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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]
972-233-3323
National Dental PlacementsPresident-Charles Loretto
www.nationaldentalplacements.comOffice 972-239-0971