Speaking from Experience: Setting Yourself Up for a Successful Dental Practice Acquisition
Co-Authored by Craig Woods
Originally Published in DSO News, February 4, 2019.
Experience has demonstrated that the least complex, best run practices make the smoothest transition to DSO affiliation. This holds true with respect to valuing the practice, shifting commercial arrangements, transitioning personnel, extinguishing debt and taking necessary legal actions. Put differently, a messy, complicated practice will lead to transition potholes that will add time and expense to the sale and integration processes.
An ideal practice that would lend itself to a seamless affiliation with a DSO or acquisition by a qualified buyer for top dollar is one that meets the following criteria:
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- Organized and accurate financials;
- Demonstrably high or growing profitability over a consistent time period;
- Properly documented commercial arrangements, such as equipment and premises leases and supply arrangements;
- Properly documented employment and compensation arrangements with dentists and key employees;
- Complying with best practices for dental procedures;
- Regulatory compliant with no recent lawsuit, incidents or investigations;
- Absence of third-party entanglements, and;
- Clear communication of critical deal points.
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A practice that meets most, if not all, of the above criteria, is not uncommon and generally will yield a higher value. Buyers appreciate that the practice may be easily valued based on good records and solid profitability. The practice’s various commercial and employment arrangements may be smoothly transitioned with minimal negotiation with and interference from third-parties. Valuable time and resources are not wasted conducting significant due diligence and vetting on issues relating to regulatory compliance and incidents of alleged malpractice and unwinding complex third-party entanglements. Finally, buyers and sellers have a clear understanding of the critical deal points—scope of restrictive covenants, post-closing employment considerations, and potential management responsibilities—which can prevent a deal from falling apart.
Stating the obvious, all practices fall along a spectrum from attractive to somewhere less than ideal. If you are a dentist owner with potential interest in selling your practice, a diagnostic test of your own practice with respect to the above characteristics is a great idea. Using the above criteria, an interested seller should perform an honest assessment of his or her practice, determine what steps are necessary to correct any deficiencies, and then implement these steps to maximize the value of his or her enterprise.
When parties insist on allowing issues to go unaddressed until fully engaged in the buy/sell process, they risk undermining, delaying or even destroying their potential deal. In our years of experience representing buyers and sellers in the DSO and dental space, we have seen the full range of problematic scenarios, including:
Holdout Owners. Third-party investors and fellow owners, depending on their relative voting power, may take the opportunity to hold a transaction hostage by holding out for an excessive payday relative to their contribution to or ownership stake in the enterprise. Equally problematic are scenarios where parties have undisclosed side-deals with unknown parties that come to light on the eve of a potential closing conveying unnecessary control and power to a relatively minor interest holder. Experience dictates that such issues should be identified and addressed early on to avoid potential impediments to a successful closing.
Bookkeeping Disasters. Bookkeepers who maintain partial, inaccurate records can disadvantage the valuation of a practice during the sale process and force parties to make unnecessary concessions in the negotiation process due to imperfect information. Incomplete financial records often lead to larger escrow amounts, more onerous representations and warranties within the purchase agreement, and arbitrary adjustments to the purchase price to account for potential concerns over unclear credit balances, prepayments and other liabilities. A deal may stall for months while parties hire outside accountants and organize the financials or even die completely if complete financial information cannot be made available. u
Unresolved Litigation and Regulatory Matters. During the transaction process, buyers will investigate any pending legal issues to assess the risk of moving forward with a proposed transaction. In a perfect world, buyers would prefer to acquire a practice free and clear of any unresolved litigation or regulatory matters. Excessive issues can frighten a buyer by painting a picture of a lax regulatory and professional environment or, if left unresolved, could subject the practice to financial strain and risk of closure. In our experience, a high volume of pending legal disputes and regulatory investigations can kill a transaction, often after the parties have expended substantial resources.
Tax Liens. More than one deal has met its end due to outstanding tax liabilities and liens. Working with the IRS to satisfy any lingering tax obligations sometimes can take time and present logistical hurdles, often at a time when the parties are pushing to finalize a transaction. Valuable time and resources are then spent addressing issues that could have been resolved, or at least initiated, before beginning negotiations or at least early in the process.
Undisclosed Deal Sticking Points. Deal terms and conditions that sometimes seem benign on their face can be real sticking points for parties to a transaction. For example, some parties value a leadership role while others may place a priority on maintaining established relationships with certain clients, vendors and third-parties. Some of these issues can become sticking points for parties that have caused deals to breakdown or, at minimum, required parties to expend substantial resources on a potential solution. When contemplating a transaction, it is important for buyers and sellers to communicate any key sticking points early on to avoid any last-minute surprises.
While no practice is perfect, sellers can increase the attractiveness of their practice and likelihood of consummating a deal by applying the above criteria to their enterprise and eliminating any problems. At minimum, an advance diagnosis and treatment plan can help you avoid the painful experiences of others outlined above, while further ensuring an efficient and painless closing.