Successful practice transitions, think different!
"A creative man is motivated by the desire to achieve, not by the desire to beat others. ... "
Music turns my crank, fires me up.
If you put music in my ears, my body starts to involuntarily spasm in time to the music. Before you know it, you better get out of the way as the 'spasms' start to look like a little like this...
This boy is a little crazy, especially once caffeinated in the morning! The brain fires up and my poor wife groggily lends me her ear whilst I spew endless random thoughts. I'm sure after a minute or two I sound like Charlie Browns teacher!
Instead of hunting down my snuggle kitten in the morning, I do my best to grab the nearest social media device and start "Trumping"....spread random thoughts via social media as quickly as they come to my brain.
I did my morning investment and portfolio review. Pasted 'important' shit all over Twitter, Facebook, Instagram. Wrote a song. Performed some analytics for work. Sent email.
Damn. Brain still overfowing with ideas.
I read an article in Canadas Oral Health magazine "The dollars are in the details". Inspired to publish a few of my own thoughts to help my friends that are thinking of retirement, and those that are starting careers in the industry.
I've been in this business since 1984, and maybe a generation before that since my father was also a sales representative in Canada working Saskatchewan and Alberta territories for Ash Temple. Ultimately starting his own dental supply house "Dominion Dental Supply" that merged with what is now "Sinclair Dental" in Canada. These are the thoughts of an "old man" in the business that is currently 52 years old (2018) and ready for the next 35.
Start here if you wanna skip the boring, personal crap.
When you have been around for a while, and you are the only one in the frozen tundra that has been performing local appraisals and evaluations for the last few decades - you learn a few things.
One of the "trends" today in Canada and has been a trend in US for a while...i-dentists (investor dentists) and Corporations.
There are plenty of resources that can explain this "phenomenon" of HUGE growth for this area. The bottom line is it's all about the numbers.
If you have a profitable business, it's an opportunity. Understanding this opportunity is going to be VITAL for the next generation of dentists - but also for you, the retiring dentist.
Do you understand the actual numbers for your business, and how this looks to an investor? As an owner-operator you always paid yourself "whatever was left" after all expenses. Depending on discipline this can range from 25% to 65% of the gross income. That's a large stretch!
I assume you have a good handle now on the true value of the assets you either slaved a lifetime to protect, or are about to invest and start your career and have been paying attention to the business of dentistry.
There are a two types of businesses you can buy.
#1 - Owner works for the business.
The majority of small businesses are Owner/operator and are valued based on owner/operator earnings. There is little to no profit for an investor outside of the owner....maybe.
These businesses will have the smallest multiples as the revenue is mostly generated by the OWNER and not the TEAM. How can an investor give any type of multiple if they HAVE to be there to generate the income?
These types of practices are what USED to be typical and would be appraised at anywhere (in current multiples) from 2 - 3X earnings (now approaching 5X).
Meaning if you had a $1,000,000 clinic with 70% overhead BEFORE you paid yourself then this was $300,000 left to you as a working owner. so if someone wants to "buy a job" they would pay $600,000 - $900,000 and depending on the value of assets could go as high as $1,500,000 possibly.....
#2 - Business works for the owner.
These are the percentage of practices that are usually LARGE and employ talented team members that create profit for the business. These businesses make use of TIMEfactors and generate profit above what the owner draws.
As an investor - this is attractive.
These clinics generally have north of $1.5M gross revenue. Beyond what I call the "tipping point". Which is the efficiency that comes from making the MOST USE of FIXED EXPENSES and QUALITY TEAM.
Valuations for profit in our business are 5 - 7X, with agreements to keep the current structure of the business in place (Owner becomes the associate).
It seems like a great idea as the owner can sell for a set price (let's say they had a $2M clinic with after owner "40% associate" pay of $200,000.
There seems to be some type of security for owners to take a sale price of a multiple of profit while retaining the opportunity to become the associate.
To me this is like a "reverse mortgage" with a 5-10 year payback for the financer. The guarantee of income coming from the previous owner while the asset continues to grow and gain in value.
Here are a few thoughts on how owners can possibly get some cash flow in retirement as well as security. All of these scenarios reward the potential seller with a fair market valuation of the profit, and even for those that are "working for the business" scenarios!
#1 - Sell Shares.
Instead of selling the entire profitability - sell shares to working partners/associates. This allows an associate to buy in at full market value while keeping a mentor/advisor close. It's possible the new associate/share holder could increase the value of the shares by increasing the gross production and net revenue as a bonus!
There is a possible tax advantage to all and allows buyer and seller to garner cash flow.
#2 - Merge.
Merge with other local clinics to increase the value of both businesses by enjoying more profitable clinics via lowered fixed expenses. An older dentist would basically "retire" his worn out clinic and move over to the newer clinic. He could sell shares in his company to the younger clinic, enjoy the benefits of a newer space and equipment, get paid for his goodwill and not have the pressure of "need to sell" if anything happens.
#3 - Associate or established investors.
If you have a partnership where the current partner isn't willing or able to buy - it may be possible to find local investor dentists with similar personalities that would be happy to give you terms that would give them a return on investment. As long as the dentist remains the principal owner, it may be possible to take private investors to help secure the value.
-Lowered fixed major costs like rent, equipment, team.
-Complementary treatment planning. Often the mergers I have been involved with bring in specialists, or GP who have different and complimentary skill sets. A group practice with complementary skills means VERY FEW referrals are sent out of the practice and these practices generate GREAT cash flow and PROFIT.
-Lowered variable expenses - supply, maintenance, repairs, CE, marketing
-TEAM effort - easier to keep and train backup members for those personal days and sick days which improves the bottom line.
It is difficult as an investor to find returns of greater than 10% in the open market. What will you do with your "secure" sale price? Is there a chance you could find a way to have your business pay you while enjoying retirement?