Dental Strategies For Success library

Positioning for Transitioning Case #2

by W. David Griggs | 07/02/2009 | Legal & Business Planning , Dental

Study of a Failed Transition

Many dentists think of a practice transition as an end-of-career event. However, in the previous issue of Strategies, we saw how one dentist increased his practice profitability and value multiple times during his career through well-planned transitions that added two associates to his practice. However, not all transitions are created equally, as you’ll see in the following case study of a failed transition that ended up destroying the dreams of two dentists.

Practice-Profile: Solo dental practice for 25 years

Practice-Owner Goals: More time off, less overhead and stress, increased profit Transition Plan: Hire an Associate to expand hours, services, production

All’s Well...

The owner-doctor began his transition in a “traditional” manner by hiring an associate to join his practice. After a few informal meetings, her initial salary and a starting date were established. Both doctors were eager to start working together as soon as possible, and they decided to put off any discussions about the future of their relationship as well as any “paperwork.” They loosely promised each other that they would discuss the possibilities of a partnership in six months to a year.

Time passed and the doctors seemed quite happy with their relationship, both personally and financially. The associate-doctor remained busy, and the owner-doctor was able to make more profit and take more time away from the practice due to the associate’s participation. Both doctors felt that they had a win-win situation.

...That Ends Well

Before they knew it three years had passed, and many of the associate’s classmates and colleagues began advising her to “get things in writing” regarding a future partnership. They conveyed “horror stories” to her of failed transitions that resulted from misunderstandings about money along with other unaddressed issues that the doctors had not anticipated. The associate began to worry: Did she have an option to become a partner, and if so, how would that happen and when? Had the practice been appraised recently to determine a buy-in price? And would the price take into account the income she had already contributed to the practice?

The associate began voicing these and other concerns to the owner-doctor. Fortunately, he was open to the idea of a future partnership with her, and he assumed the first step would be to determine the value of his practice. Based on that, he asked his personal financial advisor if he could appraise his practice. The advisor agreed to help, and after looking over various practice financial reports, he arrived at a value. In his opinion, the value seemed appropriate for a well-established dental practice. The owner-doctor agreed, and he felt good about being able to offer a partnership opportunity to his associate – especially since he had never been offered a similar opportunity when he was an associate.

Conflicting Expectations Spoil the Plan

Upon receiving a copy of the appraisal, the associate became quite upset. The value seemed "way over the top" compared to what other dental practices were selling for. Her friends and colleagues agreed with her, adding to her concern. She began to wonder where she would get the money for a buy-in, and after paying for the overhead and the price of the practice, would she have any profit left over for herself? To further complicate matters, the appraised value included the practice income that she had helped the practice achieve during her three years as an associate.

Upon hearing her concerns, the owner-doctor was befuddled. He wondered, “Was she aware of the investment and risk he had taken in order to eventually establish the practice? Was she aware of the additional cost involved in bringing her into his practice? Was she not remembering how many long-established patients had been transferred to her over the years?”

The doctors soon found themselves dealing with partnership issues that never occurred to them at the beginning of their relationship. Their once pleasant conversations became progressively more confrontational with "eruptions" occurring on almost a daily basis. Soon the doctors began avoiding each other in the hallway as they were too uncomfortable talking any further about their future relationship. Eventually their relationship deteriorated to the point of no return, and the associate pursued another opportunity in a nearby community. Since there were no formal agreements between them, the associate was not restricted from practicing in the same area. This left the owner-doctor worrying about how many patients might follow the associate to her new location, and how this happened as he thought he had offered her the “opportunity of a lifetime.”

Why Transitions Fail

Lack of planning early in the Associate relationship is one of the primary causes of transition failures. Dentists considering an Associate relationship should always complete a detailed Associate Buy-In Transition Plan prior to working together that includes:

 
1. Current Practice Value
    
2. Buy-In Price and Terms
    
3. Tax Structure
    
4. Co-Owner Income and Expense Projections
    
5. Cash Flow Analysis

 

This type of analysis provides the foundation upon which preliminary and long-term agreements can be constructed. The agreements become the practice business plan, outlining not only how a future partnership could unfold, but how all doctors would enter and exit the practice in succession much like the operation of a successful law firm.

Read the first article in the Positioning for Transitioning Series on Strategies for Early, Mid and Late Career Doctors.

_{Statements of opinion not necessarily endorsed by ADA Member Advantage, ADA Business Enterprises, Inc., or the American Dental Association, or any of its subsidiaries, counsels, commissions, or agencies.}

W. David Griggs, DDS, has been a practice transition consultant for over 28 years and has been involved with over 2,000 transitions during that time. He has personally experienced the benefits and pitfalls of 'transitioning' as an associate doctor, practice owner with associates, seller, and purchaser of a private practice. Dr. Griggs is the author of 'Successful Practice Transitions,' the best-selling book from PennWell Publishers. Dr. Griggs is currently the president of The Transition Group in the Tampa Bay Area (thetransitiongroup.com).