonly occurs with both sides feeling a similar degree of discomfort. On the other hand, giving too many scenarios or too many different ideas of how to get to agreement often confuses one or both parties to the point of not being able to make a decision. Paralysis by analysis can happen on both sides of the transaction. Careful is good, but if you miss seeing the forest for the trees, the transaction can die, and an opportunity for both buyer and seller could be missed.

Resident Webinar Announced: Transition from Residency into Practice

Take control of the future of your orthodontic career! Doug Copple will discuss how to successfully transition from residency into an established orthodontic practice, in his upcoming free resident webinar, Practice Valuation & Transition – Part 2. This webinar is scheduled for Monday, March 31 at 8:30PM EST.

Information will be presented on current purchase prices, and comparative practice data will be provided to illustrate benchmarks and trends. There will be an extensive conversation regarding cash flow pro-formas, one of the most important documents in a transition. A number of other general topics will be discussed including types of practice transitions, where to obtain financing and understanding the basics of a practice valuation. The webinar will conclude with a brief question and answer session.

This webinar is one of the many scheduled presentations that are part of the Ortho2’s Cutting Edge Webinar Series. This series will provide knowledge in helping to run a future orthodontic practice. This webinar series is being hosted exclusively for residents, recent grads and Ortho2 users, at no charge. If you have a desire to learn more from an elite group of experienced orthodontic professionals, you’ll want to take advantage of this free series that has everything you need to know to operate a successful orthodontic practice. Webinars occur weekly at 8:30 PM Eastern/5:30 PM Pacific and last approximately one hour.

Click here to register for Doug’s webinar or to find out more.

Publication Focuses on Adding an Orthodontic Associate

There are many magazines, journals and newspapers that our team reads on a regular basis to keep up with current news and events in the orthodontic community. When a publication arrives, it gets passed around the office with a sticky note, indicating who has read it and who has not. (It’s ultimately a pretty good system unless the sticky note falls off.)

Chris Bentson has been recently published in a couple of orthodontic publications. His most current article is co-authored with Daniel Sroka, JD, who has served the legal needs of Bentson Clark & Copple’s referred clients since 2004. The April/May 2013 issue of Orthodontic Products Magazine features Plus One: What You Need to Know when Adding an Associate to your Practice.  Below is a short excerpt from the article.

“Adding a doctor to the practice is a big decision and affects a great number of systems in the office. Change will occur. Thus, having clarity about why you want an associate is often the first question to ask. While there may be many motivations for bringing an associate into a practice, typically, an owner doctor chooses to bring an associate for one of three reasons.

The first is to help with the workload of treating patients due to practice growth. The second is to allow for more time out of the clinic or away from the practice, or, said another way, to increase the quality of life for the owner doctor within the practice but not necessarily to grow the practice. The third reason is often as a first step in a future transition plan where partial or full equity will eventually be offered to the associate doctor, but that plan is not yet defined.”

Click here read the entire Orthodontic Products article.

Orthodontic Practice Lease Considerations – Part 2

We previously discussed some of the issues regarding an office lease that need to be considered when buying an orthodontic practice and the selling doctor owns the office. In this article, we will discuss lease issues to be considered when the office is leased from a third party.

The first item to consider is when you can contact the landlord about lease terms once you purchase the practice. Quite often, the selling orthodontist wants the sale of the practice to remain confidential as long as possible. The seller may not want the landlord to know that he/she is selling the practice until many of the other sale and financing terms are agreed to by the buyer and seller. Thus, the buyer’s conversations with the landlord may not begin until later in the negotiation process.

Just like when the selling orthodontist owns the real estate, the lease terms must be considered. The buyer generally has to get at least a 5 year lease term, inclusive of renewal options, in order for a bank to provide financing for the transaction (the bank wants assurance that the buyer will have an office to treat patients and earn income for a reasonable amount of time in order to repay the purchase loan). The landlord generally prefers a longer lease term, and the buyer has to consider how long he/she plans to stay in the office and whether another office or location in the city is better for the practice. If the buyer’s plans are to relocate the practice soon, he/she should try to negotiate a shorter initial lease term with options to extend the lease for one year periods (to satisfy the lender’s requirement).

The lease rate also needs to be considered as we have seen some instances where the seller has been in a tenant in the office for a number of years without a rate increase, or without a formal lease agreement, and has a very good relationship with the landlord. When the seller is no longer the tenant, the landlord may see this as an opportunity to increase the rental rate to fair market rates, which has an impact on the practice’s profitability. Similar to when the seller owns the office and the fair market lease rates should be considered when the practice valuation is prepared, if it is fairly certain that the lease rate will be increased in the future, the practice valuation should take this into account and the buyer should be made aware of this early in the process.

Finally, one of the biggest issues we often face is the landlord’s reluctance to release the selling orthodontist from personal liability related to the lease (particularly when the lease is assigned to the buyer). The individual doctor often personally guarantees that his/her professional corporation will pay the lease.  The selling doctor usually has been a tenant in the building for a number of years, is financially well established, and may have a great relationship with the landlord. With the sale of the practice, the buyer will be required to personally guarantee the lease payments, but the buyer usually doesn’t have substantial personal assets as does the seller. More than likely, the buyer has minimal liquid assets, a lot of student debt, and very little or no experience running a practice. Understandably, this makes the landlord nervous and the landlord may refuse to release the selling doctor from his/her personal guarantee of the lease. This is an issue for the seller, which may require additional negotiations with the Landlord as to how long the seller will remain a guarantor.

There are many items to consider when selling and transitioning an orthodontic practice, and the lease agreement is just one of those items. However, the lease can often turn in to a multi-faceted negotiation process that can take longer than the parties anticipate.

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.

Dentistry Going Corporate

There was an interesting article featured in the April 9, 2012 issue of the ADA News.  The cover story, “ADA Explores Growth of Large Group Practices” caught my eye. The article sites a recent study conducted by the Health Policy Resources Center of the American Dental Association (ADA), which concludes that the rate of solo practitioners is falling. In 2010, 69% of dentists were solo practitioners compared to 76% in 2006.

Certain states and areas of the country are experiencing the expansion at a faster rate than others. For example, the Minnesota Dental Association reports more than 12% of dentists in the state are employed in large group practices.

The American Association of Orthodontists (AAO) surveyed new graduates in 2009 and 2011 and found that 16% of respondents are practicing in a non-traditional setting, defined as either an interdisciplinary practice or a practice where they are employees or independent contractors. Chris Vranas, AAO Executive Director says, “Overall our membership is still at 69% in solo practice, 16% in partnerships, 6% in associateships, 4% interdisciplinary practice and 5% in large corporate practice.

We ask the question – what is driving the trend? The ADA article references educational debt of young doctors and the growth of Dental Service Organizations who need employee doctors to grow.

This trend of dentistry going corporate is something Bentson Clark & Copple has been watching for several years and one that you may have noticed in your drawing area. It will take some time to have a major impact, but understanding this trend will help you as you think strategically about your brand and identity as you communicate with new patients and referrals.

To learn more about the trends of today’s orthodontic residents, check out Bentson Clark & Copple’s 2011 Annual Residents Survey Results.

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.

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