Smoothly Sell Your Dental Practice To An Associate
Are you thinking of selling your dental practice to one of your associate dentists? It is more complicated that you may think. Just because you may have enjoyed an excellent working relationship, and may also have sat across them at team dinners does not automatically mean that the negotiation for purchase and sale will go smoothly.
For most owners, selling to an associate involves treading a fine line to maintain the relationship you have, while at the same time negotiating a deal that is the best possible outcome for yourself. There are some no-brainer actions that will ensure the deal operates more smoothly.
Arrive at an accurate assessment of practice value
The most logical first step prior to agreeing on a price is to obtain a formal valuation. This will establish an independently objective assessment of value for both the owner and the associate. Settling on a price without having a formal valuation completed is akin to jumping into a lake without knowing whether you can swim. Some owner and associate clients jointly commission a valuation, knowing that in the long run it is better to have an independently derived value, rather than an arbitrary figure which might be disputed after a deal is concluded. There is a strongly held opinion that practice appraisers will always produce a value beneficial to sellers, but this simply is not true. Good practice appraisers will produce a value which is market-based, and incorporates the unique factors within the individual dental practice.
Review your bargaining position before presenting the option to buy
Selling to an associate is a completely different situation than selling on the open market. In this situation, the owner may be vulnerable in many places, without realizing how exposed they are. One of the most common situations we have seen when contracted to complete a practice valuation is that the practice owner is caught unaware by the fact that they never signed a contract with their associate, or that the contract does not have binding non-solicit or non-compete agreements. If this situation exists and negotiations do not successfully conclude, the associate may choose to leave the practice. Unfortunately, in these cases practice values tend to diminish quickly, because the ex-associate settles near to the owner’s practice, and implements a strong marketing plan to draw patients (and staff) away.
A secondary issue, which is not insignificant, is that some associates have access to practice management and/or financial data for the practice owner, separate and apart from their own billings. They may also have the confidence and trust of staff members who reveal information that isn’t relevant for an associate. But it puts them in a position of informational power.
Finally, associates also know about many of the warts and pimples within a practice, such as issues with staff members, or details about the practice owner’s health, which they can use during negotiations. One example of a particularly nasty situation that arose is one associate demanding that a key staff member be terminated because they didn’t personally get along. The issue was not one of performance, but rather personality/ego.
Be objective on the price and terms that you will accept
When value negotiations begin, it is very common for associates to ask for a lower price than the formal valuation might indicate. After all, from the associate’s perspective, they have the trust of some (perhaps many) patients and have helped to build the current value. From that perspective, it is easy to see why an associate may feel like they are entitled to a reduced price compared with the general marketplace. But are they?
Well, in simple marketplace terms, if the practice were to go on the open market, a purchaser unfamiliar to the practice might see the value in paying full or even greater than appraised value. Viewed from that lens, a practice is worth as much as someone is willing to pay for it. So it is not a correct assumption that the “worth” of a practice being sold to an associate is less than its worth if it were sold publicly. These kinds of value assumptions are only too common and can lead to deterioration in the relationships between the owner and the associate.
It is always the owner’s decision if they decide that price is not the most important factor in their decision to sell, and they may determine that they like the associate more than they like a stranger who is willing to pay a higher price. That is the owner’s prerogative – and we respect it fully.
Terms of transition are equally and critically important in associate purchases. Looking through the eyes of the associate, there is substantial financial, mental and emotional risk involved in purchasing the practice. This is where the rubber hits the road, as the phrase goes. Most associates are eager to earn as much as possible so that they can service their consequential debt loads. For that reason, they may want the owner to have a short transition. Yet they know that the best way to keep the patients in the practice is likely to phase in slowly to ensure patient acceptance. The practice owner may also want to phase out slowly to finish open cases and to adjust their own mindsets to a different routine within their own lives. Ideally, owners and associates should both be flexible to ensure that patient needs are managed in the most ideal manner, while also shifting the distribution of production. This kind of negotiation requires diplomatic and delicate treatment.
Know that information gathering is a pain
Associates already know about many of the details of the practice they are considering– but they and their advisors need to gather further sophisticated information, some of which takes time to compile. In some cases, more information is requested than is actually needed. Most practice owners are not aware of what they can refuse to provide. Therefore, making the choice to work with an independent professional firm ensures that anticipatory planning can be done, and it also right sizes the information requests that may come with buyer due diligence.
Use the services of an independent third-party
For all the reasons outlined above, it makes sense to use the services of an objective, experienced, and credible firm to handle such purchases. Third party professionals such as brokers work very hard to ensure that they are presenting the facts within the practice, as well as the perspectives and transition desires of the owner.
Tier Three Brokerage has handled hundreds of associate practice purchases. Let us handle the sensitive discussions while you continue to practice without worry where we can anticipate issues and allow you to maintain peace of mind until the transaction is concluded. Commissions on private sales are considerably lower than those on public sales, yet our Consultants are dedicated to working as hard to make their practice owner’s wishes fulfilled.
Contact us at 1-800-437-3434 if you are interested in discussing sale to an associate.