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Issue #88-1.05.10 |  |
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If You Don’t Get Your Asking Price, Can You Still
Be Satisfied?
It’s not uncommon for many doctors who sell their practice to feel it is worth more than what a buyer is willing to pay. Sometimes the value of a practice is adversely affected by some unforeseen circumstances, such as the loss of an associate, illness of the owner or other events that may cause a disruption in revenue. In these instances, the potential purchaser may want to offer a lower price. There is a solution to these issues and if all parties are agreeable, the outcome is quite good. The solution is called an earnout. An earnout is a way to increase the sales price over time based on a set of conditions. It’s a “win win” approach.
An earnout simply allows the Seller to receive more money, based on a formula that pays up to a specific amount over a certain time period. If the earnout revenue goals are not met, no additional monies are due to the Seller. However, if the goals are met then both parties reap the rewards economically. An earnout is usually structured over a two to three year period. To prepare an earnout plan, the following steps need to be taken.
1. Prepare a Practice Breakeven Point
It’s important to know the impact of an earnout’s payout on the practice’s cash flow. The simplest way to project an economic impact is to first determine the practice’s breakeven point. The Breakeven Point (BEP) is calculated by the following formula:
| BEP = | Fixed Expenses + Owner Compensation 1 - Variable Expense Factor |
Fixed Operating Expenses are all practice related expenses such as Facility Expenses, Staff Expenses, and General Expenses (i.e. bank charges, advertising, professional fees, computer expenses, licenses/permits, practice debt, etc.). Variable Expenses are in the form of a ratio and are collectively termed the Variable Expense Factor. These variable expenses are office expenses, dental and implant supplies, and lab expenses. Variable expenses fluctuate directly with Production. Once the Breakeven Point is calculated, you can then project the economic impact of an earnout by determining the additional profit the buyer would realize after the earnout payment is made. Here’s an example of calculating a breakeven point.
| Practice Revenue: | $800,000 |
| Fixed Operating Expenses: | $440,000 |
| Variable Operating Expenses (20%): | $160,000 |
| Owner Compensation: | $200,000 |
| BEP = $430,000 + $200,000 1 - .2 |
= $630,000 .8 |
| BEP = $787,500 | |
So in this case, the Breakeven Point in this practice would be $787,500. Therefore, every dollar generated in excess of $787,500 would cost 20¢ to generate that one dollar of revenue. Therefore the profit would be 80¢.
An earnout payment is typically the difference between what the Seller asked as a sale price and what the Purchaser paid. In some instances where there was an illness or some event that caused a big drop in revenue, the payout may be greater than a sale price differential.
2. Determine a Percentage of Dollars Earned in Excess of the Earnout
Amount to be Paid to the Seller
Typically, we suggest allocating 15% to 25% in excess of the earnout revenue goal to be paid as the earnout payment for a particular year. Again, this percentage is based on the results of the breakeven analysis. Here is an example of how an earnout payment would work:
Earnout Example in Year 1:
| Seller’s Asking Price | $790,000 |
| Actual Sale Price | $740,000 |
| Earnout Payout (if revenue met) | $50,000 |
| Annual Earnout Goal | $810,000 |
| Time Frame 3 Years | |
| Earnout % Payout | 25% |
| Breakeven Point | $787,500 |
| Actual Year 1 Revenue | $830,000 |
| $830,000 | (year 1 revenue) | |
| -$810,000 | (earnout goal) | |
| $20,000 | (overage) | |
| X 25% | (earnout %) | |
| $4,000 | Earnout Payment Year 1 |
For an earnout to work, trusting the Purchaser to accurately track revenue is critical. To counteract any manipulation of financial data, we structure our earnout agreements so that the Seller, at his or her own expense, can retain an accountant or auditor to ensure that the earnout calculations are made correctly. Finally, we recommend the earnout payments be made on a quarterly basis.
In summary, earnouts are a great solution when sale price and practice potential come into play. They can provide an economic win for both parties if the earnout goals are realized.
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.
Interested in having Dr. Snyder speak to your dental society or study club? Click here.
Hear Dr. Snyder’s FREE podcasts at The Dentist’s Network - HERE
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Wishing and Waiting Won’t Get You What You’re Wanting
Goals. With every New Year comes the pressure to identify them. You may even write them down, and if you’re really ambitious, you pledge to look at them and act on them daily. Then other things start to pop up and before you know it, it’s been six months and you find a piece of paper buried beneath a pile of things you meant to get to but never did. And there scribbled at the top is the word “Goals for the New Year.” That nasty feeling of failure creeps in.
You’re in good company, doctor. For many dentists, the goal-making process becomes a monkey on your back, a recipe for more stress rather than a strategy for action. Why? Goals can be intimidating because if you don’t reach them, you feel you’ve failed. Or there’s so much to get done, you feel totally overwhelmed. So you choose to simply go along doing what you’ve always done because, well, at least you know what you’ll get. But that doesn’t stop you from wanting and wishing and dreaming big. And therein lies the challenge.
How do you get results from wishing and wanting? How do you take a desire and make it a reality, without the burden of a huge list of “goals” or the risk of failure? Focus on one area at a time, and break the process down into manageable steps. Let’s say your desire is to increase production in your practice – a critical area for every office. How do you get it? By making even minor improvements in those areas that influence production - starting with treatment communication.
Have you introduced new services in your practice? In the coming year, educate patients about the many benefits of your current and expanded services. Have you asked your patients lately about their dental wants? Ms. Young may be newly single and very interested in exploring some cosmetic options in the coming months, but she may not even know that you can provide those – unless you educate her. Do patients need more dental care than you are diagnosing? In the New Year pledge to diagnose what the patient needs - what will benefit their total oral health. Resist the urge to diagnose only what you think they can afford.
Take a look at team follow-up. Is the treatment coordinator tracking patients who need treatment but are not scheduled or have cancelled? If a patient cancels an appointment and says they will call back to reschedule, give them a reasonable amount of time to do so. If they do not reschedule within a few days they should be contacted. Your concern is the patient’s welfare. Following through on treatment ensures excellent oral health and is in the patient’s best interest.
Review patient records daily and follow-up with those that have not pursued recommended care. Remember, you are your own marketing staff. In the dental practice, marketing is education - it’s not high pressure sales. It’s your responsibility to educate patients on the necessity and value of dental care. If the team isn’t sure how to educate patients effectively, train them. Conduct mini-clinics during staff meetings to share key benefits of new/existing treatments the practice offers. Draft question/answer sheets on the most common questions patients ask about specific procedures so that everyone is prepared to answer the fundamental inquiries.
In addition to improving treatment education and follow-up, take these steps to increase production in the New Year:
- Establish daily production goals and schedule to meet those goals.
- Prescribe a treatment plan for patients that includes everything that needs to be done - appointments necessary, the cost of treatment, an estimated length of treatment time, and any treatment options.
- Designate a treatment coordinator who is responsible for presenting treatment plans to patients and is expected to secure at least 85% case acceptance.
- Implement an interceptive periodontal therapy program.
- Provide superior customer service that will encourage patients to refer friends and family.
- Each month run the year-to-date Practice Analysis Report and compare it to the same period last year.
And finally, keep wishing, hoping, and dreaming big. Goals don’t have to be intimidating or overwhelming. You can turn each of your wishes and desires into reality with the right direction and the right plan. Let McKenzie Management help you get there. Give me a call and we’ll make sure this is your best year yet.
Sally McKenzie is CEO of McKenzie Management, a nationwide dental management, practice development and educational consulting firm. Working on-site with dentists since 1980, McKenzie Management provides knowledge, guidance and personalized solutions that have propelled thousands of general and specialty practices to realize their potential.
Interested in speaking to Sally about your practice concerns? Email her at sally@thedentistsnetwork.net or call 1.877.777.6151.
Interested in having Sally speak to your dental society or study club? Click here.
Hear Sally’s FREE podcasts at The Dentist’s Network - HERE
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Three Technologies That You May Not Know About… But Should!
The modern dental practice continues to evolve at a very rapid pace. Many systems that were paper and film based for close to a century are being replaced by digital counterparts. There are now computers in almost every office, and a large percentage of offices are using digital radiography, intraoral cameras, digital cameras, practice and image management software, and many have embraced the Internet to handle mundane chores such as confirming patient appointments and even scheduling online. In short, the concept of a “paperless” practice is very realistic and obtainable in 2010.
A review of these newer technologies shows that all of them were introduced to the dental market with very slow and sustained growth for 5-10 years before they became more popular. As with many businesses, dental practices are slow to adapt to change, and dentists want to be assured that investments they make in new technology will show a positive return on that investment. While some new technologies have dubious value, there are currently five that were introduced over the past few years that I feel will be of great benefit to dental offices in the near future.
Cone Beam
Cone Beam or 3-D Imaging is the new frontier for digital radiography. While these systems go by many different names, the best way to describe the system is that it’s a cross between a digital pan/ceph and a CAT Scan machine. The most popular model right now in the USA is the i-Cat by Imaging Sciences. While I could describe the system in detail, this excerpt from an i-Cat user does the best job of explaining why they are becoming so popular: “Compared to medical scanners, Cone Beam Scanning is ten times more accurate while reducing a patient’s exposure to radiation by more than 95%. Pre-surgical implant treatment planning, preparing to remove impacted third molars, determining how sinus grafts and ridge augmentations have healed, and determining the ideal position for single-tooth replacements are just some of the benefits of Cone Beam Scanning Technology.”
Magnification
Dentists are working in a very small and confined area inside the mouth. Anything that will assist them to see what they are doing and to see it more clearly will improve on the quality of care we can offer our patients. The systems that have been popular for many years are loupes: magnifying glasses that attach to your regular glasses to enhance what we are able to see. The problems that some dentists have complained about with loupes include a limited field of vision and poor posture related to that. The modern alternative is nothing like the loupes of the past. What a few companies have done is to build a high-tech system that includes a microscope and an LCD monitor, allowing images from the scope to be displayed on the screen in real-time. By utilizing a system like this, it allows the dentist to sit comfortably by the chair with proper posture. Many of them are designed to use a slim design so that they can fit into most dental operatories, and since all dentists are different, the mounting options for these systems are also varied, allowing the monitor to be attached to a light pole, wall, or ceiling. Of course, they can integrate with current imaging software already in use in the practice. There are a few companies that produce these systems, such as Camsight and MagnaVu, and the systems sell for anywhere from $30,000 to $50,000.
Impressions
Who would have thought that the age-old system of taking impressions would become passé in 2010, but the new systems from Cadent, called the iTero, and the 3M Lava, aim to do just that. According to the Cadent, it is designed to replace the uncomfortable and imprecise method of conventional impression taking. iTero - powered by proprietary imaging technology - enables the dentist to take a digital scan of the patient’s teeth and bite, make any necessary adjustments in real-time, and then transmit the file via a wireless Internet connection to a Cadent-partnering laboratory for further processing. From there the digital file is transmitted to Cadent where a model is milled. The physical model is then sent to the laboratory where a highly precise physical restoration is created. There are significant benefits such as increased patient satisfaction, improved clinical outcomes, and enhanced office efficiencies. I had the opportunity to see this system in action at the Chicago MidWinter meeting and it’s everything it is cracked up to be.
It’s impossible to predict which technologies will take off in dentistry for the future. Many great concepts have become the BetaMax of the dental world. However, the five I’ve listed here are already generating some great press and have the right concepts and design to become an integral part of dental practices in the next few years.
Lorne Lavine, DMD is the Founder and President of Dental Technology Consultants. Dr. Lavine holds two prestigious certifications, the A+ Certified Technician designation and the Network+ Certified Professional. These designations demonstrate proficiency in computer repair, operating systems, network design and installation. Dental Technology Consultants provides dentists a full range of services relating to the implementation of technology.
Interested in having Dr. Lavine speak to your dental society or study club? Click here. Dr. Lavine can be reached at drlavine@thedentistsnetwork.net.
Hear Dr. Lavine’s FREE podcasts at The Dentist’s Network - HERE
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