“9 Aspects of a Successful Practice Transition”

by Dr. Dean C. Bellavia

“Practice Transition” will be limitedly referred to here as the adding of a partner to a practice, involving retirement or not. Practice transition is a logistically complicated and emotionally draining process that a better understanding of will help.

1) The Partnership (for simplicity, only two doctors will be considered): The seller usually decides the partnership, although many aren’t sure what type to choose. A Full Partnership doesn’t involve retirement, but may involve reduced work-days for the seller. In a Phase-Out Partnership, the owner retires after a few years of partnership and sells his/her share of the practice. A Merging Partnership refers to two established practices becoming one, with equal partners; this is usually done to share overhead with each doctor having his/her own patients and net income. In a Sell & Retire arrangement the doctor sells the entire practice to the new doctor and is gone within the year; although this is not a partnership, most of this article still applies.

2) Timing of the Transition: For a Full Partnership you need to plan on a minimum of two years (one year to find a suitable partner and one year of association before becoming a partner). For a Phase-Out Partnership you need an additional two to four years of payments before retiring. In a Phase-Out Partnership, it is strongly advised that the seller receives full payment for half the practice over a specified number of years and then sell the other half at retirement. This creates trust and equality between the partners and allows for a smoother transition to retirement. For a Merging Partnership you should give yourself a trial year before legally merging into one practice. A Sell & Retire transition is completed within a year of finding a partner, although payments may last for years.

3) Searching for a Partner: Some partners are found in journal ads, by word of mouth and by orthodontic headhunters, but most new partners are orthodontic school graduates. These graduates start looking for practices about a year before graduation and most have made decisions by graduation.  When there are not enough established practices for graduates to buy into, they have little choice but to start their own practice. When there are enough practices available, it isn’t too difficult for a graduate and an established orthodontist to find a match, especially if the practice is large, (>$1M per year). Much smaller practices don’t have sufficient net income for two partners (especially for debt-ladened graduates) and the seller should opt for the Sell & Retire route when retiring. Smaller practices seeking partnerships or retirement can use a Merging Partnership, especially if located in a less popular region. If you have a very large practice (>$1.5M), most new graduates can’t handle it alone and you will need a two-step approach if you plan to retire: 1) sell half the practice to a partner, 2) when paid, sell your half to a second partner and retire.

Once a potential partner is found, they must be compatible with the doctor and not clash with the “practice personality” (refer to the April 1996 OP article “Building the Exceptional Practice: Part II – Building an Exceptional Team” or refer to “The One-Second Personality” or “The Other Book… on orthodontics” at <www.deanbellavia.com>). In essence, the selling doctor and buying doctor’s personality should not clash: strong analyzers (and strong directors) clash with strong socializers; strong relators clash with strong directors. If they clash, they should avoid working side-by-side—multiple offices are preferred—but even this fails when the new doctor clashes with the practice personality, which is the personality of the selling doctor and is what the patients expect. A people-oriented socializer practice will reject a new strong analyzer or director doctor, especially if they are weak in the socializer style; the same is true of a people-oriented relator practice. A well-organized analyzer practice finds it difficult to work with an easily distracted, non-task-oriented socializer partner (especially if a weak analyzer); they are fun, but their undone tasks aren’t. Like-wise, a get-it-done director practice will benefit from a relator partner, but not from a lower production rate due to more “hand-holding”. Technical compatibility must also be accounted for, including: preferred records, diagnostic methods, equipment and supplies, treatment mechanotherapy, etc. Management responsibilities must also be divided up among the doctors including: staffing, marketing, financial, etc., (refer to the “Associate Analysis System” in “The Book…on orthodontics” for complete details).

4) Legal & Accounting: Legal costs are necessary to write and register the partnership, but lawyers by nature do more harm than good to protect their clients; I suggest one lawyer approved by both doctors, preferably one who deals with practice transitions. Accountants are helpful for numbers, but that’s about it. Your goal is to create absolute trust between you and your partner, being fair on every issue and equally compromising on others; in the long run with trust and appreciation petty paranoias fade.

5) The Sale Price: The value of the practice is based on its ability to generate gross income to pay the bills and to generate net income for a desired lifestyle. I use the formula Gross Market Value = 0.5 X (3-YR AVG Gross Collections) + (3-YR AVG Net Income); for example: 0.5 X ($1.0M + $1.08M + $1.16M)/3 + ($.43M + $.46M + $.49M)/3 = $.54M + $.46M = $1.0M. Unfortunately, the Gross Market Value is not the “Fair Market Value”, which has many factors: Avg 2-year Initial Payment percentage (should not be over 35% nor under 25%), collectable Past Due Accounts, Material Assets, Indirect Factors, and Location Desirability. See the table below for their relevance. The “indirect factors” is a complicated calculation involving growth, managed care, debands, facility, staffing, etc. The “location desirability” is based on numerous demographics, competition, location, office appearance, functionality, etc., factors. If a building is involved, do not include it in the total value at this time unless desired by both partners.

PRACTICE Value	Calculations	Amounts
Gross Collections	Avg of 2001, 2002 & 2003 Collections	$1,080,000
Net Income	Avg of 2001, 2002 & 2003 NET Incomes	$460,000
Gross Market Value (GMV)	GMV = 0.5 X Avg 3-YR Gross Income + Avg 3-YR Net	$1,000,000
Direct Factor: % Initial Payment ADJ	2-Yr Avg %IP shouldn’t be over 35% nor under 25% (If it is 45% in this example, it is 10% over 35% and reduces GMV by 10%, giving a 90% multiplier)	90%
Adjusted Gross Market Value	Multiply GMV by Direct Factor %IP ADJ	$900,000
Indirect Factors	Percent of Gross Market Value Calculation	66%
Location Desirability	Location Desirability: from +20% (desirable) to –20% (undesirable)	4%
Fair Market Value	Indirect Factors% + Location Desirability % (66% + 4% = 70%)	$630,000
Collectable Past Due	Collectable Past Due	$33,000
Material Assets	Estimated Equipment & Supplies	$42,000
Total Value	Fair Market Value + Collectable Past Due + Material Assets	$700,000

6) The Purchase Plan: The purchase plan should include an initial payment of about 10-20% to show good faith and commitment with the balance typically paid over three years. In a Full Partnership, a salary-differential is typically used to pay the balance, although there are other useful methods for tax and legal reasons. You must avoid a partial partnership, where the new doctor is vested 20%, etc., per year; this will only create problems and it tells the buyer that the buyer that the seller doesn’t trust him/her; they must be equal in everything. When the original partner retires in a few years, his/her half of the practice is sold to the new partner for the same amount that was paid for the first half. It must be the same amount since each doctor is equally responsible for growing the practice over the term of that partnership. If the surviving partner then decides to take on a new partner, the Total Value is recalculated.

7) The First Year: This is when the new doctor becomes part of the practice or goes elsewhere. A purchase plan should be in effect before the new doctor starts and must be in place within the first three months of association. Since the new doctor will work with the present treatment mechanotherapy for at least two years, he/she must become a master of it and not make changes. For similar reasons the new doctor must not treat without both doctors present for at least three months. After three months, the new doctor should be introduced to the referring dentists, one at a time, preferably at luncheons and be heavily involved in marketing. This is also a good time to start him/her on new-patient exams, especially those directly referred to him/her. If the seller wants to reduce his/her workdays, it is best to wait six to 12 months to avoid problems.

8) Relationships: One of the most important aspects of a successful transition is the staff’s acceptance of it—don’t discuss it with anyone until you know the facts and have made your decisions. Premature announcements cause more anxiety than necessary; your team will be anxious enough even when you notify them of your well thought out plan. Even when the doctor and team’s relationship is good, a practice transition can damage it, whether you choose the right partner or not. Your invested time and energy to find a compatible partner must be protected by creating trust and admiration for each other—a positive relationship. Your anxious families, especially your spouses, must also put aside petty issues and learn to trust and appreciate one other. Anxiety is high on all levels and professional help is well worth the effort and expense. All else can go well, but if the relationships fail the transition will fail and all will be hurt, which is why relationship consulting is required in all phases of the transition.

9) Retirement Income: All too often a doctor finds that he/she doesn’t have sufficient savings (including the sale of the practice) to comfortably retire, if they can retire at all. It usually takes five or more years to make up the difference using various investment strategies, many of which are new. It is thus, important to do an evaluation of your needs and resources and plan accordingly.

In conclusion, if you consider the above nine most important aspects of your practice transition you will do very well—if any questions or problems, there are consultants available to assist you. Use the checklist below to help you account for these nine or more aspects of your practice transition.

The Partnership (or not)	¨Full Partnership ¨Phase-Out Partnership ¨Merging Partnership ¨Sell & Retire (no partnership)
Timing of the Transition	¨5-year ¨4-year ¨3-year ¨2-year ¨____ year program (until a full partner or retired & gone)
Searching for a Partner	Where: ¨Ortho Schools ¨Journal Ads ¨Competitors ¨Headhunters; Who: ¨Compatibility ¨Practice Personality
Legal & Accounting	¨Separate Lawyers/Accts ¨Shared Lawyer/Acct ¨No Lawyer ¨No Accountant
The Sale Price	¨A Fair Market Value ¨Including Assets ¨Including Building? ¨Other:
The Purchase Plan	¨Over____ years ¨Half & Half ¨Salary Differential ¨Other:
The First Year	¨Have Contract in Place ¨No Tx Changes ¨Introduce to All ¨Do Exams ¨Other:
Relationships	¨DR/Team ¨New-DR//DR ¨New-DR/Team ¨New-DR/Patients ¨Other
Retirement Income	¨Have Sufficient retirement Savings ¨Must increase Retirement Savings by $_______ to retire at age _____
Other:
Other: