Practice Negotiations and Practice Negotiations and Contracts: Financial Contracts: Financial Decisions for Future Decisions for Future SuccessSuccessCharles Loretto

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

registered with the Securities and Exchange Commission. No client or prospective client should assume that any information presented or made available during this presentation is a receipt of, or a substitute for, personalized financial planning consulting advice. Financial planning consulting advice can only be rendered after the following conditions are met: 1. Delivery of our form ADV Part 2A to you; 2. Execution of an Investment Advisory and/or Financial Planning Engagement 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 by contacting Cain Watters & Associates P.L.L.C. at 972-233-3323 ext. 6015, or send a written request to Gary V. Moore, Chief Compliance Officer.

Loretto KidsLoretto Kids

Why am I here?Why am I here?

•Build a relationship with you•Develop trust with you so that you will eventually let us review any business deal you are considering •Motivate you to own a practice sooner than later•Educate you on important life decisions that are in front of you

Loretto Keys to SuccessLoretto Keys to Success

• Know somebody• Have an unique skill set• Have an outgoing personality

• Toast masters, Dale Carnegie courses

• Work Hard• Be Nice

Do You Have a Plan?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

Ideal One Doctor Ideal One Doctor Practice Bringing in an Practice Bringing in an

AssociateAssociate•You LOVE the established doctor•Gross Production $1,000,000•Overhead 55%•New Patients 40 monthly•Partnership 2 year period•Guaranteed Salary $90,000•Detailed Plan of Attack

Marketing PlanMarketing Plan

•Marquee•Business Plan•Business Cards•Open House•Announcement to the Community•Direct Mail Campaign•Introduced as Partner on Day 1

SpaceSpace

•5 to 7 Chairs•Over 2000 square feet of space is ideal•New consult room

Why Are We in a Why Are We in a Sellers Market?Sellers Market?

•The S&P 500 as of January 3rd, 2000 was 1455 and the quarter end as of September 30th, 2012 was 1441. No stock market growth for a very long time. •Assuming the selling doctor is 60, has $1MM saved, plans to sell the dental practice and building for a total of another $1MM, pay taxes and be left with $1.75MM of liquid assets. •Now the doctor needs to get a yield on his/her money. Current CDs are yielding between 0-1% or in this example $17,500. •All news is negative, so selling a business that one built and managed over 35 years, living off of ones money is a scary thought.

Walk-Away Practice Walk-Away Practice ConsiderationsConsiderations

•What does the practice gross•What 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 furthest active patient

•What amount of production does the established doctor need to produce that you cannot•Is the employment agreement for the established doctor one year or less•What is the asset allocation of the sale(60% Goodwill and 40% FFE) The greater the allocation to Furniture, Fixture and 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 office before becoming the owner

Walk-Away Practice Walk-Away Practice ConsiderationsConsiderations

PPractice Scenario ractice Scenario Walk-Away Sale Example Walk-Away Sale Example

1:1:• 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 6

Net Revenues $650,000

Price $600,000

Practice ScenarioPractice ScenarioExample 2: 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 the starting 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%

Example 2 Continued:Example 2 Continued:Scenario 2A:•Offer: 35% of collections for any new starts that the candidate brings to practice

•Years 1-4 - Associate agreement working for 3 days/week•Year 5 – Buy-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 job•50% buy-in at 18 months•50% buy-in at 36 months

Example 2 Continued:Example 2 Continued: Scenario A:

Year: Salary:1 ?2 ?3 ?4 ?5 – Buy 50% $382,0006 – Buy 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

Proposed Sale-Example Proposed Sale-Example 3A: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 grew

Year:1. Associate Salary 8. 50%2. Associate Salary 9. 3. 5% 10. 100% 4. 5%5. 5% 25%6. 5%7. 5%

Agreed-Upon Sale-Example Agreed-Upon Sale-Example 3B: 3B:

•Seller agreed to an asset sale •Purchasing the practice as an asset sale vs. a stock sale will save the buyer over $100,000

•Buyer would still work for 2 years as an associate•Buy-In

•Year 3 – 25%•Year 5 – 50%•Year 7 – 100%

-Gross 1.6 million-Net $650,000-Price Valued at 18 months & fixed for

life

Estimated Cash for the Estimated Cash for the BuyerBuyer

Example 3C:Example 3C:Before:

Year: Profit Pool:1.$175,000 2.$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

Example 4: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 $600KNet Revenue in 2011 $240KValuation is 70% of Collections $430KNet After Debt Service $180KBuilding Valued $300KProposed 10-Year Lease $3,700 per monthEstimated Financing Building $2,600 per month (w/ ins. &

taxes)

Senior Doc Stays on Senior Doc Stays on as Employeeas 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 personal financial planning needs• Figure out the most you can produce then subtract from total

doctor production and use this a base for the established doctor.

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 it makes sense to the bank

Critical Decisions You Critical Decisions You Must Get Right!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 their business is dentistry, all banks are not the same

• Asset allocation on the practice• Stock vs. Asset sale—difference in cash-flow could be over $100,000

• Who is selling you what insurance? Agents make commission so please 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 if appropriate

Critical Decisions You Critical Decisions You Must Get Right Must Get Right

Continued!Continued!• Setting up your corporate salary is huge, this ties to your payroll taxes and your pension plan

• How much of the working capital do you use to pay bills or 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 dollar business, you don’t just lump all supply bills into one category and pay it. You don’t 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

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

• Purchasing the building. Once you are committed to buying the practice the building needs to be considered as well. Banks will lend here too, if the deal makes sense.

• Having a financial plan at home. Understand that if you are 30, married, 2 kids, business debt of 600k, lease obligations of 400k, dental school debt of 250k, new home debt of 300k, we are now in 1.5MM of debt. You need a plan!! You and your spouse!!

• You must fully understand your finances because 1.5MM of debt is emotional.

Critical Decisions You Critical Decisions You Must Get Right Must Get Right

Continued!Continued!

Critical Decisions You Critical Decisions You Must Get Right Must Get Right

Continued!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 and having no money will leave you with little options. Managing good debt is key here.

• Consider hiring specialist to surround you personally and professionally. Do you want a heart surgeon that has never performed heart surgery working on your family member or do you want someone that has performed thousands of surgeries. Note to dentist…Don’t perform your own financial surgery.

THANK YOU!THANK YOU!Cain, Watters & Associates

New Client Services-Charles Loretto charles@cainwatters.com

www.cainwatters.com info@cainwatters.com

972-233-3323

National Dental PlacementsPresident-Charles Loretto

www.nationaldentalplacements.comOffice 972-239-0971