Seller Carrybacks and Dental Practice Transitions Today
By Jen Bennett, Practice Transition Advisor
You’ve heard the term “Seller Carryback,” but what does it mean?
Seller carryback financing is when the seller of a given property, or in this case, a seller of a dental practice and assets, acts as a lender for the buyer if a conventional bank will not offer the full amount that the buyer needs to close the sale.
Years ago, it was commonplace for a retiring dentist to act as the lender for someone to purchase a dental practice. Seller financing was driven largely by the fact that banks and financial institutions had yet to embrace the industry like they do today. Therefore, there was a wide variety of structures, interest rates, terms, etc. that were built into those transitions and the exchange of funds between the buyer and seller.
Much like the rest of dentistry, the industry and the financing supporting transitions have evolved. In most transactions, it is quite common for the seller to receive all the cash at the time of closing, which is ideal. However, certain circumstances still exist where seller participation in financing is a requirement. In these cases, the buyer’s lender will require the seller to carry a certain portion of the purchase price. Usually, that amount is 10-25% of the total purchase price. Why would a bank need that, you might ask? Some common scenarios include: a declining revenue trend, uncertainty around the buyer’s production capability, and tight cash flow, to name a few.
Every lender has different standards around seller participation, but here are some common features of that path in the current environment:
- Term: Most carrybacks are amortized similar to the buyer’s bank loan. Payments based on a 10-year repayment are common.
- Rate: Since these loans are typically junior to the bank loan it is not unusual to see a seller note 0-2% higher than the banknote. Right now, around 5% is reasonable.
- Prepayment Penalty: Sellers typically want to receive the funds over a shorter timeline of 10 years. Most carrybacks do not have prepayment penalties so that the loan can be paid off or refinanced within 24 months of the transition.
With talks of increasing capital gains taxes in the near future only time will tell how prevalent carrybacks will become.
For more information, please feel free to contact Jen Bennett.
Read MoreTips for Managing Your Team When Acquiring a Dental Practice
When you purchase a dental practice, you aren’t just responsible for the building and equipment, but you also have a big role to play in making sure that new and existing team members come together smoothly. This can be a delicate process and quite difficult to navigate on your own, but there are a few tips you can follow to make everyone’s lives a lot easier.
Value Your Acquired Team Members
It should never be a case of “out with the old, in with the new” when it comes to putting together a dental team for your newly bought practice. The acquired team members have a lot of value and are an integral part of the relationship the practice has with the patient base. They may also be a big reason that many patients decide to stick with the practice. It’s essential to let existing team members know that they are important and take the time to communicate any changes on how the office will be run. Try to be patient if the transition seems slow because this will make things much more seamless compared to trying to implement whole new systems right off the bat.
Prepare for Bumps
Some of the team members at your newly purchased practice may have been there for decades or done things very differently under the previous owner. Any big changes you make will almost inevitably lead to some dissatisfaction and conflict, so it’s important to be mentally prepared that not everyone is going to like your decisions, even if you know they are in the best interest of the practice. Make it apparent that the lines of communication are always open so that team members can express grievances through the right channels. It’s also important to let your incoming staff know that they may need to help the acquired team acclimate to any shifts in day-to-day operations (they should be instructed on productive ways to do this).
How a Dental Consultant Can Help
Before you find yourself dealing with a mixed dental team, it’s important to work with an experienced consultant when buying a practice so that the transition can be as quick and harmonious as possible. They can help you choose a practice that aligns with your business and personal goals, show you how to train and retrain team members, and help you find the right people so the practice starts on the right foot.
Michael Dinsio has literally helped hundreds of dentists start, buy, and grow countless practices over the years, and Paula Quinn is a practicing hygienist and international speaker with over 30 years of experience as both a dental team member and business owner. Between the two of them, they have comprehensive knowledge of the dental industry inside and out.
Whether you’re thinking about buying a practice or are already in the process of doing so, they can help you get to the finish line with your budget, goals, and sanity all in great shape. If you’re ready to make your life easier, contact Next Level Consultants today.
Read MoreWant to Purchase a Practice?
By Megan Urban, Practice Transition Advisor
Want to purchase a dental practice? Here is a basic starting To-Do List to get you going!
– Where do you want to practice and where will you and your family be happy?
– Get your last 3 years of personal tax returns together.
– Gather your debt details: student loan, credit card, mortgage, etc.
– Start to look at your current production, or if you are in public health, monitor your procedure frequency report.
Talk with a transition specialist that can guide you through the process. They will look at some or all the following items in detail with you:
– Select a dental-specific attorney, bank, and CPA.
– Assist you to understand details of the practice, such as active patient count, expenses, insurance participation, recare, procedures completed and those referred out, potential marketing, cash flow, and due diligence in general.
Read MoreWhy We Chose to Sell Early in Our Careers and What We Learned
By Cindy Pauley, DDS, Practice Broker
Early retirement in dentistry is different than most fields. For most people working life involves a minimum of 5-7 career changes. With dentistry, we generally sign up for our entire working life. So, anything less than a lifetime can be considered early. And so our story begins…
My husband is in our office between patients massaging his aching thumb joint because the recent cortisone shot is starting to wear off. I am popping my third Advil of the day to deal with what has become regular neck pain and I say to him, “what’s our exit plan?”
His answer is quiet and dulled by the fact that this isn’t the first time I have asked this. “I don’t know?” That’s his quick answer. “Maybe 5-10 years from now”, is his long answer.
But something has changed in me. I no longer feel the joy I once had when I am working. I know he feels the same but doesn’t say it as much. Most times it’s an actual physical ache but sometimes it’s a mental one. Twenty-eight years is a long time in any career…oh wait…except dentistry. We are supposed to graduate with our advanced degrees and never look back on the careers we have chosen for ourselves. We are to never have a thought that maybe this is no longer where my energy and passion lies.
Turns out it is not all about having the most money possible in your lifetime. Money can put a down payment on a lot of things both figuratively and literally. But there is a word I have come to love with regard to money and it is the word “enough”. Did we have “enough” to live comfortably? Did we have “enough” to not worry about finances driving the important choices in our life? It turns out some of our final decision-making depended on the value of our practice. And so I looked at my husband and said “let’s get our practice evaluated again and see what we find out.”
We already had an evaluation done by a local practice management team that had sold my husband’s first practice a decade earlier, but it seemed low to us. We had assumed, at that time, that all practice valuations were the same. We thought practices were like any other piece of real estate, but boy were we wrong. Our practice wasn’t any more profitable than the last time we had a valuation, but I took a gamble thinking that maybe all were not the same and we would try again.
I started doing research in the field and my search sent us to the Omni Group. They did practice brokering exclusively and they had been recommended to me by other dentists. I gave them a call and started talking to Rod Johnston. He was both mild-mannered and highly informative. I found out much later he just also happens to be the owner of the company. He came to our office and met with us and explained the valuation process. It seemed much more detailed and complex than the first one we had done. We forwarded the necessary documents to Omni and in about a week we had a fresh perspective on our practice’s value.
Wow, what a difference a new look made! The final price was almost 25% higher in this valuation compared to the previous. How had the other valuation been so off? Would our practice sell at the new price? Well, it didn’t take long to answer all those questions. After being on the market for about one week, we had three full price solid offers and the ability to choose our buyers and our own transition plan.
The subsequent transition met and exceeded our goals. We wanted new owners that shared our philosophy of patient care. We wanted none of the staff to find out until the final paperwork was signed, and a quick exit with little to no overlap in our time in the practice. We achieved all of those goals and a full price offer.
How did that happen so quickly and how could the price point be so different? We didn’t over-analyze at the time; we were just happy it was working out so well. The full understanding wouldn’t come until later when I decided this whole process was something I was passionate about and became a broker myself.
When the dust clears and the paperwork settles out, there are multiple pathways you can follow. The most important thing is to remember as a dentist we are not just skilled at one thing, we are in every aspect of business from top to bottom. When you run a dental practice you literally do it all. The list is long, so I won’t bore you with it, but never forget how talented you are.
My husband’s path after clinical dentistry was to form a company that would oversee the maintenance and upkeep of multi-family and commercial properties which included our own holdings. I immediately got my real estate license and formed a management company to take over the tenant relations and leasing. After hiring an employee and settling into the rhythm of our new lives I still felt I had more energy and passion that extended outside of the new world we had created.
When I added up the things that I loved: business, real estate, and the dental community it was an easy decision to move forward with my new career. I only wanted to be a practice broker in one place and that was with Omni Group.
I found out pretty quickly that what looks simple to the buyers and sellers is actually a tricky business. First, on the subject of valuations. Omni does a three-part and highly complicated deep dive into each practice. This includes the goodwill, location, production, collection, overhead, and investments one has made in their practice. As far as marketing, Omni blankets the airwaves literally across the country and Canada to get the news out of the practice you are selling. They have more buyers tuned in than any other brokerage house. They also have more listings. Relationships with lawyers and banks come in as well. It turns out that the brokers are at the ready to find competitive financing with banks that are actively lending on dental practices. Each party needs an experienced lawyer to take them to the finish line and Omni works closely with local attorneys who are experienced in dental practice transitions.
One thing that came up that I didn’t expect was how much I would care about who would take over our practice. I have bought and sold many properties in my lifetime, some more valuable than my practice. In all cases, my level of really caring who bought them was low. The highest price was usually top of mind. Not so with the dental office. Obviously, a good price was important, but it became clear that someone who supported our legacy and would take good care of the staff and patients was of equal value. We were given full ability to meet with and learn about prospective buyers of our practice and made a choice that satisfied all our requirements.
When interviewed after the sale, no dentists have ever said they sold too early. In fact, it’s often the opposite. As it was for us. If we could do it all again, we would only have started the process sooner.
The end of our journey in clinical dentistry was just the beginning of our next chapter in life. I have spent my life around enough dentists to know very few of us really fade into the sunset. Once you sell your practice, you will begin writing the next chapter of your life and I promise it will be a good one.
Read MoreMarket Prices of Dental Practices – A Closer Look
By Corey Young, DDS, Practice Transition Advisor
“What are practices going for?” I get asked this question a lot. I like to ask the following question back. Are you buying a house to live in or a rental unit? This of course usually gets me a confused look, as the person asking me this is looking for a practice and not a property. Let me explain my analogy.
A residential house is a non-cash producing, market-based asset. Its value is largely determined by the resale value of similar houses in the area. Most of the big purchases we make in life are in this category. Paying ten percent too much for such an asset usually is a bad move. Being a good shopper really pays off.
Conversely, let us look at a rental unit. Actually, let us look at two rental units. Both units are very similar on a physical basis and are two blocks apart. Unit one is selling for $250,000. Unit two is selling for $300,000. Unit one is the better deal, right? What if I told you unit one ends up losing $100 a month after everything is paid for? What if I told you unit two ends up making $200 a month after everything is paid for?
If you approached the rental unit only worried about the asking price, you are looking at the wrong numbers. If you are looking at practices only based on asking price based on a percentage of gross collections, you are doing the same thing. I have seen practices selling for 50% of gross collections that are overpriced. I have seen practices selling for 90% of gross collections that are a steal.
My advice is to not go it alone. Seek out qualified transition specialists. Find the practice that enriches your future.
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