Thomas L. Snyder, DMD, MBA Managing Partner The Snyder Group, LLC Printer Friendly Version

What Lies Ahead For Practice Transitions In 2009

With this economic recession coupled to tremendous uncertainty in the credit and capital markets, practice transition planning will be significantly altered in 2009. For many potential seller retirees, losing 30% to 40% of pension assets certainly will create a significant change in plans for a potential sale in 2009. Many practitioners will now have to consider practicing additional years to hopefully regain some of the losses they have incurred. For some potential sellers, however, the economic calamity that we’ve experienced will not affect practice transition plans. This is because a growing number of practitioners are selling their practices to relocate to different parts of the country; in most instances, they will continue to practice as owners or associates. Whether you can retire by selling or are considering relocation, there are some factors brewing in the lending community that may raise some cause for concern.

Most major dental lenders are experiencing significant changes in underwriting requirements as many banks are becoming more risk-averse. Don’t be surprised if the lender asks a seller to hold paper for a period of time in order to take on some of the risk that was formerly underwritten at 100%! This may not be what you had in mind, but if you still want to sell your practice, it may be the only path you can take. Several banks, however, have not changed their underwriting requirements, so with them it’s still business as usual. Therefore, it’s important for purchasers to conduct careful screening of lenders because there may be wide variations in the type of loan commitments they may qualify for.

We have been told (albeit unofficially) that FICO scores for purchasers have increased with many lenders, potentially disqualifying some individuals who might have been able to obtain financing prior to the market crash. Cosigning a loan if a purchaser was married was usually required, but now in certain instances we are finding that real estate may have to be pledged, such as a second mortgage on a purchaser’s home. Some banks are now considering more critically the liquidity of a purchaser, namely how much savings or home equity is available.

We predict this will become a more common occurrence in small rural areas where qualified buyers are less available, so if a qualified buyer comes along and they are unable to get financing and the seller wants to retire, “becoming the bank” or being a substantial contributor to a loan may be the only option. For those who remember the early 1980s, seller financing was common when prime interest rate was 18%. Therefore many practice sales were financed by the Seller at rates lower than what was available on the commercial market. We may return then, with certain transactions, to more conservative underwriting and lending prerequisites. We’ve also been told that practice start-ups have increased in sheer numbers due to the frustration of many young doctors not being able to find a good practice for sale in their particular area. Whether the liberal lending for start-ups will continue as in the past is a potential source for concern. As the credit markets stabilize, some of these issues may dissipate and lending patterns will ease.

We are also seeing a growing trend of deferred transitions. Recruiting qualified candidates today and locking them into future transitions is becoming increasingly more common. In the case of a future sale, the purchaser makes a down payment to take the practice “off the market” as well as to lock in a future value. This strategy allows you to practice several more years and continue to fund your pension plan. Locking in a value today is good economics for purchasers because they may inherit a larger revenue base at the sale but not have to pay for their efforts in building up the practice. It also provides an option for the Seller to remain at work additional years after the sale, providing the Seller with additional income. Typically this transaction is ideal for younger purchasers who need to build up their clinical skills and efficiency. It’s also a great opportunity for mentoring as it relates to more difficult cases. In the deferred sale, the practice’s value is adjusted at the time of sale for inflation and additional asset purchases.

It’s hard to be totally on target with any predictions, but given our current economic climate, proper financial management is becoming more critical regardless of what phase you are in with your practice transition plan. My partners were both involved in commercial lending in the 1980s, so they have a wealth of experience in dealing with difficult lending situations. Please call us if you are experiencing a problem in obtaining financing—we may be of assistance.

Dr. Thomas L. Snyder is Managing Partner of The Snyder Group, LLC, a nationwide practice transition and financial management consulting firm. With more than 75 years of experience in the field, The Snyder Group can provide you a full range of services relating to practice transition matters and retirement planning. They can be reached directly at 1.800.988.5674.

If you would like additional help, email Dr. Snyder at drsnyder@thedentistsnetwork.net.

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