7 More Winning Practice Transition Strategies
Practice transitions activity has increased dramatically since the beginning of 2013 when pent up demand was unleashed due to the improving economy and rising real estate and stock market values. Higher practice values have also stirred greater interest among doctors in capturing additional wealth through effective transition strategies. Below, practice transitions expert Roger K. Hill* discusses seven strategies doctors can use to maximize their practice’s value to help reach their financial goals.
Last year, we discussed how doctors could achieve a 50% (or greater) return on investment through purchasing a competing practice and merging it into their own. Having helped over 200 doctors implement this strategy, we’ve seen the substantial benefit that it has had on their practice and personal finances. Here’s seven other leading edge transition strategies.
1. Purchase a second practice location and build it up – While practice mergers can work well when the acquired practice is located nearby, in many situations the potential practice for purchase is located too far away for patients to be effectively merged. In this case, Hill advises entrepreneurial doctors to purchase practices that have good growth potential, but which have been poorly managed, and operate them as an additional location. Purchasing this type of practice or those for sale in distress situations such as bankruptcy, loss of license, death, disability, etc. and turning them around through implementing effective marketing and management strategies can result in huge profits during the holding period. Furthermore, Hill says that he has seen some doctors double their original investment in only five years through reselling that practice.
2. Open a specialty satellite in a referring doctor’s office – One of dentistry’s biggest megatrends is the expanding range of services offered by general dental and pediatric practices. While virtually all corporate dental chains offer a complete array of services, this strategy has seen significant growth recently in traditional general dental and pediatric practices. In one recent instance, an orthodontist was contacted by a pediatric dentist outside his local market area. The pediatric dentist indicated that he was interested in bringing an orthodontist into his office to provide those services to his patients, and asked if the orthodontist was interested in such an arrangement. The relationship had to be structured properly to avoid fee splitting concerns. However, it turned out to be a “win-win” relationship with both doctors making more money. The pediatric dentist received a portion of the income otherwise referred out. Meanwhile, the orthodontic specialist generated substantial additional income through this captive relationship.
3. Leverage growth potential with an associate – Hill has recently been contacted by several doctors looking to explore entrepreneurial options, such as expanding into a new location to serve an underserved population, or purchasing another practice that comes on the market. While these doctors had the clinical and management expertise to run the practice, they lacked the time to perform the clinical services. In situations such as this, adding a full-time associate can allow the host doctor to take advantage of the opportunity to grow the practice and increase profitability, even after paying the associate. Moreover, this builds the practice’s value for future sale, all without increasing the doctor’s clinical workload.
4. Maximize practice value through selling a partnership interest – Hill notes that some practices are so large these days that it is impossible to sell off the entire practice at one time to a single individual buyer and receive full value for it. Maximizing the sales price requires selling off a fractional interest in the practice through a partnership buy-in, and later selling the remaining ownership in the practice to the same or another buyer. While these partnership buy-in/buy-outs typically take 5-10 years to complete and have added cost and complexity, they can allow the doctor to reap hundreds of thousands of dollars in additional practice value that might otherwise have been forfeited.
5. Sell off a second practice location – Doctors wishing to slow down, but not sellout, have several practice transition options, says Hill. He has helped several successful doctors sell off a second practice location in order to realize its true value. In one situation, a selling doctor refocused his efforts on his remaining practice location and built it back to the production and collection levels previously achieved by both practices in less than two years. As a result, his annual income stream was unaffected by the sale of the second location. However, he invested the after-tax sales proceeds to create a second retirement fund, helping to assure his financial security.
6. “Slow down” merger – In areas where there are several doctors approaching retirement age, Hill recommends that they consider a practice merger, or space sharing arrangement, using fewer locations by combining facilities. In one situation, two competing doctors each wished to reduce their clinical time commitment to no more than 2-3 days a week. Doing so independently would have resulted in excessive facility, equipment, and staff labor costs. Rather, the two doctors agreed to merge their practices into a single location, and operate two and a half days per week each, or five days altogether. Thus they achieved their goal of substantially reducing their clinical workload while providing coverage for more time off. Furthermore, they dramatically reduced overhead costs through eliminating duplicative facility and equipment expenses, and cut labor costs through eliminating overlapping positions and fully utilizing employees for a five-day clinical workweek.
7. Maximize practice sale proceeds – A number of potential sellers may be 2-3 years away from selling out, but wish to identify and secure a future practice purchaser. Meanwhile, a growing number of dental school graduates are looking for practices to buy, even if it is on a delayed basis. Given these conditions, Hill recommends that selling doctors consider entering into a contract providing for the ultimate sale to the new doctor, but with a delayed (2-3 years) closing date. Through delaying the closing date, the seller is able to maintain ownership and related practice profits for a longer time period, maximizing the total value received from the practice transition. In addition, he is able to protect the value of his practice through accelerating the closing date in the event of his earlier death or disability. Meanwhile, the practice buyer has the opportunity to nail down his future practice home and possibly work there on a part/full-time basis until the closing.
In other situations, doctors want to remain in practice but substantially reduce their clinical time commitment now. In these cases, Hill recommends that the selling doctor consider an immediate sale followed by a post-closing associateship for a 2-3 year period following the date of sale. This allows the selling doctor to continue to work to help maintain the practice volume, while the buyer builds his clinical speed and management skills. Furthermore, this allows the seller to maintain post-closing compensation for services rendered, creating an ideal way to derive further income from the practice transition. While the seller’s post-closing employment cannot be guaranteed, there’s a legal option that can provide proper protection. Having the purchaser sign a note to the seller that becomes due in the event his post-closing employment is terminated early can protect the seller in this situation, says Hill.
* For more information on practice transitions services call 877.306.9780.
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