There is no correct way to transition a dental practice from seller to buyer. Every buyer and seller comes to the negotiating table with different ideas and expectations. However, the goals of each can be quite different. The usual goal of every buyer is to retain the greatest percentage of the existing patient base as possible. Since the intangible value (i.e. goodwill) of the total practice valuation is usually far greater than the tangible assets (i.e. equipment) this goal is well founded.
Following a "traditional" transition plan, (explained below) although most sellers hope that a buyer will be successful with winning over the patients and staff, they are usually and understandably more focused on their own retirement issues. These might include post-sale tax and estate planning and quality of life issues such as spending more time with spouses, children and grandchildren.
It is important to remember, however, that a successful practice transition is a continual obligation that can extend months beyond the closing of the sale. Part of the sale of the goodwill obligates the seller to assure they will take every reasonable step before, during and after the sale to promote the buyer of their practice to their former patients and staff. Below I have summarized some of the different transitional approaches to transferring ownership of a dental practice from one owner to another that I have utilized. I am not implying that these are the only methods, or that one is more effective than another is. There are advantages and disadvantages to each method. Read on.
The Traditional Approach
This approach is most commonly utilized to transition a practice from one owner to the next. Before summarizing the subsequent steps to this approach, please note that some of the steps are not mutually exclusive and may also apply to the other less traditional approaches of transitioning a practice.
The first step of the transition process would be to introduce soon-to-be owner to the staff. Retention of the staff is one of the most important parts of a successful transition, since their familiar faces will be the bridge between the former owner and the new owner. Most brokers and/or attorneys will advise that this step not be taken until the purchase and sales agreement is signed and a significant amount of the buyer's deposit money is being held in an escrow account. This money is usually a non-refundable deposit that is subject to forfeiture should the buyer decide to back out of the purchase at the last moment. There are circumstances where the buyer would be entitled to get their deposit back, such as, for example, a material misrepresentation made by the seller about the practice. These circumstances should be very limited though, since it is the seller bearing all the risk at this point if the sale is not consummated.
The second step of the traditional approach to transitioning a practice is the patient letter. This can be very important, since it is usually the first time the patients will hear of the retirement plans of their dentist. It is also the first impression the patient will have of their new dentist. The theme of the letter should be a sincere thank you from the seller for all the years of loyalty, the seller's approval of his or her successor, a short professional and personal biography of the new dentist and request of the patient to extend the same loyalty to the new dentist as they extended to them.
The third step should be the letter the buyer sends out to their new patients. Usually, more information is given to the patients about themselves, their commitment to servicing them, along with any proposed positive changes they plan to incorporate. This might include more convenient hours of operation or some new procedures they offer, such as cosmetic dentistry, whitening, etc.
The fourth step, an optional one, might be some type of social gathering or "open-house" at the office. I have worked with some dentists who did a wine and cheese gathering that appeared to be quite successful.
The fifth step, a newspaper announcement, is also optional, but effective for community public relations, alerting those patients who might have overlooked the personal letter, and also a subtle advertisement for the practice for new patients.
As part of a traditional transition approach, the seller usually will spend time in the office as a consultant. Acting in this capacity, he would review patient files with the new practitioner prior to any appointments, introduce the new dentist to some of the patients, and assures that the relationship between his former staff and new dentist gets off on the right footing. This consulting period usually last two to three months, and is not typically compensated as it is considered part of the goodwill the buyer already paid value for.
Acting as a consultant, the seller is not performing any dental procedures, and thus is not an employee of the practice which compensation would normally be due. After completion of this consulting period, the seller will usually make himself available to the buyer by telephone on an as-needed basis, but the buyer is more or less running the practice by himself or herself.
The buyer should continue to use the seller's name on all stationary and signage for a period of time (usually 12 months) post sale. This demonstrates to the patients the seller's continued endorsement of their successor, along with de-emphasizing that a change of ownership has taken place, as most patients do not like change. Naturally, there are many important smaller tasks under this approach that are also important, such as acquiring the phone number of the former owner, that do not require any explanation.
ALTERNATIVE TRANSITION APPROACHES
"The Silent Buy" - This approach is much different than the above from a couple of key perspectives. First, as the name implies, the buy-out or buy-in is kept silent. The patients are not made aware of the new owner's status until much later, usually a period of 6 months or so. The logic behind this type of transition plan is to afford the buyer a chance to firmly establish a foothold on the practice by becoming a familiar person in the office before announcing the retirement plans of the owner or that a transition of ownership has occurred. This may not seem like the most honest of approaches, but some buyers who I have sold practices to have reported some success with retaining most of the existing patients. Some buyers have taken this type of transition plan one step further by not telling the staff about their purchase until a later date. I would not recommend this however, since some buyers employing this strategy have later reported problems such as no apparent authority with staff members. Without such authority, staff members are not as inclined to freely accept any suggestions from the new "employee", being unaware that the new dentist is actually their employer. Secondly, if the actual situation is discovered, most staffs do not take well to the charade that was played out, feeling distrusted.
When the new practitioner feels they have successfully become acquainted with most of the patients of the practice, the parties then announce the retirement of the seller as if it was a recent event. The subsequent steps closely follow the steps of the traditional approach from this point onward. If the staff is involved in this type of transition plan, it is important that they know exactly what to say to the patient who calls for an appointment. They can tell the patient that their doctor has taken in an associate, encouraging the patient to book an appointment with the new associate. They might tell the patient the older dentist is temporarily cutting back on his hours, with the new associate covering most of the available appointments. It is important to also emphasize to the patient that their doctor has fully discussed their charts with his new associate and also some procedures the newer dentist brings to the practice that were formerly not available. I should add a word of caution to the new "associate". Be careful not to try to convince the patient to "buy the farm", so to speak. Subtle "seed-planting" is fine, but avoid bombarding the patient with everything they "need" in one visit. Also, NEVER discredit the former dentist. This applies to all types of transition plans. This is one way to lose patients quickly, since it is the loyalty to their former dentist that keeps them coming back. Building the same loyalty can take time, so be patient.
TRUE ASSOCIATESHIP LEADING TO PURCHASE
Some buyers express an interest in the practice, but their decision to buy may not have ripened. The obvious advantage for the buyer under this type of transition plan is they get to "test-drive" the practice before expending any funds. They also get a chance to firmly establish the doctor/patient relationship prior to any transition. There are some precautions that should be followed for both the potential buyer and seller. First I will discuss the issues that would affect the seller.
Under no circumstances should the buyer begin employment without an employment contract. That contract should have a reasonable non-compete clause. Under the worst case scenario, if the employer/employee relationship dissolves, you would not want to lose your patients to the new dentist who locates down the street whom you introduced them to and encouraged them to see. Secondly, prior to any employment agreement, the older dentist should have the credit report of the potential buyer. You would not want to waste valuable time with a candidate that would never qualify for financing when your retirement date arrives. Having an associate working in the practice under this type of agreement effectively takes the practice off the market. It is very difficult to continue to advertise and market the practice for sale with the associate working in the practice. The seller should also do his due diligence, fully investigating the potential buyer's personal and professional references prior to inception of any employment.
From the buyer's perspective, this can be an effective manner of securing their future. However, prior to beginning as an associate, the employment contract should be clear concerning the buy-out formula. Many dentists who choose this type of transition plan will have a practice valuation done before the employment relationship begins. This is important since a buyer would not want to be penalized for their own efforts to grow the practice with a higher valuation price. Most buyers would also want to know how long the seller wants to continue to work. Some future date to further discuss the purchase should be written into the employment agreement. I have assisted many buyers who have entered into this type of relationship who have unfortunately experienced repeated delays in the retirement plans of the seller. They become almost trapped in the practice, having devoted many years of their professional lives to the same.
Once the decision to buy is finalized and an offer is accepted, this transition plan would follow the traditional approach. The advantage is that the staff and patients are all very familiar with the associate, easing any apprehension that change may normally cause.
PARTNERSHIP, THEN LATER BUY-OUT
Many buyers of practices acquire a partial equity interest in the practice, often called a "buy-in" as the method of acquiring a practice. Under this approach, the partner has some decision-making authority (unlike the former approach) in the practice. Without getting into a legal discussion on partnerships and continuing our focus from a transitional perspective, this can be an effective way to transition a patient base. The greatest advantage with this format is the patients normally will stay with the practice because their doctor is still associated with the practice. It also makes transitioning the remaining interest to the partner when the other partner retires relatively easy. However, having a written partnership agreement is imperative. This would answer most of the potential questions or issues that may arise such as profit sharing, salaries, disability, buy-out formulas, death, or dissolution of the partnership, to name a few.
Another advantage from the buyer's point of view is that this can be a less expensive way to establish equity in a practice, since most buy-ins are financed with sweat-equity. The seller takes a percentage of the buying partners earnings in the practice. Since bank financing is usually not available, a discounted interest rate is usually agreed upon for the buy-in.
From the seller's perspective, if they know they want to retire at some definite point in the future, it is reassuring to know they have the buyer in place to implement their retirement goals. It also assures the family of the seller that should an untimely unfortunate event occur such as the death or disability of their loved one, they will be compensated according to some pre-agreed formula usually funded through insurance funds. Secondly, it also allows the seller to continue to work in the practice without the chance of being terminated.
There are other transition methods that are hybrids of the above, and some quite different. No plan is correct for all transitions. The right choice should be the one that fulfills the differing needs of the buyer and seller, with the primary goal of assuring the patient base transfer.