Creating a seamless transition
Buying or selling a piece of real estate is easy: As the man said; “You pays your money and you takes your chances.” But how do you handle intangible concepts such as the goodwill and loyalty of a dentist’s or a doctor’s long-time patients?
There is a way, but it’s not like transferring a piece of real estate.
“You’re not really selling a practice like you’re selling a bar. You’re selling an individual or a couple of individuals,” who have operated that practice for years and are now retiring, said Ken George. The trick is to create a seamless transition for the patients.
George, the owner of a Sunbelt Business Brokers office on 28th Street in Grand Rapids, said he has been “buying and selling businesses for 35 years.” Sunbelt bills itself as “the largest Main Street and lower middle market business intermediary firm in the world.” The firm defines “Main Street” as businesses with annual sales of less than $1,000,000. They include franchised and non-franchised restaurants, retail stores, professional service firms, small manufacturers and a broad array of other small businesses.
Of course, there is an obvious difference between a dental practice and a Burger King. The person coming in to buy a hamburger likely may not even notice new faces behind the counter. On the other hand, the dentist IS the business, said George. The same holds true for a medical practice. How can the dentist or doctor selling a practice that has been built up over decades assure the new owner that the patients won’t bail out when the new dentist/doctor takes over?
An earn-out is one solution.
According to Inc.com, an earn-out is a common feature of many acquisitions. In a sale that includes an earn-out clause, the seller agrees to stay with the business through a transition period, which in the case of a dental practice could run for months, even up to a year or more. “Or enough time to run through the roster of patients and personally introduce the new person and provide as transparent a transition as possible,” noted George.
George said there may be some patients unwilling to accept the loss of a long-time dentist or doctor, and they will go elsewshere, but by and large, most people will “give the new guy a chance.”
Scott Van Timmeren is a young dentist who recently bought the practice of Henry Texer Jr., who has had a dental practice for 32 years or so on 44th Street in Wyoming. Texer’s name is still prominently listed on the business website and at the practice. He may still come in to help out, said Van Timmeren, but essentially, Texer now is retired.
Van Timmeren, who graduated from the University of Michigan Dental School in 2007 and worked as an associate at a couple of dental practices, said he weighed the pros and cons of starting a new practice versus buying an established one. “Part of it came down to, this isn’t really the best time to start a dental office from scratch. It’s hard to bring in a large number of patients in a short amount of time,” he said.
Van Timmeren estimates there are about 1,500 patients in the practice he bought from Texer. He said he had access to “years and years of background information and financials,” which enabled him to show his bank that he was prepared “to go in and try to make (the business) do exactly the same thing, or better.”
He started working at the practice well before he bought it, but he still had not met all the patients when the deal was done. So the office held an open house for patients to meet Van Timmeren and say goodbye to Texer. Letters from each went out to every patient to make them aware of the transition.
Staff is another key issue in the acquisition of a practice. “Staff is the most important thing,” said Van Timmeren. “The biggest thing for me was making sure that the staff was willing to stick around.”
Van Timmeren got a lot of advice from Betsy Haller, vice president of business banking at The Bank of Holland. She said she has been involved in perhaps a dozen similar transactions in the last few years.
Cash flow is a major financing issue in the purchase of a practice, said Haller, because there is typically a shortfall in collateral. Also, life and disability insurance are very important for the young doctor or dentist starting a practice, she said.
Haller said the staff is typically a huge asset to the business because they usually have a strong relationship with the patient base, she added.
“Office staff consistency is key to a strong practice transition,” said Haller. “So, despite how over-staffed you may think the practice is, avoid making any staff changes/eliminations during the first six to 12 months, if possible. This will also give you more time to assess staff strengths or training needs,” she said.
Some acquisitions are financed in part by the seller, but if bank financing is required, the bank will look first at the purchaser’s personal credit history.
“Maintain strong personal credit,” said Haller. “Make sure your personal financial house is in good order. When lending to a personal service business such as dentistry, strong personal credit is critical. This is viewed as an indication of how you will run your business.”
Going back to the actual purchase: How much does that intangible part of a practice cost? Appraisals can be done of equipment and real estate, but what is the income potential actually worth on the market?
George said there are a lot of variables to determining that and a lot of due diligence and negotiation is required, including the earn-out factor. In general, however, the price could range from one and a half to three times the annual cash flow.