What are my options for transitioning my practice?
We are asked frequently about different options for practice transition to professional practice such as a dental practice. There are a variety of ways to transition, but all are encompassed in the following 4 general scenarios:
Associate / Buy-in / Buy-out
In this transition scenario, the practice owner hires an associate, then at some point sells an ownership interest in the practice to the associate, and at some later time, sells the remaining interest in the practice to the associate. This model used to be the “norm” as recently as 25 or 30 years ago in the dental world. However, with most general dental practices, we are finding this process far less common due to the risks and issues that are raised. Commitment seems to be an issue – – for both associates and practice owners. Many of our seller and buyer clients come from buy-in/buy-out situations that just never materialized. There are other issues that may arise as well, such as how and when to value the practice, how and when payment is made, and how practice management issues are handled during the partnership phase of the relationship. All of these issues can be addressed. However, most practice sellers these days favor a simpler, more direct sale of the entire practice in one of the ways set forth below.
Over the last 25 years or so, it has become increasingly common to see a practice owner, often a senior dentist but not always, sell the entire practice to a dentist, often a junior dentist but not always, who is not associated with the practice. In this methodology, the senior dentist sells his/her entire practice at one time to a new dentist. The purchasing dentist typically obtains third party financing and pays the selling dentist for the practice entirely at closing. Thus, the selling dentist does not have to worry about guaranteeing the buyer’s note obligation or providing seller financing or anything like that. Something to think about is that the transition from practice seller to practice purchaser can be a bit more abrupt in this scenario. Depending upon how big the practice is and how busy it is, there may or may not be enough space and work available for the purchasing dentist to keep the selling dentist on post-closing for very long. Thus, this transition model often works best if the selling dentist is willing to walk away from his/her practice after a shorter transition period. One variation on this model is the associate who purchases the practice where he/she works in its entirety from the practice owner. This variation can allow for some extended transition as the practice associate and practice owner can essentially just “switch roles” following the transaction closing with the associate becoming the owner and the owner becoming the associate.
There have always been dentists who own multiple practices, but the rise of the multi-practice owner here in New England has occurred primarily over the last 15 years as lenders have become increasingly comfortable loaning money to successful multi-practice owners. Selling to a multi-practice owner has the benefit to the seller of getting paid for his/her practice in total at closing. A variation being offered by some multi-practice owners is allowing seller to retain a minority equity interest in the practice. However, this methodology also carries with it the benefit or obligation, depending upon how the selling dentist views it, that the seller will stay on to work for the multi-practice owner for a period of time following closing. This post-closing work obligation or opportunity can last for several months to a few years. For a practice owner who is tired of managing his/her practice, but who wants to work for another year or two or three, selling to a multi-practice owner may be a great option. In addition, there are many, many multi-practice owners looking for “good” practices, so a selling dentist is often able to find one whose priorities, ethics and style are a good match with the seller’s.
Dental Service Organization (DSO) or other Private Equity Backed Buyer
In the last several years, DSOs and other private equity backed buyers have become increasingly active in New England and elsewhere. Selling one’s practice to a private equity backed buyer carries with it some benefits, but also raises some questions and issues a selling dentist should certainly consider and have addressed. One benefit is that, because they are funded with private equity, these buyers do not have to obtain financing from a third party lender. Another benefit, again because they are funded with private equity, is that these buyers will often value the seller’s practice at a higher multiple than a “traditional” buyer or even a traditional multi-practice owner might. Issues to consider, though, include the same opportunity or obligation that is present when selling to a multi-practice owner, i.e., that the seller will be expected to stay on to work for the buyer for at least 2-3 years post-closing. Often, part of the purchase price is paid based on the seller remaining and the continued strong performance of the practice post-closing. So, a practice seller needs to think about how and when he/she is paid as much as what he/she is paid. In addition, the management of the practice following closing can often be heavily regulated by the buyer’s organization. DSOs and other private equity owners often want to centralize and manage all schedules, marketing, ordering, employee salaries and benefits, and other aspects of the practice in order to have the practice comply with organizational guidelines. Thus, a seller who is contemplating selling to a DSO or other private equity backed buyer should discuss thoroughly what his/her role will be in the post-closing management of the practice, if any, and what flexibility there will be in work schedules, ordering supplies, choosing labs, etc.
It is important to note that there is no one “correct” way to transition one’s dental or other professional practice. Each practice owner should consider the benefits and issues raised with the various methodologies and be honest about which method(s) may work best for him/her.