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When asking the above question, too often I hear the response, “I will put my practice on the market and sell it”…kind of like selling my house.
News flash: your practice is radically different than your house.
This fact precipitated my thinking about all of the conversations I have had with doctors over the years about retirement, and the result is the TOP 8 REASONS WHY A PRACTICE IS NEVER SOLD:
The doctor approaches the practice sale in the same way he or she would sell a house.
Your practice is an asset that you utilize and that generates revenue. Your house does not generate revenue and is not a vehicle for profit generation. Practices are valued differently than houses because they have a cash flow and (hopefully) profit.
And practices are valued, for selling purposes, using time-weighted formulas that evaluate revenue, profit, and cash flow streams over the most recent five-year period. Which brings us to
The doctor wakes up one day and decides it is time to sell the practice.
Being from Texas, this is the equivalent of a rancher deciding to sell cattle without fattening them up first in the feed lot. Where is the planning? Even a house (or should be) is repaired to excellent condition if the owner expects to command a premium price for the house.
As with a house, never underestimate the power of the office’s curb appeal because there is an emotional component to the buyer’s decision and it is bundled in the appearance of the office. Which brings us to
It is later than you think.
Most doctors are extremely tardy in their decision to exit the practice; they simply wait too late. This is critically important because the practices are invariably waning, not waxing, because entropy has afflicted the doctor. You don’t have the energy or desire to learn new procedures, attract new patients, or in short, grow the practice.
Everything is the practice becomes staid and then old: you, the office, and your patients. In many practices, the age of the patients mirror that of the doctor. Revenue begins to decline. Your practice has become a hobby, not a profession and vehicle for earning a living.
You are only as old as you look.
With worn carpet, marred and gouged wall covering, faded paint, old equipment and technology, and threadbare furniture, your practice looks as tired as you are.
With such messages to the patient, you are announcing on a loud speaker that you do not offer the standard of care and cutting edge technology.
You are yesterday’s practice, or perhaps the previous generation’s practice. Using outdated diagnostics and therapeutics (film based radiographs come to mind) literally drive younger patients from the practice.
Employing an unconscious strategy
By not investing in your practice, you are engaging in an unconscious exit strategy: saving your way to prosperity. Unfortunately, you are eating the seed corn rather than the bounty of the harvest.
Extending this metaphor, the more corn planted, the greater the harvest. Even Ebenezer Scrooge eventually abandoned this strategy, so take a lesson from “history”.
Great Expectations
Many of us have an idea of what we believe our practices to be worth, but our calculations are a very qualitative assessment of a very quantitatively definable asset: the practice.
I hear many doctors utter the phrase, “ I need $XXXXX for my practice.” What they are really saying is, “ I need $XXXXXX to fund my retirement.”
Unfortunately, the world does not care what you need but only what the practice (asset) is worth. Because many doctors have an unrealistic expectation of their practice’s worth, they hold out for the anticipated selling price and never sell the practice. Here are the facts in today’s world: only 50% of urban and suburban practices are sold, and only 10% of rural practices are sold.
Why? Two reasons: (1) the doctor’s “need” does not coincide with the calculated value of the practice, and (2) there is no curb appeal to the office because it is old and outdated.
Money, Money, Money: It’s a rich man’s world
To whom will you sell your practice? This seemingly ridiculous question deserves some examination. Of course, the practice will be sold to a young doctor who wants to leverage your efforts to the next generation and beyond. Enter the caveat: most young doctors don’t have the cash to satisfy the equity requirement (down payment).
So you are reduced to owner financing or some other creative way of creating an indentured servant. Many doctors hire an associate with the idea that they will eventually take over the practice,
Good Ol’ Boy Agreement
The history of dental economics is littered with stories of senior doctors and associates who have embarked on the personal relationship equivalent of living together (as opposed to being married).
These relationships are easy to begin, are subject to many misunderstandings and surprises, and terminate in chaos with no “rules of engagement”. I have seen the ugly results of these casual, ‘everything will work out’ verbal agreements from afar with former clients and up close with friends.
Some of my closest friends have made this late career mistake and were not able to financially recover from the results. So a word to the wise: create a formal agreement with anyone you bring into the practice so that everyone understands the terms of the employment and agreement.
Instead of simply hoping that your practice will be sold for a fair price, i.e. a price that pleases you and is acceptable (and cash flow…able) to the buyer, I suggest the following step-by-step strategy which will all but certainly ensure your successful and orderly transition from practice owner to associate or retirement.
At least ten years before retirement or final sale of the practice, build a new office or remodel your existing office to reflect the level of care you are proposing (or aspire to) to your patients. This single step is critical to putting your practice on a waxing financial guide path rather than allowing your practice to decline in appearance, clinical capabilities, and productivity.
Don’t give yourself a pass concerning the office appearance. In most cases, 20 year old offices look like 20 year old offices. Have your staff take pictures of every room and space of the office and then project those images on a screen or wall with your staff and critically assess the manner in which your patients view your office.
And don’t kid yourself about the practice’s clinical capabilities. If you are not using current or cutting edge diagnostics and therapeutic modalities, you are not maintaining the clinical capabilities of the practice. Are you using lasers, digital radiography and imaging, vital bleaching techniques, optical impression devices such as the D4D? You may not be employing all of these devices, but if you are not using any of them, your practice is falling behind clinically.
Productivity speaks for itself. Either the numbers are improving each year or they are not.
If you want to maximize the price of your practice, then revenue and profitability need to be increasing each year (for the past five years).
As you consider this new environment which will propel you into retirement, remember that the office must be big enough to accommodate the additional doctor (and increased hygiene patient base) while you are still working and introducing the new doctor to the patients of the practice.
Practice in the new office for five years striving to increase the number of new patients each month and associated revenues.
Then have the practice valued by a transitions company (practice broker); most valuations use some form of a weighted revenue formula using the data from the most recent five year period.
With the practice valuation established, conduct a methodical and disciplined search for the associate who will be a good fit with your practice…because the intent is that the associate will become the partner and eventually the owner.
This intent is carefully delineated in an agreement between the senior doctor and associate with specific performance parameters; generally, the agreement period covers a three to five year period.
You become the associate or retire. With the practice price that you believe is fair and reasonable. And everyone lives happily ever after.
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