11.3-4 - practice negotiations and contracts

8/11/2019 11.3-4 - Practice Negotiations and Contracts

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Practice Negotiations andContracts: Financial Decisionsfor Future Success

Charles Loretto


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DisclosureCain, Watters and Associates P.L.L.C. is an Investment Advisor

registered with the Securities and Exchange Commission. No client orprospective client should assume that any information presented ormade available during this presentation is a receipt of, or a substitutefor, personalized financial planning consulting advice. Financialplanning consulting advice can only be rendered after the followingconditions are met: 1. Delivery of our form ADV Part 2A to you; 2.

Execution of an Investment Advisory and/or Financial PlanningEngagement Letter between us.

For additional disclosure, please refer to the Cain Watters &Associates P.L.L.C. FORM ADV Part 2A. You may obtain a copy bycontacting Cain Watters & Associates P.L.L.C. at 972-233-3323 ext.

6015, or send a written request to Gary V. Moore, Chief ComplianceOfficer.


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Loretto Kids


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Why am I here?

Build a relationship with you

Develop trust with you so that you will eventuallylet us review any business deal you are

consideringMotivate you to own a practice sooner than later

Educate you on important life decisions that are in

front of you


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Loretto Keys to Success

Know somebody

Have an unique skill set

Have an outgoing personality Toast masters, Dale Carnegie courses

Work Hard

Be Nice


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Do You Have a Plan?

Most dentists think they have a plan Are you protected with adequate coverage? Life Changes

Have you set retirement goals? Timeline

Future Income

Savings Goals

Investment Returns

Have you set business goals?

Buying an Existing Practice Becoming a Partner

Starting a New Practice


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Ideal One Doctor Practice

Bringing in an AssociateYou LOVE the established doctor

Gross Production $1,000,000

Overhead 55%

New Patients 40 monthly

Partnership 2 year period

Guaranteed Salary $90,000Detailed Plan of Attack


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Marketing Plan

MarqueeBusiness Plan

Business Cards

Open House

Announcement to the Community

Direct Mail Campaign

Introduced as Partner on Day 1


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Space

5 to 7 Chairs

Over 2000 square feet of space is

idealNew consult room


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Why Are We in aSellers Market?

The S&P 500 as of January 3rd, 2000 was 1455 and the quarter end asof September 30th, 2012 was 1441. No stock market growth for a verylong time.

Assuming the selling doctor is 60, has $1MM saved, plans to sell thedental practice and building for a total of another $1MM, pay taxes andbe left with $1.75MM of liquid assets.

Now the doctor needs to get a yield on his/her money. Current CDsare yielding between 0-1% or in this example $17,500.

All news is negative, so selling a business that one built and managedover 35 years, living off of ones money is a scary thought.


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Walk-Away Practice Considerations

What does the practice grossWhat does the practice net

Can you do the dentistry

How much would you net after debt-service

Can you live on that income

Is the established doctor staying on and for how long

Is the non-compete a greater distance than the furthestactive patient


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What amount of production does the established doctorneed to produce that you cannot

Is the employment agreement for the established doctorone year or less

What is the asset allocation of the sale(60% Goodwill and40% FFE) The greater the allocation to Furniture, Fixtureand Equipment for the buyer the better for tax purposes

Get a second opinion before you buy the corporation

Consider shutting down the pension plan in the officebefore becoming the owner

Walk-Away Practice Considerations


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Practice Scenario

Walk-Away Sale Example 1: Buyer has been in the practice for 2 years

Practice is outdated and needs new equipment

Established doctor is willing to stay on in the practice as an associate

Buyer is producing $60,000 doctor production in 4 days Practice was doing 800k two years ago, now doing 1.2M

Price was set at 600k prior to associate joining the practice

Gross Revenue $1,200,000

Number of Ops 6Net Revenues $650,000

Price $600,000


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Practice Scenario

Example 2:Resident is completing program this year

The practice is in California

Seller presents first option to buyer, but the buyer is not happy with thestarting pay because he has 450K in dental school debt and has 2 kids

Collections $1,700,00

Overhead is 55% or $765,000

Valuation in 2008 1.1M on 1.4M collections, overhead was same at

55%


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Example 2 Continued:

Scenario 2A:Offer: 35% of collections for any new starts that the candidatebrings to practice

Years 1-4 - Associate agreement working for 3 days/weekYear 5Buy-in half of the practice

Year 7 Buy-in the other half of the practice

Scenario 2B:$700 per day for 2 days a week$1,300 per day for 2 days a week at a corporate job50% buy-in at 18 months

50% buy-in at 36 months


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Example 2 Continued:

Scenario A:

Year: Salary:1 ?2 ?3 ?

4 ?5Buy 50% $382,0006Buy 50% $382,0007 $765,000

$1,530,000

Scenario B:

Year: Salary:1 $70,0002 Salary $35,000

Partnership $191,000

$226,0003 $382,0004 $765,0005 $765,0006 $765,0007 $765,000

$3,737,000


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Proposed Sale-Example 3A:Seller is proposing a stock sale

Buyer would work for 2 years as an associate

Buy-in starts at year 3 and is complete at year 10

Salary for doctors is $175,000 or 30% of collections

-Gross 1.6 million

-Net $650,000

-Price Valued at year 3 & revalued at year 10

*Higher price assuming that the practice grewYear:

1. Associate Salary 8. 50%

2. Associate Salary 9.

3. 5% 10. 100%

4. 5%

5. 5% 25%

6. 5%

7. 5%


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Estimated Cash for the Buyer

Example 3C:Before:

Year: Profit Pool:1. $175,0002. $175,0003. $175,000 $15,0004. $175,000 $30,0005. $175,000 $45,0006. $175,000 $60,0007. $175,000 $75,0008. $175,000 $150,0009. $175,000 $150,00010.$175,000 $300,000

$1,750,000 $825,000

$2,575,000

After:

Year: Profit Pool:1. $175,0002. $175,0003. $175,000 $75,0004. $175,000 $75,0005. $175,000 $150,0006. $175,000 $150,0007. $175,000 $300,0008. $350,000 $300,0009. $350,000 $300,00010. $350,000 $300,000

$2,275, 000 $1,650,000

$3,925,000


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Example 4: Associate is from the area

No valuation of the practice has been completed Associate wants seller to stay in the practice and help

Seller wants to hold onto the building

Gross Revenue in 2011 $600K

Net Revenue in 2011 $240K

Valuation is 70% of Collections $430K

Net After Debt Service $180K

Building Valued $300K

Proposed 10-Year Lease $3,700 per month

Estimated Financing Building $2,600 per month (w/ ins. & taxes)


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Senior Doc Stays on

as Employee Have a separate short-term employment agreement

Non-compete issues with radius and at least 5 years

Know exactly what seller needs to net for their personalfinancial planning needs Figure out the most you can produce then subtract from total doctor

production and use this a base for the established doctor.


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Please Consider the

Building: Purchase of Dental Building

20-30 year financing

A bank will lend you the money on the building every time when itmakes sense to the bank


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Critical Decisions You Must

Get Right! Setting up your corporation correctly Structuring your loan correctly

Are you getting the best deal. Do you understand all terms and options of the loan,application fees, is this bank easy to work with after they close, what percent of theirbusiness is dentistry, all banks are not the same

Asset allocation on the practice Stock vs. Asset saledifference in cash-flow could be over $100,000

Who is selling you what insurance? Agents make commission soplease know what and why you are getting the policy.

Shutting down the pension plan Rehiring all the new employees Starting a new pension plan

Placing your spouse on the payroll if appropriate, placing children on the payroll ifappropriate


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Critical Decisions You MustGet Right Continued!

Setting up your corporate salary is huge, this ties toyour payroll taxes and your pension plan

How much of the working capital do you use to pay billsor reinvest back into the business

Setting up your payroll correctly Understanding how to do your accounting. It is not as

simple as it seems. When you manage a million dollarbusiness, you dont just lump all supply bills into onecategory and pay it. You dont just put all employees in

one column and pay their salaries. Understanding the break-even in your practice and

setting goals for you personally and your team


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When and whom to hire as a consultant. Timing andcash-flow is critical here

Purchasing the building. Once you are committed tobuying the practice the building needs to be considered

as well. Banks will lend here too, if the deal makessense. Having a financial plan at home. Understand that if you

are 30, married, 2 kids, business debt of 600k, leaseobligations of 400k, dental school debt of 250k, newhome debt of 300k, we are now in 1.5MM of debt. Youneed a plan!! You and your spouse!!

You must fully understand your finances because1.5MM of debt is emotional.

Critical Decisions You Must

Get Right Continued!

C


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Critical Decisions You MustGet Right Continued!

You need to pick the right place to live and practice. You also need to make a good financial decision when

you are 250k+ in dental school debt. You must understand that cash is king. Saving money

can bail you out of problems. Paying down debt andhaving no money will leave you with little options.Managing good debt is key here.

Consider hiring specialist to surround you personallyand professionally. Do you want a heart surgeon thathas never performed heart surgery working on yourfamily member or do you want someone that hasperformed thousands of surgeries. Note todentistDont perform your own financial surgery.


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THANK YOU!Cain, Watters & Associates

New Client Services-Charles [email protected]

[email protected]

972-233-3323

National Dental PlacementsPresident-Charles Loretto

www.nationaldentalplacements.comOffice 972-239-0971

11.3-4 - practice negotiations and contracts

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