Let me tell you about one of the worst transitions I’ve ever been a part of. I knew it was the worst when my client, the buyer, called and started to cry on the phone.
This client had done everything right. He had kept expenses low in school, moved to a small town for an associate job where he could learn a lot, he kept his head down, worked hard, and saved more than $60k to be ready to buy a practice.
He first called me thrilled to have found a practice in his home state. The seller, in his 40’s and still planning to work in dentistry, had three locations and was selling one “to free up time to focus on real estate and other business projects.”
Through the process of evaluating and almost purchasing the practice, my client did everything right. He assembled a team of an accountant (me), lawyer, and banker who all specialized in dental transitions. We carefully evaluated the financials of the practice and identified the pros and cons of the practice. He submitted a carefully considered the LOI and spent three days over two separate trips to his home state doing vigilant due diligence on the patient charts, equipment, and practice in general. We worked closely together on the financial due diligence, verifying tax returns, production and new patient reports, fee schedules, and even requesting a lien search from the broker.
Everything looked good. The buyer gave notice at his job and let his landlord know he was moving in roughly 90 days. He even sent in earnest money to the seller, and paid rate lock fees at the bank.
Then, everything fell apart. And it was 100% the seller’s fault.
The lien search destroyed the deal. As the bank was verifying lien details, the broker discovered the practice for sale was used as collateral on two business loans for unrelated businesses. After nearly two weeks of back and forth between the various banks and seller, the seller finally remembered one of the loans had a prepayment restriction (not just a penalty!) and was he was unable to pay off the loan or re-collateralize. The seller was contractually and legally unable to sell the practice.
The seller shrugged his shoulders and told my client, “Gee…sorry about that. Guess I can’t sell the practice after all.”
My client was out of a job, apartment, and several thousand dollars in expenses. All because a multi-practice owner didn’t have the wherewithal to keep track of his businesses.
I blame the majority of the seller’s incompetence and amazing level of cluelessness on the fact that he is a multi-practice owner.
In fact, I thought of three reasons why you should avoid buying a practice from a multi-practice owner.
1. You’re buying the worst location.
You are undoubtedly buying their worst location. Logically, you need to mentally switch places with the seller to know that, if he owns multiple locations and wants to continue practicing dentistry, he is going to drop the least desirable location first. He’s going to unload the practice with staffing issues, the one where they can’t attract new patients, or where a brand new competitor opened up down the street.
The seller is always going to know more than you can find out. There’s a reason they’re selling and unfortunately the incentives are aligned so he won’t be perfectly transparent about all the reasons.
“But,” you might object, “at least they’ll discount the practice in the valuation, right?”
Ha.
Fat chance. The seller is throwing in the towel on their dream of building a dental empire and becoming a billionaire selling to some DSO. They’re more likely to instruct the broker to get top dollar if for no other reason than to help them feel better about the desire to sell.
2. Questionable patient loyalty.
Chances are the two locations are relatively close to each other. Close enough that the dentist can drive between the two without too much trouble, even if one location was being managed by an associate. If the dentist can drive between the two locations relatively easily, then so can the patients.
You’re an unknown to the patients. The patients remember the other guy and have Google.
It’s unlikely a significant portion of the patients are going to be willing to drive further away to see the old doctor, but some will. And a certain percentage of patients are always going to look at the doctor change as a chance to reevaluate where they go to the dentist. Now you likely have a higher percentage of patients looking around and wondering if they should check out a new office.
Yes, you can write in non-solicit and non-compete requirements into your legal documents that give you some measure of protection against the seller poaching away all the best patients (and staff!). Ultimately, however, no non-compete agreement can take away a patient’s right to choose where they go to get dental services done. You can’t count on a non-compete to protect you from a seller still practicing within driving distance.
3. The transitions are always messier.
Just like my tearful buyer who found out about lien issues, I’ve found often there is some kind of unforeseen issue with multi-practice doctor sellers.
Sometimes it’s a lien. Occasionally it’s a staffing or equipment issue. There’s always something though. My take is that it comes down to a seller being stretched way too thin, not having a good grasp of all the details of their businesses, and being a busier than the average person.
Many buyers have told me they were shocked to see the quality of treatment plans and dental work in the practices they buy from multi-practice owners, which makes sense. All other things being equal, a dentist wanting to own and run multiple practices is marginally more likely to rush their work and be more aggressive in recommendations to patients because that will make them more money. Or, to employ an associate who isn’t as careful as they would be as an owner.
So am I recommending you never buy a practice from a dentist who owns multiple locations?
No.
But you now have three reasons to be more cautious as you consider practices to buy.
And if you try to buy one, the deal falls apart and need to vent, you can call me. I’ll have the tissues ready.
Read More:
Yes, Now Is the Right Time to Buy a Dental Practice!
3 Vital Numbers You Need to Know | Finding a Dental Practice to Buy
The IDEAL Active Patient Number | Finding a Dental Practice to Buy
