Five Considerations When Planning to Sell Your Practice, with Danielle McBride, Oberman Law Firm

Intro: [00:00:02] Broadcasting from the Business RadioX studios in Atlanta, it’s time for Dental Law Radio. Dental Law Radio is brought to you by Oberman Law Firm, a leading dental-centric law firm serving dental clients on a local, regional and national basis. Now, here’s your host Stuart Oberman.

Stuart Oberman: [00:00:26] Welcome, ladies and gentlemen, to Dental Law Radio. Unbelievable guest speaker today, unbelievable on the podcast, Danielle McBride, partner in Oberman Law Firm. And little brief background, Danielle’s been practicing for about 21 years. Specialty market is dental law, mergers, acquisitions, tax, compliance. And we’re going to drill down on a couple of things today. I know that Danielle has probably done a couple of hundred transactions, if not thousands, in her illustrious career. And I know she’s going to have a lot of insight into this.

Stuart Oberman: [00:01:00] But I get this question, what do I need to consider when preparing for sale? So, what I want to do is Danielle, I want to leverage some of your experience here and expertise, and I want to run through about five things to consider when preparing your practice, we’re talking to a dentist for sale. So, let’s run through a couple of things. It’s sort of reoccurring theme – our doctors get into trouble, they’re not prepared. Number one, give me a number one. What’s the number one issue we see in preparing for practice sales that are sometimes problematic?

Danielle McBride: [00:01:41] Sure. So, number one is the due diligence in getting that in order. And that means understanding the business and your numbers, cash flow or profitability for the practice, what you sometimes hear in DSO languages, EBITA. And that’s the key to practice valuation and practice transition. You need to know your numbers, your discretionary expenses, those add backs in the practice. You need to take a look at your biggest expenses like staff, supplies, laboratory expenses. Knowing fee increases. What’s your fee schedule? We get questions for fee schedule, and when’s the last time you increased fees on things? And that’s a key thing right now with inflation.

Danielle McBride: [00:02:33] You want to also make sure that you’re not letting those fee increases lapse and not doing something from year to year as well to kind of keep up with things. Marketing, website, social media stuff, patient numbers, active patients, new patients, PPOs and referring doctors if you’re a specialist. All of those are due diligence items that are going to be requested by buyers, whether they’re private parties, individual dentist buyers, or whether they’re DSO transactions. And the DSO transactions, they’re much heavier on the due diligence. They will ask for every piece of paper you could possibly come up with in this transaction.

Stuart Oberman: [00:03:13] Plus.

Danielle McBride: [00:03:14] So, you know. So, getting those things in order ahead is key.

Stuart Oberman: [00:03:20] I got a question. So, profitability and EBITDAs. So, look, our doctors run a lot of stuff through their practice that they shouldn’t, and they get into trouble and it affects their numbers. What are some of the things that you see? Before we jump to number two, what are some of the things that you see doctors running through practices that they really need to clean up to get their numbers in order?

Danielle McBride: [00:03:46] Sure. A lot of it is things like running office expenses and personal expenses through the practice. And so, it’s easy to see.

Stuart Oberman: [00:03:56] That never happens.

Danielle McBride: [00:03:57] Yeah, yeah, never happens. They don’t go to Home Depot and buy toilet paper and paper towels for the office and home. So, a lot of times, they’re running things like that through the practice, and they don’t separate the receipts out. And so, it’s getting lumped into categories like office expenses or promotional expenses, things like sponsoring some of your kids’ events, and you write it off through practice promotion. That’s greedy when a buyer-

Stuart Oberman: [00:04:24] Pay your children, right? How do they pay their children?

Danielle McBride: [00:04:25] What’s that?

Stuart Oberman: [00:04:25] How do they pay their children?

Danielle McBride: [00:04:29] A lot of them pay their children. Put your kids on the payroll. You should be putting them on the payroll as soon as they’re old enough, maybe six or seven years old. Have them reaching the lower filing cabinets or modeling for the website, have them mow the lawn for the practice, and get them IRA contributions.

Stuart Oberman: [00:04:49] That’s good. Wow.

Danielle McBride: [00:04:50] Yeah. So, kids on the payroll. There’s a lot of spouses on the payroll too. And sometimes, they’re paid. Sometimes, they’re underpaid. Sometimes, they’re overpaid. And those are things that go into profitability on the practice as well and you don’t necessarily. Those are the easy things to see. The harder things are when they’re running all this stuff through office expense, and they’re like, “Yeah, yeah, $50,000 of it is just me running personal expenses through.” Well, that’s hard for a buyer to accept that. Okay, well, the profitability is really $100,000 higher than what’s showing up when I’m looking at your typical add backs. Your practice promotion expense – auto, car, meals, travel, continuing ed, staff or family on the payroll, those sort of things, those are all pretty easy to see. It’s the other things that really need cleaned up sometimes because it’s going to be hard to explain to that buyer unless you start showing them all your credit card statements.

Stuart Oberman: [00:05:55] I know you made a best friend out of all of the underpaid spouse managers.

Danielle McBride: [00:06:01] Yeah.

Stuart Oberman: [00:06:02] You just became an absolute cult hero, I can tell you that. Well, that’s good. That’s definitely good stuff that affects the profitability. And we also have seen some audits from state and federal on expenditures that are never good like that. So, give me a number two. Give me a number two on things to consider.

Danielle McBride: [00:06:24] Number two-

Stuart Oberman: [00:06:24] Yeah.

Danielle McBride: [00:06:25] … is the lease. Everyone always forgets about the lease and waits till the last minute. So, if you’re preparing for a transaction, get your lease out. Look at what the terms are, find out if you’ve got to get consent from your landlord to sell, find out what happens if you have a personal guarantee on that lease. If you’re going to assign the lease, if it’s a third-party landlord, make sure that you’ve got under control your lease. You want to make sure that you know what the terms are. If you’re up for a renewal and you’re thinking about selling your practice, there are lots of things that you could try to work into that lease with the landlord to try and prepare for a practice sale. Perhaps even getting something into the lease saying that you don’t need their consent to sell to transition the lease to that buyer if you’re selling your practice. I’ve run across lots of leases over my years with third-party landlords and it can be a real headache. And that is the single biggest reason I get a transaction delayed is that, “Oh my god, we don’t have the lease assignment from the third-party landlord.”

Stuart Oberman: [00:07:40] Now, are you seeing — we’re seeing this a little bit coming west to east? Are you seeing that if – which a landlord does not have to do – end the lease early, that they want a percentage of the sale to do that. We’re seeing some interesting numbers coming through that.

Danielle McBride: [00:08:01] Yeah, I’ve seen some. It has been more of a West Coast issue that I’ve seen this in. Midwest and Northeast, I haven’t seen a lot of that with a percentage of the sales. In New York, I have had a few transactions where we’ve had to try and buy the landlord, and essentially pay them something in order to get a seller out of a lease. But I had a transaction like that.

Stuart Oberman: [00:08:24] That’s called legal bribery.

Danielle McBride: [00:08:25] Yeah. Yeah, it is. The New York leases, they’re a lot of fun, let me tell you.

Stuart Oberman: [00:08:33] Wow! I mean, what usually starts in the West comes East. So, I think we’ll be seeing that eventually. But well, number three. That was a great number two. We had cash flow number one, and lease number two. And what are we looking at, maybe the third issue?

Danielle McBride: [00:08:50] Number three is staffing, goodwill transition, patient retention issues. So, you want to be able to transition the practice well. And some of the key things are not just the doctor transitioning to the new doctor, but also staffing and patient retention. And so, a lot of times, the goodwill transition is a key component. And sometimes, that’s where you see negotiations kind of get a little stuck from time to time. Is it the buyer wants to make sure that the seller and the staff are going to contribute to the transition, and make sure that the patients can be retained, that there’s going to be an introductory letter, or a letter to referral sources if it’s a specialty practice? Introductions maybe with the top 5-10 referral sources. Making sure that the staff is going to stay in the transaction, and that you’re not going to lose, and have a bunch of staff turnover right at the transition date. And now, you’re trying to retain patients, but you’ve got all new faces in there.

Stuart Oberman: [00:09:58] What about associate issues?

Danielle McBride: [00:10:01] Associate issues as well. That’s another key thing in staffing is that if you’ve got an employment agreement or you have associates working in the practice, and you didn’t have an employment agreement with them, and there are no restrictive covenants, your buyers are going to be coming in, and they’re going to be asking for those associates to sign contracts. And if you didn’t have one before, you’ve got nothing to actually assign, which means a new negotiation with that associate and potentially with the buyer. And if they’re a key producer in the practice, especially in these big DSO transactions, they’re offering this money for the transaction based on key production numbers. And if you’ve got an associate that is not going to stay with the practice or that you can’t enforce a covenant not to compete for in order to prevent them from competing with the buyer, then you’re going to have some things you’re going to have to negotiate, and it could really create some problems.

Stuart Oberman: [00:10:57] Now, question for you, when you do your practice evaluations, and you do a great job on that, does the associate not staying affect the value of the practice when you’re asked to evaluate what that practice is worth?

Danielle McBride: [00:11:14] Sometimes. It depends on the circumstances.

Stuart Oberman: [00:11:17] That’s a great legal answer.

Danielle McBride: [00:11:19] Yeah.

Stuart Oberman: [00:11:21] That’s a typical answer, “Well, it depends.”

Danielle McBride: [00:11:23] It really depends on facts and circumstances.

Stuart Oberman: [00:11:24] Yeah.

Danielle McBride: [00:11:24] Yeah. And the key is going to be whether or not the practice can find a replacement and associate easily, or whether or not the practice owner or the other doctors working in the practice are able to pick up that profitability, or to pick up that production from that doctor who’s not going to stay.

Stuart Oberman: [00:11:40] Staff, staff, staff. Wow! Let’s look at the number four. Give me the number four.

Danielle McBride: [00:11:48] Number four, equipment, assets and curb appeal. And a little bit of this is about allocations as well. You’ve got goodwill, and you’ve got tangible assets in the practice. And so, one of the things, if you’re thinking about putting your practice on the market, there are some practices out there that maybe they haven’t updated with newer equipment, or they’ve thought about refreshing their waiting room, or adding a CERAC machine, or adding a major piece of equipment, and they haven’t done it yet.

Stuart Oberman: [00:12:21] Pick it up at 179 deduction, right?

Danielle McBride: [00:12:24] Yeah, you can get the 179 deduction, so you can buy it and you can write it off all in the same year. And in part, it’s a seller problem; in part, it’s a buyer problem. And so, there’s a little bit of a fine line you walk between whether or not you go ahead and make some of those improvements to make the practice more attractive to a buyer, or you say, “I don’t want to invest in a lot of super new technology and go into debt just to be able to make the practice. I’ll take that into account when I value the practice. I’m going to look at what the equipment is and how much it’s valued there. If the practice is not – say they don’t have electronic records, everything still on paper in boxes, and computer systems haven’t been upgraded, there are some minimum requirements for computer systems to be upgraded that most buyers are going to ask.

Danielle McBride: [00:13:21] And so, those are things that are going to go into negotiating the ultimate purchase price that a buyer is going to be willing to pay. Now, some of it, it’s a seller’s problem. Some of it, it’s a buyer’s problem. If you want to be super fancy and buy all the latest and greatest technology, buyer, go ahead. That doesn’t mean I don’t have a practice that’s fully capable of supporting you working in it, and you can make whatever changes you want to make on your dime, but there are some things that a seller might want to do just to make things a little more attractive for a buyer.

Stuart Oberman: [00:13:53] And then, it’s — yeah. I mean, we had Dr. Richard Madow on a couple of episodes ago. He had a good talk about doctors buying equipment and profitability and doesn’t need that. And that was interesting analogy, and how that just compared to what you said regarding [crosstalk].

Danielle McBride: [00:14:18] Sure. Don’t go into debt to make it-.

Stuart Oberman: [00:14:19] Yeah.

Danielle McBride: [00:14:19] Don’t go into debt to make it appealable-

Stuart Oberman: [00:14:21] That’s a good-

Danielle McBride: [00:14:21] … or attractive to a buyer, but there are some things that you could do, especially if you’re looking at a year or two out from a practice sale and making a few revisions here or there. You can write these things off, 179, depreciation, deductions, bonus depreciation, et cetera, so.

Stuart Oberman: [00:14:40] Yeah, I mean, that is practical, practical advice, which a lot of times, I think doctors are missing from the advisor standpoint. Let’s talk about the last, number five. And this get a little sticky in the contract areas also. It’s, you know-

Danielle McBride: [00:15:01] Yes.

Stuart Oberman: [00:15:01] This is where, sort of, the rubber hits the road. And talk about number five on some of these.

Danielle McBride: [00:15:08] So, number five is my accounts receivable, prepaid accounts, patient credits and treatment in progress.

Stuart Oberman: [00:15:17] Yeah.

Danielle McBride: [00:15:17] Now, there is no one size fits all on any of those. And often, they wait until the last minute to look at these, “Oh, I’ll get you this. Oh, I’ll get you this report. Oh, I’ll look and see,” or they run the report, and they don’t pay attention to it.

Stuart Oberman: [00:15:33] Famous last words.

Danielle McBride: [00:15:35] Yeah. I mean, patient credits, in particular, your accounts receivable aging, you may have things that are sitting on the report if you haven’t cleaned up your collections, if you haven’t cleaned up your patient credits, those are all things that can go into the ultimate purchase price if someone’s going to purchase your accounts receivable and take over the practice. And then, your prepaid accounts. And it can vary based on specialty. Obviously, in orthodontic practices, you’ve got long-term contracts with payments that may have been paid in full, contracts paid in full at the start of treatment but you’ve got a buyer that’s doing — say, you had a bunch of patients pay right before the closing, you got all the money, but the buyer is going to get — seller got all the money, but buyer’s now going to have to do all of the work to finish those patients.

Danielle McBride: [00:16:27] And so, there, oftentimes, has to be some sort of adjustment to price or proration on prepaid contracts. And there can be other specialties as well or even general practices that maybe do some particular restorative type work or something that will have treatment in progress and prepaid treatment that is long-term patient treatment planning, where you’ve got courses of treatment that lasts for multiple appointments over a longer period of time, with maybe episodes of healing required in between, and you’ve got someone who’s got a $10,000 case that’s being paid on a monthly basis because that’s the arrangement they entered into with the doctor there, and their treatment is maybe a quarter of the way done, you’ve got to actually think about those things. And oftentimes, we add exhibits to the contract that will list patient credits, patient refunds having to be made prior to closing, prepaid cases being prorated between buyer and seller.

Stuart Oberman: [00:17:36] Do you have to do-

Danielle McBride: [00:17:36] Thinking of progress list being done.

Stuart Oberman: [00:17:38] Do you have to give special consideration in contracts when you have that seller who’s leaving, and and you’ve got open cases, or what happens if you got a hundred patients come back from faulty work-

Danielle McBride: [00:17:53] Right.

Stuart Oberman: [00:17:53] … what happens with that?

Danielle McBride: [00:17:57] Right. And that’s where we have provisions in our contracts that usually deal with what happens if there’s defective work or rework, and can the buyer — as a seller, you don’t want the buyer to just say, “Well, I have to redo all of this work. And now, you owe me this money,” and it goes on indefinitely. There are time limitations that should be put in their requirements. There are parameters that should be set. And this is all based on the facts and circumstances of the practice. You may have some practices where this isn’t a problem because you don’t have patients that are not paying when they receive their treatment.

Stuart Oberman: [00:18:31] Danielle, great stuff about the patient credits. One thing in redos, one thing I want to do is I want you elaborate a little bit more on the contract side as far as what happens when you’ve got a doctor that maybe is selling sticking around for a year or two. I mean, you mentioned earlier about limits in contracts and redos. Elaborate just a little bit more on that contract provision, what should be on there to limit the seller’s liabilities going forward?

Danielle McBride: [00:19:03] Sure. I mean, the seller should limit the liability going forward based on some parameters for patients. You can’t just have patients who have not been seen in the practice for the last year coming in to have rework done or having the buyer not consult you about rework before they agree to retreat a patient and then charge you for the fee to redo the work on that patient. Sometimes, I see caps or limits set.

Danielle McBride: [00:19:34] I mean, generally speaking, accounts receivable, patient credits, they all should be reviewed and wrapped up in your records. Your accounts receivable and credit should be cleaned up prior to a sale. You want to make sure that you don’t have long outstanding credits there. Maybe there are patients that you don’t even have in the practice any longer. A lot of practices are in the habit of not cleaning those up on an annual basis. So, clean those patient credits up because you’re going to have to pay them off. Generally, a buyer will ask for them to be paid off prior to closing. The DSOs, also, take that into account when they’re factoring in expenses to be paid and credits if they’re going to be assumed. You don’t want to be giving the buyer money that’s never going to come in.

Stuart Oberman: [00:20:26] Yeah. Well, it’s interesting, for 50 DSOs, you’ll have 50 ways of calculating all of this. That’s amazing.

Danielle McBride: [00:20:32] Yes.

Stuart Oberman: [00:20:33] Well, that is five great things to consider when you’re preparing your practice for sale. And all these are, obviously, a moving target. As the transition takes place, I mean, these are just moving targets and just constant adjustments. Well. Danielle, amazing, amazing stuff as always. Just, again, five topics that our doctors just have to consider on any transaction.

Stuart Oberman: [00:21:00] Also, honestly, this can be applied to any business listeners also on what they’re looking at, whether it’s just AR or cash flows, profitability. So, really, everything you’ve talked about today and in previous podcasts, I mean, any business owner really could use. So, amazing stuff.

Stuart Oberman: [00:21:19] Well, great job, Danielle. Thank you very much. And as always, amazing knowledge. And we really enjoyed having you on the podcast today. And I know our listeners did, so. Well, with that, we will call it a day as s we say. If you have any questions, please feel free to give us a call, 770-886-2400. Danielle, how do they get in touch with you if they want to send you an email or request some information?

Danielle McBride: [00:21:47] They can send me an email. They can call the corporate number. They can also send me an email at danielle@obermanlaw.com.

Stuart Oberman: [00:21:55] Good, good. Yeah, number’s 770-886-2400. My name is Stuart Oberman. It is Stuart@obermanlaw.com. Thank you for listening, and we appreciate it, and have a fantastic day.