selling a dental practice Archives

William Barrett, Mandelbaum Barrett

May 20, 2022 by John Ray

Dental Business Radio

William Barrett, Mandelbaum Barrett

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William Barrett, Mandelbaum Barrett (Dental Business Radio, Episode 30)

William Barrett, CEO of Mandelbaum Barrett and author of The DSO Decision: Winning Answers from Every Angle, was Patrick O’Rourke’s guest on this edition of Dental Business Radio. He covered considerations for practice owners who are considering selling their practice to a DSO or creating a DSO themselves. Bill and Patrick also discussed getting proper legal counsel, misclassification of independent contractors, practice brokers, partnerships, and much more.

Dental Business Radio is underwritten and presented by Practice Quotient: PPO Negotiations & Analysis and produced by the North Fulton studio of Business RadioX®.

William Barrett, Chief Executive Officer, Mandelbaum Barrett

William Barrett is the Chief Executive Officer of Mandelbaum Barrett. He has over 20 years of experience representing a wide range of businesses with a unique specialty in mergers and acquisitions. He provides strategic advice to companies of all sizes from formation to dissolution and every stage in between. He is known for the personal attention that he gives his clients and the energy he brings to every deal. Bill has a reputation as a deal maker who knows how to be creative and get things done.

Bill often serves the role as outside general corporate counsel to his clients and advises them on issues concerning contracts, employment law compliance, developing policies, executive compensation programs and agreements, as well as business succession and related tax planning. His representative clients include commercial organizations and entrepreneurs in the areas of manufacturing, industry, service, banking, finance, insurance, construction, real estate development, as well as healthcare professionals of varying disciplines and organizations. Throughout his career, Bill has successfully managed the purchase or sale of hundreds of businesses, professional practices, and facilities.

In the healthcare space, Bill is well recognized nationally as a transactional lawyer in dental and medical practice transitions, practice sales and purchases, associate buy-ins, start-ups, and the structuring of dental services organizations (DSOs) and management services organizations (MSOs). Bill represents clients throughout the country and is well versed in the specific rules and regulations that govern the healthcare industry.

William S. Barrett (Bill) is the author of Pain-Free Dental Deals: An Entrepreneurial Dentist’s Guide to Buying, Selling and Merging Practices and The DSO Decision: Winning Answers from Every Angle. He has authored many articles addressing the legal and business needs of licensed professionals and facilities. He regularly speaks on a wide variety of topics to professional tradeshows, associations, study groups, societies, as well as students and residents at dental and medical schools across the country. In 2018, Bill appeared on Howard Farran’s well-regarded show Dentaltown to talk about practice transitions. Hear what he and Howard spoke about here.

Mandelbaum Barrett

Since its founding in 1930, Mandelbaum Barrett has been committed to providing its clients with the highest level of personal, hands-on attention to their legal needs. They take a proactive approach in representing our clients; from the board room to the courtroom. Mandelbaum Barrett attorneys are zealous advocates, treating their clients’ concerns as though they were for their own family.

They take the time to get to know their clients. The better they know them, the better they can anticipate their needs and potential legal issues before they arise. That’s why they invest the time to learn about clients’ industries and competitors. That’s also why they provide informative seminars on various business, economic, and legal topics. They are in this together as their client’s partner for success.

Their business clients are diverse and include organizations of all sizes in various industries with national and international interests, such as banks, governmental entities, real estate developers, public and private institutions, biotech companies, manufacturers, health care providers and facilities, as well as individuals and families. Clients say they choose Mandelbaum Barrett because an experienced attorney is both effective and efficient.

Company website | LinkedIn

Dental Business Radio covers the business side of dentistry. Host Patrick O’Rourke and his guests cover industry trends, insights, success stories, and more in this wide-ranging show. The show’s guests include successful doctors across the spectrum of dental practice providers, as well as trusted advisors and noted industry participants. Dental Business Radio is underwritten and presented by Practice Quotient and produced by the North Fulton studio of Business RadioX®. The show can be found on all the major podcast apps and a complete show archive is here.

Practice Quotient

Dental Business Radio is sponsored by Practice Quotient. Practice Quotient, Inc. serves as a bridge between the payor and provider communities. Their clients include general dentist and dental specialty practices across the nation of all sizes, from completely fee-for-service-only to active network participation with every dental plan possible. They work with independent practices, emerging multi-practice entities, and various large ownership entities in the dental space. Their PPO negotiations and analysis projects evaluate the merits of the various in-network participation contract options specific to your Practice’s patient acquisition strategy. There is no one-size-fits-all solution.

Connect with Practice Quotient

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

January 21, 2022 by John Ray

Dental Law Radio

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

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Five Considerations When Planning to Sell Your Practice, with Danielle McBride, Oberman Law Firm (Dental Law Radio, Episode 31)

Whether your exit plans are near term or down the road, this episode of Dental Law Radio is must listening. Danielle McBride joined host Stuart Oberman to discuss major considerations for any dental practice owner who plans to sell. Preparing for the due diligence a buyer will conduct is particularly vital. Danielle also discussed expenses which negatively impact profitability and therefore valuation, the lease, staffing, patient credits, and much more. Dental Law Radio is underwritten and presented by Oberman Law Firm and produced by the North Fulton studio of Business RadioX®.

Danielle McBride, Partner, Oberman Law Firm

Danielle McBride has been practicing law for over 21 years, and her primary focus is representing healthcare clients on a local, regional, and national basis. Ms. McBride regularly consults with clients regarding simple to complex healthcare transitions, including mergers and acquisitions, employment law, governmental compliance, tax strategies, practice valuations, DSO formation and structures, employee compensation, associate and partnership contracts, joint ventures, and partnership buy-in/buy-outs.

In addition, Ms. McBride brings a wealth of knowledge and experience preparing practice valuations for clients, as well as formulating simple to complex tax strategies, and entity formations.

Ms. McBride holds a Bachelor of Arts in Sociology/Criminology from The Ohio State University, a Juris Doctor (J.D.) from Ohio Northern University Pettit College of Law, and a Master of Laws (LL.M.) in Taxation from Case Western Reserve University.

TRANSCRIPT

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.

About Dental Law Radio

Hosted by Stuart Oberman, a nationally recognized authority in dental law, Dental Law Radio covers legal, business, and other operating issues and topics of vital concern to dentists and dental practice owners. The show is produced by the North Fulton studio of Business RadioX® and can be found on all the major podcast apps. The complete show archive is here.

Stuart Oberman, Oberman Law Firm

Stuart Oberman is the founder and President of Oberman Law Firm. Mr. Oberman graduated from Urbana University and received his law degree from John Marshall Law School. Mr. Oberman has been practicing law for over 25 years, and before going into private practice, Mr. Oberman was in-house counsel for a Fortune 500 Company. Mr. Oberman is widely regarded as the go-to attorney in the area of Dental Law, which includes DSO formation, corporate business structures, mergers and acquisitions, regulatory compliance, advertising regulations, HIPAA, Compliance, and employment law regulations that affect dental practices.

In addition, Mr. Oberman’s expertise in the health care industry includes advising clients in the complex regulatory landscape as it relates to telehealth and telemedicine, including compliance of corporate structures, third-party reimbursement, contract negotiations, technology, health care fraud and abuse law (Anti-Kickback Statute and the State Law), professional liability risk management, federal and state regulations.

As the long-term care industry evolves, Mr. Oberman has the knowledge and experience to guide clients in the long-term care sector with respect to corporate and regulatory matters, assisted living facilities, continuing care retirement communities (CCRCs). In addition, Mr. Oberman’s practice also focuses on health care facility acquisitions and other changes of ownership, as well as related licensure and Medicare/Medicaid certification matters, CCRC registrations, long-term care/skilled nursing facility management, operating agreements, assisted living licensure matters, and health care joint ventures.

In addition to his expertise in the health care industry, Mr. Oberman has a nationwide practice that focuses on all facets of contractual disputes, including corporate governance, fiduciary duty, trade secrets, unfair competition, covenants not to compete, trademark and copyright infringement, fraud, and deceptive trade practices, and other business-related matters. Mr. Oberman also represents clients throughout the United States in a wide range of practice areas, including mergers & acquisitions, partnership agreements, commercial real estate, entity formation, employment law, commercial leasing, intellectual property, and HIPAA/OSHA compliance.

Mr. Oberman is a national lecturer and has published articles in the U.S. and Canada.

Oberman Law Firm

Oberman Law Firm has a long history of civic service, noted national, regional, and local clients, and stands among the Southeast’s eminent and fast-growing full-service law firms. Oberman Law Firm’s areas of practice include Business Planning, Commercial & Technology Transactions, Corporate, Employment & Labor, Estate Planning, Health Care, Intellectual Property, Litigation, Privacy & Data Security, and Real Estate.

By meeting their client’s goals and becoming a trusted partner and advocate for our clients, their attorneys are recognized as legal go-getters who provide value-added service. Their attorneys understand that in a rapidly changing legal market, clients have new expectations, constantly evolving choices, and operate in an environment of heightened reputational and commercial risk.

Oberman Law Firm’s strength is its ability to solve complex legal problems by collaborating across borders and practice areas.

Connect with Oberman Law Firm:

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Keys to a Smooth Practice Transition, with Danielle McBride, Oberman Law Firm

January 7, 2022 by John Ray

Dental Law Radio

Keys to a Smooth Practice Transition, with Danielle McBride, Oberman Law Firm

00:00 /

Keys to a Smooth Practice Transition, with Danielle McBride, Oberman Law Firm (Dental Law Radio, Episode 30)

Danielle McBride, Partner at Oberman Law Firm, talks with host Stuart Oberman about the elements needed for a successful and smooth sale of a dental practice. Danielle discusses ingredients like having the best advisors in the dental industry, detailed financials, quality of earnings, and much more. Dental Law Radio is underwritten and presented by Oberman Law Firm and produced by the North Fulton studio of Business RadioX®.

Danielle McBride, Partner, Oberman Law Firm

In addition, Ms. McBride brings a wealth of knowledge and experience preparing practice valuations for clients, as well as formulating simple to complex tax strategies, and entity formations.

TRANSCRIPT

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 everyone to Dental Law Radio. We have a very, very special guest today, Danielle McBride, Partner in Oberman Law Firm. And a little background on Danielle – she’s very busy right now – Danielle has been practicing for 21 years and her primary focus is health care transactions, mergers, acquisitions on a local, regional, and national basis. Big, big in M&A transactions, employment law compliance, tax strategies – as you heard on a previous podcast. And we’re going to have some subsequent podcasts that Danielle is going to join us on – practice valuations, DSO formation. Lord, everything is DSO. Everything is scaling nowadays.

Stuart Oberman: [00:01:13] A little education background on Danielle, she graduated from Ohio Northern University with her law degree. And she has a Masters in Taxation from Case Western University. And we are absolutely delighted to have you in the studio, as we say, Danielle. And I know today you’re going to talk about keys to ensure a smooth practice transition, and you could maybe elaborate on this. It is an amazing market. It is a hot market like I’ve never seen in my years of practicing. Valuations are out the roof. Private equity is throwing money at transactions.

Stuart Oberman: [00:01:58] But there’s a lot of misconceptions about what it takes to have a smooth transition, and I really want to drill down on your expertise. You’ve been doing this for over 21 years, and I want to hear what you have to say and your thoughts all the way from due diligence to leveraging advisors. So, give me your thoughts on some matters regarding what it takes to have a smooth transition, as we say.

Danielle McBride: [00:02:29] Well, thanks, Stuart, for having me on the podcast. And, yeah, this is Keys to a Smooth Practice Transition. I kind of call this my ABCs. A is for advisors. One of the best things that you can do for yourself is to surround yourself with the best advisors you can. And they should be specialized, you know, professionals in this area, in the dental industry.

Danielle McBride: [00:02:57] Leverage your advisors that have the experience in these transactions. I mean, there are dental specific lawyers like us. There are dental accountants. There are dental finance lenders. There are dental brokers. All of these people, all of these advisors have a ton of experience. This may be your one and only transaction, buying a practice or selling a practice or merging going in with a DSO. We’ve done hundreds, if not thousands, of these transactions, these advisors have.

Danielle McBride: [00:03:29] So, you know, it’s important to get those specialized professionals to work with you. And they’re out there. And if you have at least one of those advisors, they can help you find others. If you’re in need of a dental specific lender, if you’re a buyer of a practice, if you’re in need of a dental specific accountant, there are lots of other financial business and consultants that have specialized knowledge in the dental field. And that’s my A, you know, my ABCs.

Danielle McBride: [00:04:04] The second is your business. You’ve got to know your business. And it’s important whether you’re looking to sell to a third party or to a DSO in these transactions. Knowing your business, knowing the numbers, having the data that’s going to be requested through all of the due diligence is going to be one of the most important things that you do in these transactions.

Stuart Oberman: [00:04:25] I got a question for you. I got a question for you. You do valuations. We hear –

Danielle McBride: [00:04:30] Yes. I do practice valuations. And so, one of the keys in those valuations is profitability in the practice transition.

Stuart Oberman: [00:04:37] We hear this all the time, “Know your numbers,” what does that mean? When someone says, “Well, I got to know my numbers.”

Danielle McBride: [00:04:47] Know your numbers.

Stuart Oberman: [00:04:48] What does that mean? I mean, our guys, it doesn’t seem like they understand that a lot of times.

Danielle McBride: [00:04:55] Yeah. So, knowing your numbers means a couple of different things. One is being able to get the data on new patients, and insurance plans, and how much of your practice is PPO plans versus fee for service. Those kind of numbers are important. But the key numbers are profitability.

Danielle McBride: [00:05:17] Or sometimes in these DSO transactions you hear being thrown around EBITDA, E-B-I-T-D-A, Earnings Before Income Taxes, Depreciation, and Amortization. It’s essentially, not just the net income, it’s profitability, it’s the cash flow in the practice. You got to look beyond W-2 compensation or net profit. It’s that plus add back. Discretionary expenses, I like to call them. The perks that the doctor runs through the practice.

Danielle McBride: [00:05:49] It can also be things like family on the payroll, if they’re being paid more or less than what would be fair salary for someone doing the work that they’re doing in the practice. It can also be rent. You know, looking at fair rent and whether you’re paying yourself above or below what fair market rent is on a piece of property or your office building that you also own along with the practice.

Stuart Oberman: [00:06:13] Is your specific profit margin? You hear like, “Well, you should be netting out 20 percent profit or 40 percent profit.” Is there a magic number that’s sort of advisable for those things?

Danielle McBride: [00:06:26] Well, it varies based on the specific type of practice. So, your general dental practice might be running an overhead of 60, 61 percent, 40 percent profitability. And that 40 percent of profitability is your W-2 income, your profit, your discretionary add backs, adjustments for paying yourself high rent on your building, non-recurring expenses, if you hired a consultant to come in one year, those sort of things. It’s going to vary if you’re an oral surgeon or if you’re an orthodontist or a pediatric dentist. There are different percentages for those different specialties.

Stuart Oberman: [00:07:11] Huh? Now, I know we do a lot of DSO transactions as a firm, so if they’re getting ready to sell their practice, how should they prepare due diligence? Should they say, “Hey, Danielle. I’m ready to sell my practice. I know there’s a lot of due diligence on the DSO side. Can you send me a due diligence checklist so I can start preparing for this?” How do they prepare for due diligence, which will wear them out a lot of times?

Danielle McBride: [00:07:42] Yeah. It’s going to wear them out and you’re going to get asked for stuff over and over again.

Stuart Oberman: [00:07:46] The same stuff.

Danielle McBride: [00:07:46] You’re going to send them all of your quarter one, quarter two, quarter three, quarter four financial statements and tax returns. And every insurance provider you take in the practice. Some of the banks even ask for monthly profit and loss statements for the year, especially after COVID.

Danielle McBride: [00:08:13] COVID kind of changed things from a financial perspective. From the lender’s perspective, it used to be that you could get away with sending them the years worth of financial statements and tax returns. And then, we had COVID and then they wanted to see month by month. So, we wanted to see every month of 2019, and every month of 2020, and every month of 2021 so far.

Danielle McBride: [00:08:36] So, having the ability to get at least quarterly financial statements is an important part of the due diligence. And then, they’re just going to ask you for every business insurance, every business license, every license for every staff member and doctor in the office. They’re going to ask for balance sheets.

Danielle McBride: [00:08:56] And if there are liens on the practice, which is often one thing that people forget. So, if you had an SBA loan, for instance – a lot of people had this. I just had this with a transaction – SBA EIDL Loans, you can pay those off. My client actually got an email from the SBA saying, “This is your authorization to file a UCC termination on the lien that we have on your practice.” And we needed to get that termination statement filed to clear it for the lender so that the buyer’s lender would actually fund the transaction. So, there are things like that.

Stuart Oberman: [00:09:36] Do you see a lot of PPP problems right now? Loans are not being authorized to pay back and items are being withheld on the transaction?

Danielle McBride: [00:09:48] I did earlier in the year. So many of the PPP loans have finally gotten forgiven. That that problem has started to get a little bit easier to deal with. Usually, it’s some document references on the PPP loans and that it’s been forgiven and some sort of proof to the lenders or the buyer that it’s actually been forgiven.

Danielle McBride: [00:10:12] But I did have to do a lot of escrows. And back in 2021, I first started doing transactions again after COVID opened back up and the lenders started lending again. I was having to escrow funds for PPP because the guidance came out from the IRS saying that you had to escrow the amount of the PPP loan with the bank. And the banks were like, “We don’t know how to do this.” So, you know, I was actually escrowing funds into attorney escrow accounts and holding it because the bank wasn’t prepared to do it.

Stuart Oberman: [00:10:44] Wow. So, do you recommend from an expedient standpoint smooth transaction that we have sort of a due diligence checklist, whether it’s us or whomever, provide that due diligence checklist information to whoever the adviser is and then put that information – we’ll call it a data room? And then, this way the seller or the buyer can get in there and start plucking that information. Is that something that you thought?

Danielle McBride: [00:11:16] A lot of times, if you’re working with these bigger DSOs, they will do exactly that. They’ll have some sort of service where you’re uploading your documents and they will have a checklist that they have to go through. Because a lot of the private equity lenders, they’ve got checklists and they want to see each and every one of those items checked off before they will give the green light to fund the transaction.

Stuart Oberman: [00:11:36] Now, some of these bigger deals, we hear the term quality of earnings. Quality of earnings, what does that mean? Because a lot of the buyers on the corporate side will spend a lot of money on quality of earnings. Our doctors, I don’t think, really understand what that means and how that affects their practice.

Danielle McBride: [00:11:58] Well, I think the quality of earnings is really going back to the profitability in the EBITDA of the practice and the better the cash flow is. It’s sort of like when you hear the old adage, “Okay. Well, what is my practice worth as a percentage of collections?” And everybody says, “Oh, it should be 75 percent of collections or 65 percent of collections.” Well, that’s great.

Danielle McBride: [00:12:19] But if you have two $1 million practices and one has a 65 percent overhead and the other one has a 50 percent overhead, they’re both not worth 65 percent of gross revenues. One has a better quality of earnings. One has a better cash flow. One has higher profitability. And the practice is going to support that buyer and provide a higher profit ratio for that buyer, that DSO, that corporate purchaser.

Danielle McBride: [00:12:53] And especially for a private party, too, I mean, that’s what you want to look for, a practice that has a better cash flow, higher profitability. And you can clearly see that in the tax returns. That’s another thing, too, that a lot of sellers have to think about this. A lot of them have been aggressive with their deductions, but they’ve also maybe been a little lax about putting the documentation together and being clear on that. And so, sometimes when you get a practice like that where they’re just running a ton of things through the practice, you got to sometimes do a little bit clean up because the buyer is going to ask those questions and they’re going to want to see, “Well, where is the cash flow?”

Stuart Oberman: [00:13:30] That never happens. You mean doctors are running their personal stuff through the practices? Are you kidding me?

Danielle McBride: [00:13:34] That never happens, right?

Stuart Oberman: [00:13:39] Are you saying the house payment, and the kids, and the trip – wow. Well, they call this add backs. Is that what they call those?

Danielle McBride: [00:13:51] Add backs. I like to refer to them as discretionary expenses.

Stuart Oberman: [00:13:55] Or having their six year old child, son or daughter, make $10,000 a year –

Danielle McBride: [00:14:02] Yeah. They model for the website. They got to pay them something.

Stuart Oberman: [00:14:05] Or the flyer for the office. Wow. That’s a lot of stuff. And this could be a conversation for hours and hours and hours. Well, I think that if our doctors take this information, figure out when they’re going to sell, how they’re going to sell, who their advisors are, what do they need to do to get prepared, I think this is great advice. How do they reach you if they have any questions on the sale, the due diligence?

Danielle McBride: [00:14:38] They can reach out to Oberman Law Firm at 770-886-2400. My email is danielle@obermanlaw.com. And you can go on our website, too, obermanlaw.com for information. There’s some blog posts and lots of information about the practice on there. And, yeah, reach out. Give us a call. We’ll help you. The other key to a smooth transition is not waiting until the last minute to plan for it.

Stuart Oberman: [00:15:11] Well, that never happens either, huh? Well, I know you’re a regular contributor to the firm’s newsletter, Advisor Insights. Great information coming in there. And I know in a previous podcasts, you had a great, great information on tax. I know you got some other podcasts that you’ll be on the air for. Amazing. Danielle, thank you. Thank you so much.

Stuart Oberman: [00:15:36] Ladies and gentlemen, thanks for joining us on Dental Law Radio. If you have any questions, please feel free to give us a call, 770-886-2400. And email me directly, stuart@obermanlaw.com.

Stuart Oberman: [00:15:49] Guys, ladies and gentlemen, thank you very, very much. Danielle, thank you again. Amazing job as always. We rely on you a lot on the acquisition, and tax side, and general guidance on compliance. So, thanks everyone and have a great day.