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Practice Negotiations and
Contracts: Financial Decisions
for Future Success
Charles Loretto
Cain, 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
Loretto Kids
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
•Motivate you to own a practice sooner than later
•Educate you on important life decisions that are in
front of you
Loretto 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?
Most dentists think they have a plan…
• Are you protected with adequate coverage?
• Life Changes
• Have you set retirement goals?
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 Practice
Bringing in an Associate
•You LOVE the established doctor
•Gross Production
•New Patients
40 monthly
2 year period
•Guaranteed Salary
•Detailed Plan of Attack
Marketing Plan
•Business Plan
•Business Cards
•Open House
•Announcement to the Community
•Direct Mail Campaign
•Introduced as Partner on Day 1
•5 to 7 Chairs
•Over 2000 square feet of space is
•New consult room
Why Are We in a
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 Considerations
•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
Walk-Away Practice Considerations
•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
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
Number of Ops
Net Revenues
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 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
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:
Scenario A:
5 – Buy 50%
6 – Buy 50%
Scenario B:
2 Salary
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
1.6 million
-Net $650,000
Valued at year 3 & revalued at year 10
*Higher price assuming that the practice grew
1. Associate Salary
2. Associate Salary
3. 5%
4. 5%
5. 5%
6. 5%
7. 5%
8. 50%
10. 100%
Agreed-Upon Sale-Example 3B:
•Seller agreed to an asset sale
•Purchasing the practice as an asset sale vs. a stock sale will save the buyer over
•Buyer would still work for 2 years as an associate
•Year 3 – 25%
•Year 5 – 50%
•Year 7 – 100%
1.6 million
Valued at 18 months & fixed for life
Estimated Cash for the Buyer
Example 3C:
Profit Pool:
1. $175,000
2. $175,000
3. $175,000
4. $175,000
5. $175,000
6. $175,000
7. $175,000
8. $350,000
9. $350,000
10. $350,000
$2,275, 000
1. $175,000
2. $175,000
3. $175,000
4. $175,000
5. $175,000
6. $175,000
7. $175,000
8. $175,000
9. $175,000
10. $175,000
Profit Pool:
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
Net Revenue in 2011
Valuation is 70% of Collections
Net After Debt Service
Building Valued
Proposed 10-Year Lease
Estimated Financing Building
$3,700 per month
$2,600 per month (w/ ins. & taxes)
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 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
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 Must
Get Right!
Setting up your corporation correctly
Structuring your loan correctly
Asset allocation on the practice
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
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
Critical Decisions You Must
Get Right 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
Critical Decisions You Must
Get Right Continued!
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
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 Must
Get 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 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.
Cain, Watters & Associates
New Client Services-Charles Loretto
[email protected]
[email protected]
National Dental Placements
President-Charles Loretto
Office 972-239-0971