Transition Management: Do You Need to Transition Your Practice?

by Derek Hill

The simple act of selling your dental practice will absolutely not be an option for thousands of dentists over the next five to 10 years. The historical sequence of events that have lead almost every dentist to retirement in the past will not work in the future, in fact parts of that familiar process are starting to fail right now. Many will incorrectly view this changing environment from a perspective of fear and concern rather than as an opportunity to explore new and rewarding options. The new language of practice succession is being lead by the word “transitions”. Very simply, a practice transition is a series of events sequenced in a way that results in the transfer of equity from one dentist to another.

Why Selling Your Practice May Not be an Option

Fact One: As a business, the profession of dentistry is changing. The supply and demand for dentists is changing, the lifestyle expectations for many dentists is different today than it used to be and the economics of day to day life have changed. All of these factors and more have altered the possibilities for dentists wanting to “sell” their practices.

Statistics suggest that over the next five to 15 years, there will be 25,000 more dentists retiring than there will be dentists graduating in the US. Divide that number by 10 and you have the Canadian statistic of a 2,500 seller surplus. The first huge wave of Baby Boomers is now 55 and they will reach their peak saturation within 15 years. Over the next 15 years, starting now, every Baby Boomer dentist will be somewhere between 55 and 70 years-of-age and they are going to want to retire. What really makes this a problem is that the educational systems will not be producing replacement dentists at anywhere near the same rate, in fact graduating classes in the US are shrinking. There simply will not be enough buyers to buy all of the practices that will be for sale for the next 15 years.

Fact Two: The net worth of most professionals is significantly lower today than it was two years ago. Until recently, practice value was not necessarily a big consideration for most dentists because their portfolios were bulging. Many dentists actually accelerated their retirement plans because of the growth of their stock portfolios. Unfortunately, many of these doctors are now looking for associate or locum positions. Hopefully what has happened to most portfolios is just temporary, but what if it is not?

What should not be overlooked is that as a dentist your best investment continues to be your dental practice. A properly valued dental practice will provide the owner with a 25% to 35% return on investment in addition to an imputed associate compensation of 40%. The economics of today emphasize the fact that your practice has become a complicated but very valuable component of your net worth, capable of providing substantial income and capital value. Reliance on the income and capital of their practice and the maximization thereof may be more important than ever for the dentist thinking of retiring over the next five to 15 years.

Fact Three: Many professionals entering the retirement zone are not financially ready for a whole variety of reasons and will need to work longer. Working longer is fine but it comes with risk. Health issues, competitive issues, patient attrition, loss of stamina and focus are only a few of the factors that contribute to the risks of practicing significantly past one’s prime. Professional practices tend to build during the practitioners 30s and early 40s, they coast from then until the mid-50s then start to decline. Hanging on too long because of lifestyle requirements without an effective transition strategy invariably means a reduction of income and practice value at the very time when both of these resources need to be maximized.

How the Right Transition Strategy Can Help

From the vendor’s perspective a transition strategy has two principal objectives:

1. To allow the owner to maximize his earnings over the last several years of practice;

2. To allow the owner to realize the maximum capital value of his practice.

A transition strategy is usually a progressive process of transferring equity from one individual to another while allowing both parties to be earning an income or sharing in the profits from the practice. The process from beginning to end can take three to four years or as many as 10 and can progress through several different mixes of ownership. A transition strategy may involve recruiting an associate who at some stage becomes a partner and ultimately the sole owner. A transition strategy could involve an owner merging his patients into the facility of a colleague and working first as partner and then as an associate after selling his practice to his colleague. The nature of a transition strategy should be determined by both the needs and the imagination of the dentist and his or her advisors.

The real magic of the transitional approach is rooted in the concept that the whole is greater than the sum of the parts. In a typical example, if you can take the stable but idling foundation offered by a senior dentist who is in or about to enter the declining years of his career, and marry that to the energy of a younger dentist who is in the growth years of his career, the result will be beneficial to both parties. The senior dentist will enjoy higher income and capital appreciation from his practice and the younger dentist will also enjoy faster growth and a better return on his investment then would have been the case in most simple sales.

Well-planned and executed transition strategies have the effect of reducing, if not virtually eliminating, risk. The biggest unknown in any investment is the risk factor and by reducing risk the opportunity to create a win/win scenario is greatly increased. Risk usually exists in the sale and purchase of a dental practice for two reasons. There is a risk that the patients will not stay with the new owner and there is a risk that the new owner will lack the management skills necessary to operate the practice successfully. Most transition scenarios are structured in such a way as to virtually eliminate any major risk. The overlapping involvement of the two parties virtually ensures that no patients leave because of any perceived change in ownership and also allows the younger dentist a period of management mentorship during which, he or she may learn the skills necessary to assume ultimate control of the practice.

The synergies of a transition flow only if the parties are able to work effectively together. Both parties must share a common perspective on a lot of basic “core” values including such things as perspectives towards staff, patients, quality of care, money and personal lifestyle to name a few. If there is not a synergy of core values the relationship will eventually break apart. The use of an advisor who can quickly determine whether there is a good core value match between two potential “partners” is a key element in the success of any transition.

There are also times when a transitional approach will not work. In situations where one party needs to absolutely be in control of every aspect of their practice and has a very difficult time delegating any responsibility, a transitional approach may be futile. In situations where the transition process would be very quick, for example less than two years, it may be more effective just to sell the practice.

How do You Know if You Need a Transition Strategy?

Ask yourself the following questions and if you answer yes to more than one question you should definitely think about an alternative to just selling your practice.

1. Will the sale of your practice be an important part of your retirement plan?

2. Do you plan to retire in the next five to 10 years?

3. Will you need to work longer than you would like?

4. Do you have associates?

5. Do you feel you have an unusual practice for any reason?

6. Do you feel your practice is similar to those of your contemporaries?

For many dentists, question six may be the most important. If your practice is no different t
han most of the other practices that will be coming to the marketplace, how can you be sure that there will be a buyer at a time of such a sellers’ surplus?

The good news in all of this is that with proper planning, the personal, professional and financial rewards can be significant. Ten years ago, a prevailing belief was that dentistry was a dying profession. Today dentistry is more vibrant than ever. The same will be true for practice “sales”. Notwithstanding the coming buyers’ market, with a little planning, the practice succession process can lead to vibrant conclusions.

Derek Hill, CA, is a principal of The Hill Kindy Group Inc., a company specializing in the succession and transition needs of dentists in Canada and the United States.