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The Deferred Buy-In / Buy-Out
A Wave of the Future
A deferred buy-in/buy-out is fast becoming a common practice transition strategy. With more practitioners realizing that there will be increased competition for qualified purchasers developing a pre-determined transition plan for a buy-in or buy-out is a prudent strategy.
When designing a deferred transition plan, it is wise to establish a baseline practice value within the first year of the relationship. This is particularly true if your candidate will be practicing on a full time basis. Associates do not like paying for something that they help grow. If you have untapped potential in your patient base your associate will be able to thrive and revenues can increase 15 to 25% per year in the first few years. So, if you establish a baseline value and let your associate work as hard as possible you will not be penalized for what you may think you’ll lose if you wait and have the practice valued a few years later at the time of the transition event. If you have done your associate economics correctly you should generate a 30 to 35% profit margin. For example, if your associate generates $300,000 annually, that is a $90,000 to $105,000 increase in your net income per year! So using a baseline value is not such a bad idea.
Some of the key ingredients to a properly designed deferred buy/in – buy/out are:
“Locking in” the Practice Value: The practice’s intangible asset value, (goodwill, location, covenant, reputation, etc.) which typically comprises 75% of a dental practice’s value, remains the same except for a cost of living adjustment made at the time of the buy in or sale. We use the Bureau of Labor Statistics CPI adjustor to determine the present value of the Intangible Asset Value. Tangible assets (equipment, supplies, leaseholds, etc.) will be re-appraised at the time of partnership or sale to account for “ wear and tear” of existing equipment as well as the purchase of any new equipment or technology since the baseline valuation.
Contract Agreement Preparation: All agreements should be prepared within 6 months of the associate/employment phase. The associate’s employment agreement should, however, be prepared prior to employment. Additional documents needed would be either Stock Purchase or Partnership Interest Acquisition Agreements. These documents should be prepared in their entirety, but will not become effective until the actual transition occurs. All issues relating to your professional relationship need to be addressed now by both parties. Some of the major issues include: income splitting, tax allocation issues, rules of business conduct, retirement age, and early partnership or shareholder withdrawal, Shareholder Agreements and Shareholder Employment Agreements are required in situations where a Professional Corporation is formed. For those practices functioning as a Limited Liability Corporation you will need an Operating Agreement.
Future Valuation Issues: This is the trickiest part of the deferred buy-in/buy out transition. We have found that many “junior “ partners lose interest in purchasing the remaining interest of their “senior “ partner either because they do not want to incur additional debt, or feel they may be “ overpaying “ for the departing partner's interest. To avoid this situation, we recommend that formulae be included in your agreements that will state exactly how a future value will be calculated. Not only is the future price of the retiring partner addressed but also what appropriate discounts should be applied in the unlikely event of disability or death of either partner. We recommend that if the senior partner is not contributing at the same level of production than in the past, an adjustment to final buy-out value is appropriate.
Consideration Payment: If you adopt a “deferred transition” strategy, the host doctor has effectively taken the practice off the market so it is not unreasonable to request a down payment as consideration for this action. Realistically, this request is not always made for many partnership opportunities, although, based on the host’s age, it may become necessary. If the associate changes direction and wants to back out, there can be an economic loss that may be hard to recover if the host’s retirement plans are fast approaching and no one is available to succeed him/her. In the case of a deferred sale, this payment is a must! By structuring win-win agreements a long-term deferred practice buy in/ buy out can be quite successful for both parties.
The Snyder Group provides a vast array of practice transition services. Please visit their website for details.
Interested in having Dr. Snyder speak to your dental society or study club? Click Here
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Attracting The Right Patients
According to recent studies by major market research firms, 63% of online shoppers are women. Women control 75% of household finances and 80% of purchasing decisions. Women buy or influence the purchase of 80% of all consumer goods. Women also influence 85% of all health care decisions. Do you see the opportunity here? If not, you might as well stop reading this article right now. But, if you realize how lucrative addressing the needs of women in the dental world can be, then you'll need to understand what influences their purchasing decisions. As we all know, men and women are different. We respond differently to the same communication and social situations. A man and woman listening to the same conversation might come away with completely different impressions of what was said.
For example: men tend to choose a dentist based mostly on price and convenience, women utilize a more careful approach. Your receptionist's tone of voice, or the photo in your yellow page ad might not matter to a man, but might be a deciding factor for a woman. Why? Women are more likely to make buying decisions based not only on the dental services you provide, but also on what your practice stands for. This once again reinforces women's relationship approach to purchasing. So, if you want to attract women, become focused on softer features and benefits that are important to them–and make sure your marketing message communicates it loud and clear. The premise behind this reality is simple: If women have to go out of their way to track you down... if you make them jump through hoops to get service... if your attitude is "take-it-or leave it"... they'll probably leave it-and take their dental dollars elsewhere. Your objective with female customers should be built on a long-term reputation of honesty, integrity, ethical behavior, and "off-the-charts" attention to detail. And most importantly, always remember that it's easier to keep her than to win her back.
Women are not afraid to stop and ask for help, so they will respond more to quality customer service standards and a polished office flow than any of their male counterparts. And even though men may not be as in need of these intangibles, if you incorporate the higher standards of women into your practice, you are bound to give men a bit more than they even thought to ask for. Studies have also shown that graphic design and advertising that uses cliché women's colors (pinks and purples) or focus on "women's topics," will always alienate male patients. Women can also feel turned-off by such an obvious approach as well. Understanding that women are the number one target is only part of the equation. Targeting the right women is a critical component in creating a great marketing strategy. Rather than just guessing whom these women might be, marketing experts rely on important demographic information that can be obtained from reliable marketing research firms. When accurate and valuable consumer information is integrated into a marketing tactic such as direct mail, the results can be profoundly more successful than just mailing something to any warm body with an address and a mailbox.
Demographic information can come from a lot of sources, but the best information is never free. In our company, we pay for an expensive subscription to consumer information that can be extremely detailed. For example, an Orthodontist may want to target homeowners and not renters. He or She may also want to target homes with children and parents in certain age categories. Additionally, home value, income level, and length of time in the community are other factors that can dramatically influence the success of a marketing effort. I teach dentists that a time sensitive offer is also a key component of any successful marketing tactic. The type of offer promoted can also have a huge influence on the type of patient that responds to your advertising efforts. A discount off of a cleaning and exam will motivate a particular type of consumer differently than a free whitening offer. A same day crown offer will create interest and response from a different kind of patient than a discount on silver fillings.
Lastly, it is important to remember that the right kind of potential patient is usually slower to respond to advertising and offers than other patients. It doesn't mean that they don't respond, only that they make take longer to switch practices. There is a saying in marketing that women don't buy brands, women join brands. With that said, a long-term consistent brand building and advertising campaign is an absolute necessity. A mediocre marketing program with a dedicated effort will always be more successful than an award-winning strategy that is executed halfheartedly. Dedication is the reason businesses and marketing efforts succeed. Show me a successful business of any kind, and I will show you a dedication to marketing. The flaw in most dental practices, with regard to marketing, is misunderstanding this important concept. Marketing is not an expense, marketing is an investment. If it is executed properly, every penny spent will return to you multiple times. If I had a dollar for every time I heard a dentist tell me that he or she couldn't afford marketing, I'd be a rich man. When dentists start to see marketing like they see their dental supplies, they are headed in the right direction. When they start to see dental marketing like they see their retirement account, they are finally starting to get it.
Interested in knowing more about how to market your practice? Click Here
To reach Joel Harris Email him at Joel@thedentistsnetwork.net
Interested in having Joel speak to your dental society or study club? Click Here
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