June 30, 2022
by Dr. Sean Robertson
Commercial air travel is safer with every passing decade.1 Advancements in mechanical, operational, and technological design contribute to an ongoing trend in risk reduction of mortality in the airline industry. That risk is now approximately 1 in 8 million passengers.1 Regardless of how small a given risk, it behooves any industry to continually strive to minimize adverse outcomes.
Take-off and landing are the “riskiest” minutes in air travel. Boeing reports only 14% of fatal accidents occur during cruising at altitude.2 From taxiing to cruising altitude, the percentage of an accident is approximately 31%. From descent to landing that percentage is 55%.2 This is commonly referred to as the “plus three minus eight” periods of air travel, which reflect the first three minutes and last eight minutes of each flight that carry the greatest risk.
The safety of air travel and the likelihood of a smooth flight is not the exclusive responsibility of the pilot. Ground crews, meteorological technology and weather conditions, mechanical inspection and operation, on board technology, pilot judgement and air traffic control are some of the interdependent variables that can impact the safety of a flight. As with air travel, any situation where the stakes are high requires minimizing risk to increase the probability of the desired outcome. This is achieved through preparation, analysis, knowledge, experience, perspective, and some degree of predictability. Although the purchase and sale of a dental practice does not carry the risk of mortality, it does carry the potential risk of adverse outcomes that can impact the financial and transition plan for both a buyer and seller.
Buyers and lenders assume their greatest risk during take-off. When a buyer purchases a dental practice, there is always a requirement of security held by the lender. That security is to minimize the lender’s risk of loss and provide some form of “guarantee” of the loan against personal equity. Patient retention, staff retention, overhead affordability, loan repayments, and practice growth all need to support the ability for the new buyer to reach cruising altitude, increase predictability of operations, and realize profit. That predictability gives the lender reassurance that the loan will be paid and the owner reassurance that a steady income can be generated for their efforts.
For dentists selling their practices, the transition out of ownership can be likened to a pilot landing the plane. Minimizing the turbulence in your practice sale, metaphorically landing the plane, and closing the deal takes preparation of your corporation share structure and lease, a solid financial strategy with your advisory team, transition planning for your staff and patients, and the right communication to support a transfer of ownership.
In every transition out of ownership, the seller will consider three areas of importance. These include their financial goals of sale, their ideal transition plan, and the right fit in personality and philosophy of care of the buyer. The importance of each of these three considerations can vary and is individual to each owner. The volume of dentists looking to purchase a practice continues to exceed the number of practices available. As such, finding a buyer for a practice is not typically a rate limiting step in the transaction. But a signed letter of intent is not a signed purchase agreement. A signed letter of intent is simply a boarding pass.
Often, dental practice brokers are mistakenly compared to real estate agents. In real estate sales, the marketing of the property and expertise of the agent is a service paid for to get a signed agreement of purchase and sale. In dental practice brokerage, the brokerage first appraises the practice. This appraisal serves as a comprehensive inspection of the practice. It’s the mechanical inspection before the flight. It permits a preparatory review of all systems and operations to ensure any skeletons in the closet are identified and addressed. Doing so permits value to be maximized. Without such a thorough analysis, lenders are reluctant to lend funds to a buyer and the due diligence process has greater likelihood of identifying barriers that can prevent a sale.
Different than with a real estate transaction, a signed letter of intent in the sale of a dental practice represents the beginning (not end) of the working relationship with your practice broker/transition consultant. Practice owners may elect to transfer ownership to their associate, family member, or a buyer known to them. Our company refers to this as an “internal buy-in”. In these instances, all the steps from a signed letter of intent through a successful transition are consistent with that of an open market sale. Internal buy-in transitions require the same degree of preparation, experience, and knowledge from your advisory team to ensure a smooth descent to closing. In fact, when a relationship is already formed between a prospective buyer and seller, a smooth process from engagement to closing is of utmost importance to preserve the relationship while also maximizing the goodwill transfer.
Once a signed letter of intent is registered, your broker should be acting as your air traffic controller. This means supporting the due diligence process. This process involves attaining the required documentation from your legal counsel and accountant and providing these to the purchaser’s advisory team and lender. This can also mean providing the purchaser with projections to support financing for the purchase at a given price. Many buyers our company works with are not familiar with how to write projections or generate a business plan for their lender. Your broker should be supporting the negotiation as the details get ironed out in the final purchase agreement. And although a purchase agreement should reflect the spirit of the letter of intent, there are always grey areas that require clarification and negotiation to facilitate a win-win transition. This is often where your broker or transition consultant earns their cheque and proves their value. This is also where a lack of preparation, experience, and knowledge can result in a failed final approach.
An experienced transition consultant has been refining their processes for years. Working with a brokerage should mean you are getting experienced negotiation skills working for you and a plan to support the transition you envisioned. Working with a broker should mean you have a flight plan; someone to facilitate communication between all the parties involved and an air traffic controller that keeps the plane on route to land. Nothing in life is a guarantee but when the stakes are high and the results are significant, having the right team can minimize risk of failure, land the plane, and close the deal.
About the Author
Dr. Sean Robertson, is a licenced dentist and founding partner of The Dental Broker Team, a full service appraisal, sale, and transitions firm for dentists. He can be reached at firstname.lastname@example.org