Mergers and acquisitions, popularly known as M&As, have been a favorite tool of the corporate world, starting with the conglomerate craze of the 1970s and 1980s and continuing to the present with the surge of consolidations in the financial and airline sectors. But what holds true here is the old adage, slightly paraphrased, that what’s good for the goose (large corporations) is also good for the gander (in this case, the transitioning dentist paired with an aggressive mid-career practitioner). A merger can prove to be among the most important and potentially successful actions taken by dentists over the course of their career.
In a practice merger, one general dentist acquires another general and/or specialty practice and merges the two into one facility. The usual scenario pairs a dentist moving on to a later career phase with an established financially and professionally successful practitioner whose office is generally in the same geographical area. Please note that the merger is usually between two dentists in the same discipline or in closely related disciplines. Most frequently, the merger moves the acquired practice into the buyer’s physical office, but there are instances of the reverse or even of a new facility housing the merged offices.
What is most important is that when done successfully, a practice merger provides a win-win situation for both participants. The transitioning dentist is seeking to achieve a reduced workload or to move directly to retirement in a specified period of time. But he or she faces difficulty achieving this goal because of financial, health, and/or emotional issues.
A merger presents a unique opportunity to create value for what is most likely a practice environment based upon old ideas, equipment, and habits. It provides a rescue from waning practice load, income not keeping pace with inflation, a reticence to extend leasing commitments, difficulty keeping up with management or current dental procedures, or even fear of the unknown future. A practice merger is an insurance policy that earns a premium for the transitioning dentist and offers options other than a partnership, a delayed buyout, or an outright sale.
The acquiring practitioner has opposite goals. This dentist is looking for a larger practice and patient base, a higher after-tax income, and increased utilization and efficiency from the hygienist, professional, and office support staff. The practitioner making the acquisition has longer-term goals then the seller.
Win-Win Situation
The benefits to the selling dentist are many. There is a full cashout for both the practice and real estate. The responsibility for managing the practice is substantially reduced. A practice merger also allows the dentist to have a flexible transfer easeout and continued professional growth, and it provides a steady source of income either from a revenue sharing agreement or a negotiated salary while working full or part time. The merger essentially protects the interest of the transitioning dentist against death, disability, and loss of practice value.
The acquiring dentist also realizes significant benefits. The merger is a “big bang for the buck” and highly leveraged investment. On a percentage basis, financial returns far exceed those of other types of investments, while providing substantial investment safety, utilizing, if necessary, 100% financing for the acquisition and expansion. It results in a significant increase in practice profitability, viability, production, size, referrals, and efficiency.
The profit gain is particularly magnified when the offices are merged into one of the two current sites. In this example, physical costs (rent, utilities, insurances, etc) remain basically fixed or go up only slightly, while the increase in practice size and staff utilization provides much higher profit margins. The gain in market share can be extremely generous while competition from neighboring practices is limited proportionally. All this comes with a sizeable increase in practice value salability.
Ensuring Success
The key to the success of the merger is careful due diligence that includes not only financial and legal considerations, but also the human elements of the endeavor. It is imperative to the success of the merger that the right professionals are engaged to facilitate the venture, not only to generate the necessary feasibility study and to craft the employment and buy-sell agreements between the seller and buyer, but also to ensure the compatibility of the two participants. The payback on such a transaction is invaluable.
Appropriate advisors can provide the details of the economic benefits of the merger to both the buyer and the seller, appraise practice values, assess the credit worthiness of the buyer and seller, provide needed brokerage services, ensure transaction confidentiality, and advise on payout options. Perhaps the number one asset these advisors can bring to the table is their ability to match a buyer and seller who can successfully coexist for the length of time they share an office. Quite often, emotional and psychological issues will tear apart a thriving dental practice, even though all the business factors point to a successful environment.
The involved dentists may fear potential criticism from one another on technical and business approaches. Or, it could be any other aspect associated with the human makeup of the two practice merger participants. Quite often, the human factors of the practice merger are overlooked and the participants become mired in a contentious, depressed environment, regretting their involvement in the transaction. Ensuring against such a scenario is the overwhelming reason for bringing the right experienced team into the process directly from the start.
Interested practitioners can obtain more information about practice mergers from professional publications, local dental societies and associations, and the ADA and by seeking out qualified consulting services. It definitely is worthwhile investigating whether this is a viable current or future option for one’s practice and career.
Mr. Clemens, founder and president of the Clemens Group, has been providing dental practitioners with services related to practice evaluation and transition for over 40 years. He is a charter member of the Practice Valuation Study Group, professionals dedicated to providing quality and timely appraisals and valuation services, and is a founding member of ADS American Dental Sales, a national network of independent brokers/consultants specializing in dental practice sales, consulting, and appraisal services. He can be reached by writing to alan@TheClemensGroup.com or (212) 370-1169.
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