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This Dental Acquisition Podcast hits all the biggest problems that crop up for BUYERS when looking for dental practices to transition. Michael Dinsio, MBA, and co-founder of Next Level Consultants has seen hundreds of deals.
In this #dentalpodcast episode he gets together with Tyler Jones an Attorney who has also done many many deals. Between the two of them they can tell you what usually works and what... well doesn't work.
⚠️ !!!TOP RED FLAGS to PROCEED WITH CAUTION!!! ⚠️
5:56 Does The Seller Own More Than One Practice
14:26 Seller Wants A Long Term Workback Agreement
23:25 The Associate Buy In & Does It Work Out
27:15 Seller Owns Property on an Associate Buy In
32:37 Buying A Fixer Upper Practice
42:57 Seller Doesn't Hire A Team of Professionals
SHOW HOST:
As a dental buyer representative, Michael Dinsio helps dentists buy dental practices step-by-step. With over a decade of experience and more than 500 dental transactions, Michael is a key opinion leader in the dental industry. This program helps walk dentists through the process of becoming a dental practice owner via dental practice acquisitions. If you would like a free consult with Michael or would like to work with Michael in the future visit his webpage. https://www.nxlevelconsultants.com/buyer-representation.html
DENTAL UNSCRIPTED HAS A WEBSITE ! ! !
Find all the content from SEASON 1: "Start Up Unscripted"... as well as SEASON 2: "Dental Acquisition Unscripted", it's all here in one spot here 👉 https://www.dentalunscripted.com
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This podcast covers from START to FINISH How to Acquire a Dental Practice. Michael Dinsio, founder of Next Level Consultants has literally seen hundreds of deals as a banker in the industry & he has personally consulted hundreds of dentists as a Buyers Representative. Michael talks with GUEST SPEAKERS about Due Diligence, Legal, Demographics, and more... He invites experts to the show to help you avoid those headaches and heartbreaks. So start at the TOP w/ Episode 01 and work your way through the transition process. We break it down step by step in a true #UNSCRIPTED and genuine way.
00:00
Oh yeah! Here we go! Practice acquisition! There are pitfalls throughout the entire process.
00:21
If you want to buy a practice, this is how folks. Acquisition Unscripted, the truth when buying and selling a dental practice. And now your host, Michael Dinsio. All right, all right. Here we go. Another episode of Dental Acquisition Unscripted. Again, Mike Dinsio with Next Level Consultants. And today,
00:50
We have a special guest and friend. I always say that special guest and friend, but actually Tyler is a pretty good friend of mine. And we've had him on the show before on the startup side of things, I believe. But today we are going into the acquisition side. So special, special guest to me and friend Tyler Jones. Thanks for being a part of the program, my friend. Hey Mike, thanks for having me. You know, when I thought about this episode this morning, I said, this is going to be fun because we're going to actually
01:19
get into some weird stuff today. And I feel like, you we're always talking about topics like, you know, how to do an LOI and how to get your banking terms good. But today is like real world, like how to tell if you're going to struggle in an acquisition, we're going to go through four or five different things that just should be red flags as you go into the process and no better than
01:48
Mr. Tyler Jones, partner at Health Cell Federman to help me and navigate me through this conversation. so Tyler, just tell us a little bit about your firm, what you do and how you help people. Sure. So my name is Tyler. I'm in charge of our tax group and our health group. So I work almost exclusively with dentists in kind of all phases of their career, but a large chunk of that is buying and selling practices. So
02:14
We do startups, employment agreements, Department of Health things, but kind of my passion has always been acquisitions. I like buying and selling practices and it's intellectually stimulating and I'm excited to talk about this. Cause as I was getting ready for it, thinking about, well, I could just tell war stories for hours with Mike, but what do they do for lunch all the time? But what do they all have in common is more interesting.
02:42
actually, it was kind of easy to get them down to like, what are the five things that I hear when I'm taking an intake call from a client, you know, who's talking to their lawyer for the first time where I go, you know, that's not necessarily a problem yet. But there's a high degree of likelihood that this will become an issue. And, you know, oftentimes, the clients are really concerned with the minutiae like
03:08
purchase price and how the AR is going to be bought and when they're going to meet the staff and I'm thinking as Mike is about, you know, some things that aren't even on their radar. no, I love that because, you we, I personally take just like you a lot of calls from prospective clients like like our listeners and
03:30
and soon to be clients, but like they'll be running through the scenario in the first 15 minutes and I'm asking my questions and you're asking your questions. And it's the calls where it's like, oh boy. And then, oh boy, oh shit, here we go. And they're super excited about it because, know, look, like you guys have never bought a practice. You haven't done hundreds like we have. so, and this episode is all about kind of
04:00
putting in one 45 minute episode of like all of our experience and what we've seen historically be challenges post-close. So let's get into the first one. And by the way, folks, we are live. keep reminding you all, if you didn't know, you can literally chat with us and you can go onto our Facebook and YouTube and look at the schedule.
04:27
Not too many people do that, but you're welcome to. if anything stimulating comes through the chat, we're happy to address it. But Tyler, with that being said, let's go through the very first one that you had in mind. And then I'll go on the next ones. I'll give you the first one. What's, what's the first one that comes to your mind on hot issues going into transitions? The number one thing that I would say just from an intake call where you go, this one's going to be a little harder than the average transition is.
04:56
Is this the seller's second practice? Does the seller own more than one practice? Brokers tend to think like all practices are the same. If you own five, you can sell them one at a time. But I think what buyers don't appreciate is there is no practice owner who owns multiple practice that isn't sharing resources between those practices. You know, it makes you think I love this one. Thank you for bringing this one up. This one was on my list as well. But like
05:26
Let's talk about this. So I'll redefine it and say in Denzio style, just to say it again. So someone owns a second practice or a third practice. They own multiple practice and they're peeling one off and selling it to potentially you. What like, what's the first thing that comes to your mind? Cause I'm thinking about like 17 things right now. Why that could be a challenge. thing I always say is no one is going to sell their best practice. They're going to sell.
05:55
the one that's got problems. So you got to figure out what the problems are. Cause there's a reason it's getting peeled off. so you're already thinking, okay, why it's almost like when you're dating, well, me and your old married men now, uh, kids, have a totally different life. But when we were single, you know, why, what's wrong with this girl? Like why, why isn't she married? She's, you know what I mean? It's like,
06:22
What's going on here? So it's kind of like you're instantly thinking you should be anyways. Yeah. Why didn't why, why is this guy doing this or cows doing this? Yeah. Is the lease about to expire and the landlords not being very cooperative? Did they just have a bunch of employees quit and the owner said, I can't do this anymore. And so they've set a common problem is, is you'll see they have two or three practices, but there's an associate in this one. And the associate is basically a hygienist.
06:51
Yeah. And so you're sitting there going, okay, well, how much money is this practice really going to spin off? And then if you peel back the onions, you know, how many employees are shared between the practices, know, how many patients are shared between the practice? Totally. And you start figuring out, so if he diagnoses something at this location, or she do they actually get the crowd seated somewhere else? Yeah. You know, is the is the fancy machine at
07:20
the other location? Yeah, are they sharing expenses? You know, does the CPA get booked under both or just one? So it looks like there's more cash flow coming out of this practice than the other. Yeah, you just got to be hyper diligent when you're looking at a second office because yeah, sometimes they are great. Maybe the sellers practices are too far apart or the dot to serve this way and they just want to focus on one. But
07:47
more often than not, immediately have to start figuring out, well, who are you going to be working at the taking with you? Right? Cause if you have staff that are between the two of you, they have an easier out to quit and go get a job. That's right. That's right. That's the number one thing that buyers have the hardest time with. go, well, I don't care if they work somewhere else on their day off and I have to go, Oh, you do care. Cause the first time you make a change, they will go running. Yeah. I like like,
08:15
from a legal perspective, Tyler's got his like super protective protective hat on there. There are things that Tyler, you can get into that contract to to try to save some of the risk. But what I found though, and this is actually going to be a theme for all of these ideas and topics that we're gonna go over today. So Tyler can really lawyer up and really put a bunch of stuff in the purchase and sale. But here's the thing, like, and you and I have been a part of a lot of deals.
08:45
Are you really going to pursue them when they break the contract? And I would tell you nine out of 10 times my clients, probably your clients, Tyler, it would go to small claims court over a five, 10, $20,000 issue. It's probably not worth it. No, that's why it's not enough to just put in the agreements when you're doing these types of deals where it's the second practice, what you want to happen. Of course you should, but you kind of need to set the stuff in motion beforehand. Like we had one where
09:15
they had a shared cloud server between the practices and we needed to schedule and we were adamant we're going to schedule in advance the split of the server so that we're not sharing information. And the seller fought and fought and fought, right? Didn't want to do it, didn't want to do it before closing. And the buyer eventually, you know, said, I trust him, I think he'll do it. Did he do it? No, anytime software is colluded, that's going to be a
09:44
tough one to handle when it comes to billing or sharing files. I'm on one right now in Hawaii. And there's two practices and two softwares and two phone numbers. Actually, no, one phone number, one software, two practices, same books. So it's literally the exact situation that we're describing here. And you just don't really know what you're getting. And so
10:12
And it's really hard to do an evaluation from my side of things as far as a buyer's rep, like you guys are asking me what the practice is worth. you know, in theory, it's worth X, but in all reality, post close, we don't really know what we're getting truly. And if if I knew that you could discount it, but the seller is not going to tell you really they're not going to be and by the way, the sellers don't 100 % know how it works either. So they're not all evil. It's just
10:40
It's a transition and stuff doesn't go the way it's planned. Totally. Like you have the one, I'm thinking one right now where, you know, the seller didn't realize this, but his CPA was paying the office manager and the front office staff for both locations out of one practice, the one that was not being sold. And I think you caught that, you identify that issue and you go, well, if you buy this practice immediately, you're going to have way more overhead than what these financials show.
11:08
Yeah, it's not that the seller was trying to get away with anything. It's just they don't know. They don't know. They don't get that granular. I will say though that the number one thing that happens when someone owns multiple clinics is there's some piece of equipment in that clinic that the seller thinks belongs to the other clinic 1000 % if it's the endo motor or the implant kid or hell I've had a chair taken out of a practice before a chair and and
11:37
You always have, Oh, it's on loan from the other clinic that was on loan. On the right. So that, there is an exclusion list, but again, what, that's why we always have pictures and a list and Tyler, again, you can button it up legally all day long. Tyler could legal it up. Your, your purchase and sale could be twice as long as a, as a normal boilerplate agreement, but the
12:04
what it comes down to is are you going to pursue legal actions if they break it and nine out of the 10 of the times you don't. And so you usually get screwed in that in that. And to further this point, two things. Number one, if I own more than, frankly, two, three practices, you got to ask yourself, why are they not selling it to DSO? Because that would be the smart move, by the way. If you have more than two, three.
12:32
Like the better play would be DSO. I hate to say it. Tyler and I are pro private practice, but once you get a practice that's so big and not one person can handle that business, it might make sense to consolidate it. So you got to yourself that. number two, when I was at the bank, the higher default rates were on second and third practices because they're harder. And so it's always an underperforming, frankly, shit show.
13:02
that you're buying, you got to find all these things out. You got to find a lot of things out. I agree. I saw I just always tell people the due diligence is going to be way harder. And you have to kind of coach the buyer up and say, listen, you're going to start asking the seller and their broker some questions that are going to come off as crazy offensive. And yeah, but you know, there's too many people start a second practice thinking I want to make more money. So I'll double my money with another location.
13:31
Yeah. And the reality of it is, is it just turns into a loss leader almost instantly. It's it's why I won't go on record and say which bank but there is a fairly large dental lender in the country that we would all know if I said the name and they just don't do second offices because of this reason. And it's a real it's a real thing. All right, let's switch. Let's switch to to my to mine. Okay, I got one for you.
14:00
And to prove that we're so this isn't really unscripted style. This is actually a scripted. It's scripted. This is actually a letter I got if you're watching on YouTube. Here's my notes. It's somewhat scripted. This is about as scripted as it gets. All right. So here's mine. And it seems to be like something that happens to you and me, Tyler, all the time. And it's buyers, folks, you listeners.
14:28
you guys have this like romantic idea and I'll take those words out of Tyler because he always says and a romantic idea that the seller should stay on and jockey these patients over to you. And so post close doesn't it make sense to have them there and they're they're literally hand holding these patients over to you and say no, no. Okay, it doesn't happen. Number one, the way you think it's going to happen. so my second one is
14:58
The seller sells you the practice, gets his or her check, and then wants you to employ them post-close. And they want a guarantee of how many days, and they also want a guarantee of how much production. And they also want to be paid 32 % to 35 % of production. So it's like this cake and eat it too situation. And buyers are like, oh, I'll do that because I'm
15:25
they're gonna pass the goodwill. Have you have you ran into this? This week? Yeah, every week. I think the thing I always say is that a seller who wants to sell their practice and work back for an extended period of time, kind of demanding that they work back because a lot of sellers will say I'm happy to work back if you need me. Right. And that's fine. That's charitable and nice of them. But when the ones who say
15:52
I have to work for another year. You can't fire me except for cause for one year. I get three full clinical days a week at 35 % of my production. That's a barometer that that person actually doesn't want to sell their practice. Yes. And they're selling it because they have to because either their spouse is pissed and wants them to retire or they've been to enough seminars with
16:21
Insiders telling them you have to sell now. Now is the time to sell. Yeah, so they're they're not ready to stop being a dentist. And basically, if you think about the overhead of a practice, how big does a practice really need to be if you're servicing debt on it for it to be a two doctor practice? If it wasn't a two doctor practice when you bought it, how can it become a two doctor practice overnight? Yeah. And the number I always says the practice is a bread and butter practice. It's 1.2 million, give or take.
16:50
And if the practice do in big cases, could be one as much as 1.5, where you need another doc. So if you're anywhere south of a million dollars in collections, collections, not production, you don't need another dentist. And so what you're essentially doing is you're, you're literally paying this person on production that you can do. And that probably is the exception, by the way, is if there's some kind of
17:17
procedures and stuff that you're not capable of doing, you need them to keep that production up like Invisalign or maybe some complicated stuff. That might be the exception that I could get behind it. But when you're demanding so many days, essentially they're not making any money running this business. So they want you to buy it and then they want a guaranteed paycheck. Totally. And the thing you have to remember is that
17:45
It's not necessarily that they're paying and you're not making as much or producing as much, but it's just killer for the transition. Like without question, the people who signed those deals where, know, I say, you really shouldn't do this. They sign it and six months later, the seller and the staff have kind of formed these weird little clicks with each other and they're not getting behind the new schedule you want to put in place. And that's right. The seller's telling the office manager, it this way.
18:13
I mean, I had a case right now where this buyer bought and like a year later, he found out that anytime there was a big case, like a big implant case where there was no insurance, the seller was telling the office manager, hey, just run this over through my old books of my old company. I'll this one, do this one. And the office manager is doing it. Now that's theft and wrong. And I'm not saying every seller who wants to do that wants to do that. to go back to what Mike said, I just think that
18:41
there's this thing that goes on on the internet. I think it starts on dental schools and then in dental schools and then it gets kind of ratcheted up and like the dental dark web that is like when the seller is with you chair side for 90 to 180 days and that doesn't say I can count on one hand the number of times that that's been true. And I can count on
19:06
many hands the number of times people call me they say I gotta get Dr. Denzio out of here. Out of there. Get him out of there. Yes. I have a have a client right now in Arizona where we are practice consultants post closed seller still on sellers daughters front office desk. Kiss the Jeff. And she is
19:30
probably underperforming and there's a conflict. There's just conflicts all over the place. So it gets even stickier when family is still there. at the end of the day, you have to think how much production can I give this person? Can I write a check for 30%, not 35 % of that number? And will it still leave me enough to eat after the loan? And again,
20:00
Most the time at the practice is not over 1.2. It doesn't make sense. Totally just from my perspective doing the legal on it It's just a sign that the seller doesn't actually want to sell and so your Acquisition process is gonna be way harder because they don't have the cabin They want to go to more or they don't have the grandkids they want to spend more time with And so when you say hey, I want you to pay for that in the transition or you need to get that fixed
20:29
They're just going to go, no, I don't really even want to sell anyways. And it just turns into this really degraded process that's nothing like when it's a seller who wants to leave and kind of go out into the sunset. And I always tell buyers like have more confidence in yourself. If it's a bread and butter dental practice, you don't need them. No, that's right. I'll last point and then I'll give you the next one. So be thinking of it.
20:56
I have this conversation all the time with my clients is valuation in its most basic form is looking at historicals and figuring out what profitability was, and then being able to predict that same profitability in the future. So I mean, that's in the most basic form of valuation. So if the business was making X in the past, and then in the future, you're making less because the seller is staying on and you got too many mouths to feed.
21:25
It should be discounted if they're staying on it. Again, cake and eat it too. It frankly, it's worth less in my opinion, if the seller is going to be taking a lot of profit out of it after the transition. So totally. And I'll end on this one sound bite. have a case right now where the person let it was like a $900,000 practice, really no business being a two doctor one. The buyer was just adamant that the seller can work back. He wanted it. The buyer was, you know,
21:54
finishing up some other things in his life and needed someone to work back for him. And at the end of it, it just wasn't going to work out. There wasn't enough money to service the debt, lost a couple staff members, the seller was making too much money working back, and the buyer had to fire that seller. Do you know how bad of a soundbite that was in a small town that the new owner of the practice had to let the seller go? It's so bad for patient attrition, they find out whether you know, no matter how hard you
22:24
try to button it up. And it ended up being so much worse than firing because all the staff learned that the seller was fired. And that's just such bad optics as opposed to, hey, if I go on vacation, you can come in and work for me. But other than that, I took it over on this day. You just gave me an idea. Can we write into some contracts what the message can be if we have to let them go in the future? I mean, you could but
22:53
Again, are you going to avoid the problem to begin with? I haven't worked back. Hey, can we both agree that this will be your the story when I fire you in six months? Can we both agree on that during the trip? Yeah, negotiations weren't hard enough, let's start the breakup now. Let's the soundbite. All right. What's your third one? What's your third one? This one's kind of the other one is I think the most. Probably.
23:21
overly romanticized thing in like the dental dark web is the associate buy in. I, when people call me, they think they've got it on easy street. Hi, I've been working out of practice for 10 years. The seller's 50. I'm 35 and I'm going to buy in for 50 % interest now for
23:44
$1.2 million. And it's just going to be sunshine and puppies because I already work in the practice and I know exactly how things are going to go. And on paper, it sounds like just perfect. But there's just so much stuff that goes into those. And the problem is, is the buyer has almost no negotiation power. Because if the deal doesn't go through, they're probably fired.
24:09
The seller isn't going to keep them around afterwards. Yeah, we've had a couple of those that I'm thinking about and we've only had a handful that were just like for those YouTubers that are watching just buyers like I'm out, know, F you I'm out and they had they had the grit and and
24:36
good for them stubbornness to walk away from a bad deal. But they asked that demolish their whole life. They had to move and to make got to go get an associate job probably making less at the associate job. I mean, what a heartbreaker seller by the way also loses because now their productions dropping it. It's very I always say like, like you should be hiring more professionals on deals like that.
25:04
And when when in fact the opposite happens, they're like, Oh, this is an easy deal. We're just making a hat. No, dude, these are way more complicated. need way more professionals because you need a heat shield between you and the seller. You need Tyler to blame for that nasty revision you asked for because like, really the problems start almost from the first day. Yeah, you know, okay, you're buying it at 1.2. You're doing 30 % of the production, the seller is doing 70.
25:34
If you start doing more and the practice increases in value in the next 10 years, are you going to buy the other half at the same method or do you want to freeze the purchase price? Why would you buy your own goodwill? Right. And usually you ask that question and it gets the associates brain going and a seller doesn't want to freeze the price for the second buyout. No, because they, because they provided the opportunity for you. They gave you the golden touch.
26:02
These are my employees, my systems, my facility. So you had the opportunity to do this. And that's not how it happened when I bought in from the old guy. Yeah, no, this is this is really good. the new problem has been if the seller is the landlord, they've been paying themselves $10,000 a month in rent for the last 20 years. And then the second someone's going to be helping them pay rent, the rent's 20 grand a month.
26:32
And they find their friend from the golf club to tell them that the ranch is worth 20. Let's slow down. That's so super important. So not only are you probably overpaying for the practice, which I could get behind a little bit of a value being slightly higher because they do tend to be they do tend to be good transitions because nothing's changed. So I could buy into the
27:00
the value increase, it has to be reasonable. But Tyler mentioned the future value is in question. That's important. But then, yes, if they're the landlord, it's actually you're the accountant guy. Why don't you explain it? what do sellers or what do owners do to try to mitigate some profit when they own the building and how that's messy? Slow it down for Denzio style. The problem is that
27:28
seller who owns his own real estate, or she does, they'll set up a rent payment between their two entities of 10 grand a month. And their CPA told them in 2002 that that's the sweet spot number for tax purposes. So I had nothing to do with the market or what market rents are nothing to do with to maximize tax brackets 20 years ago, and the seller never thought anything on what they've been paying 10 grand a month.
27:56
Yeah, they go take their practice to a broker or to evaluation person. And the valuation person doesn't question it. They go, Oh, rents 10 grand a month. So all of sudden the value is based off rent to $10,000 a month. And then you're about to become a 50 % owner. now half the rent is your responsibility. That's right. You don't own the real estate and the seller wants to do a lease.
28:26
at the time of closing for a new rent amount. And the rent amount never gets smaller. It's always going to be way bigger. Of course. The seller is going to say, yeah, maybe you could buy the real estate one day, but not today. You can't afford it. can, you know, the bank loan kind of tapped you out. And so that's why I always tell people is if you, if the seller owns your real estate on an associate buy-in, you have to negotiate the lease at the time of the sale.
28:54
So many people call and say, well, I was just buying in. So we did a lease assignment and it makes your interest harder to sell and you're just stuck and you're going to be, you know, writing, signing the front of checks to the seller and his family for the rest of your career. If you don't have some pathway to ownership of that real estate, that's right. We stop control over the lease. folks, just to break this even more simpler, simple when, if, the seller didn't buy the building,
29:24
and you were negotiating with the landlord on the deal that you're looking at, you're pushing for market rates with that landlord. It should be no different just because the seller is your partner that owns the dental practice and also owns the building. like we said, what makes these like the nightmare is that you have no bargaining power. Yes. And if this deal doesn't go through, you're probably fired or going to need to quit. You're not going to want to break bread with this person at lunchtime anymore.
29:54
Mm-hmm. That's right. Those are the things you have to get just out in front of Very early when you're gonna do an associate buy-in That's what I always say like if the average transition is somewhere between 30 and 90 days of prep You kind of need to start the associate buy-in like six months in advance That's right and have the right longer and have the right Expectations going into what you're doing here because you're gonna work hard You've got a loan to pay you're the junior partner now and
30:23
It's not the same as being 100 % owner. You don't get all the fruit because that's not how it works. You're doing this because you want a smooth transition. And yeah, the way partners pay themselves now, there's a large CPA group in the United States that has come up with a new formula for how partners pay each other. And it's Latin for whoever was making the most money before the sale will keep making the most money after the sale. And you have cake.
30:52
Cake, eat it too. And then the cherry on top is real estate. So you're buying it for too much probably, which again, I'm okay If you were making 35 % of production before you bought it, how much more are you really going to make after you buy it? There's that. Then you're servicing a debt, they're not. And then you're overpaying for a lease. mean, buy-ins can be an absolute nightmare.
31:18
And, and, and they're challenging. I guess I would distill it down to if you're doing a buy-in and the seller's not willing to talk about what the second buyout is when you buy the seller out completely. If they're not willing to have those conversations, it's a huge red flag. That's right. That's right. And, and I mean, all kinds of things here, but folks, if you're associating or you're going to start a job and the carrot is, ownership in the future.
31:46
That makes this thing even more complicated because now your associate agreement has values attached to it. And it's like a mini purchase and sale agreement at the associate contract level for a future purchase of maybe. I mean, it's just it's it gets it gets really fun guys. There's there's those buy ins sound great, but they definitely have some pitfalls. I have one.
32:15
speaking of like expectations and like, getting all those upfront. I don't know how to say this other than just having mismatched expectations of going into a transition. Like I have a lot of clients that call me and again on that initial interview, and you're just like, Oh boy, oh boy, oh boy, like it's what's building up to be like the worst deal ever. And, and there's too many
32:43
clients that think like a practice that's underperforming, they're going to go in and just crush, you know, and and like they're trying to get this amazing buy in and then they're just this business tycoon with all this experience to explode a practice and be an amazing leader. They just have this like expectation that it's going to go a certain way. Does that make sense? Totally.
33:12
I kind of tell people when I'm talking to buyers at study clubs and stuff is before you even start thinking about buying prices, you got to know thyself, right? Because every single person says, I want to buy a $400,000 practice and grow it into a million dollar. Every single person will say that. And that's great. But like not everyone's a flipper, right? I'm not handy. I cannot flip a house. What I buy needs to be camera ready because I'm not able to fix it.
33:41
And that's the same for dentists is you have to know thyself, right? If do you have the energy to work six days a week? Do you have the energy to be a hygienist one column a day? It's a lot and a practice that's doing $400,000. Yeah, maybe you can grow it into a million and I hope you do as your attorney. But yeah, you know the
34:03
kind of the mismatch expectations is, is they'll say, oh, Tyler, I found this great practice. What an opportunity, $380,000 just outside of Phoenix or just outside of Boulder. but I have some concerns. Some of the equipment's a little dated and the sellers over pays his staff. And you kind of go, well, doc, that's why it's 380,000. That's right.
34:31
you know, so they'll sign an LOI on a flipper and then they're shocked to learn that there's hair on it. Yeah. Oh yeah. So that just makes the transition so much harder because you're trying to work through this client's expectations about what they're getting. You go, Hey, if you need camera ready, you know, with four hygienists, a dialed in office manager and someone billing insurance, it's probably not, it's probably not going to be a screaming deal.
34:58
It's going to be a $1.5 million practice. That's right. You're going to have to back up the Brinks truck to buy it. I always I always say to that point, ex banker talking like, look, you buy a practice for 500 grand. What's that? When how what's the average payoff on a $500,000 practice? Well, it's it's seven to 10 years, give or take. OK, reverse it on a $2 million loan practice.
35:26
What's the average payoff for that loan? It's more than twice the amount. Again, seven to 10 years. It's because there's so much more cashflow on a $2 million practice. The smaller practices are hard. They're hard. So hard. The seller doesn't think it's a bad practice, right? Because they don't have debt on it.
35:53
And the office manager is their wife and they don't have to pay their wife any money. And so for them, a practice doing 400 grand a year spins off 180 grand and they don't have a mortgage anymore. That was paid off 10 years ago and they don't have student loans and they're not collecting dogs and kids anymore. That's right. So 180 goes a long way for them. But the 35 year old who buys it, who's still collecting dogs and kids.
36:21
That 180 is not going to go that far. It's not. always get in the conversation of like startup versus buying a practice for 400 grand. They're like odds. It's this is a great deal. You know, I'd end up spending way more on a startup and couldn't build it for that. You couldn't build it for that. But the problem, I guess, I don't know how to say this better. I flipped the house once in an old life in Ohio. And I remember my dad telling me like, son, like,
36:50
you know what you're buying, right? Like you're buying a really old house and you're planning on flipping it and you're getting it for a great value and it's in a beautiful neighborhood. I get it. But do you have the energy to literally rip the walls down, redesign it, get all this in, do all this. And I'm like, hell yeah. And I was in my twenties then. And I'm going to tell you right now, I would have saved money had I scraped that old ass house and just built
37:18
a new house and I'm not talking saved money as in dollar for dollar. I'm talking about time and money. I spent way more in that older house. Totally. And another thing I think people forget is with inflation and higher practice price values the last like 10 years. The way I talk about a $500,000 practice now is the way you and I would talk about $280,000 practices eight years ago.
37:48
Yes. And so when people say they have these flippers, yeah, but like, even the flippers are twice as much as what they used to be. Yeah. And so the problem is, is people say, Oh, 500, my friend who graduated eight years in front of me, he bought his for 280. Surely this practice will be the one that I can get in. It'll spin off cash and I'll be able to grow it.
38:13
I guess it's not really as much of a nightmare. It's just about when you're talking to a client and it becomes really clear that they want a deal, but they also want the cash that a big practice will support. you know, managing those expectations can make the deal really hard because you're going to have to go to the seller and explain why their practice isn't that great or why the AR is for free.
38:37
And it's all and it's also a hard negotiation, someone that's on the side of the buyer negotiation process. It's a very hard negotiations like, is it worth 300 or 350 or 250? It's like I start losing valuation methods when when the practice is kind of worth nothing. And 250 is a lot of money.
39:03
But when you amateurize something over 10 or 15 years, 250, 350, we're talking about a $300 a month difference. It becomes irrelevant. What's more important naturally is, is it a decent lease? What team are you getting? Is the area too saturated? You almost look at it like a startup. have to like break it down and look at the demographics and think about maybe I have to fire this whole team.
39:32
You almost have to think about it that way. Yeah, I just they're the toughest ones to do. I always tell people that it's cheaper from a legal perspective to buy a $3 million practice than it is to buy a $300,000 practice. They're just every little dollar starts to matter. The landlord wants to raise the rent $100 for the new tenant. Where is it going to come from? And it's just, it's, it's tough to find those expectations and the clients who
40:00
You always go, ooh, that was a rough transition. That is not what they talked about in dental school. Yeah. Yeah. But you got something for three. And to your point, I would just add that there's a temptation to always think, well, whatever I'm buying, I should get value for what I'm buying. And really, what's the price dips below 300 grand? You're not really buying it because of its cash flow or what a bank could loan on it anymore.
40:27
It's more becomes what it's worth to you and bridging the gap between that and what a seller wants to sell it for. Yeah, it doesn't really like the people who go call and they go, Oh, I want it for 250. But the seller wants 270. He's overvalued it by 20 grand. It's not really possible. It's, you know, he wants 270 you want 250. And it's just kind of a horse auction at that point. I do I do end up
40:56
talking about like in definition purposes, like 50,000 one way or another is a lot like going to Starbucks and getting a cup of coffee for $6, which is already expensive. Or should I just upgrade to like maybe a nitro cold brew? Like it's the same decision. It's just preference. And that's kind of like
41:25
350 or 300 and that's hard to explain explain to my clients a lot But at the end of the day like it's cheap that that's the answer. It's cheap But 50 grand is a lot of money. I don't know how to explain that sometimes totally and then the second they close on it They'll call and they'll say hey the paper towel dispenser in the bathroom doesn't work
41:50
That that no, no, no joke. Like I think that's that's kind of where I was going with that topic was like, don't think you're buying like a fantastic acquisition. If if you know what you're buying, it's already cheap. It's probably not good equipment. It's probably not a good team. It's probably not a great patient base. It's probably a mediocre lease. Like you're buying a flipper and sometimes scraping it and starting news better. But if you're OK with a flipper, then be OK with a flipper.
42:20
Totally. If you value a two minute drive to work and this practice is two minutes from your home. Perfect. Put some dollar value on that. you know, understand what you're buying, I guess is the point. All right. You got one more. We're almost out of time to make this a top five. What's your fifth? I don't know if I have a fifth. I don't know. probably say the fifth is the seller isn't using a broker or an attorney. That's a perfect one.
42:49
or a buyer's rep. No, I'm joking that that seems to be a something unique these days, but definitely brokers. Yes, go ahead. People always get nervous. Oh, there's a broker on the deal. You know that usually they make the transition smoother. They have a moderating effect on a seller's worst instincts. They're able to have tough conversations with sellers like hey, that's normal. You just need to agree to that. would say just in general less
43:18
less people involved is actually worse for both sides. Right. When I have a deal that just closed in September, it was unbrokered because the practice was smaller and struggling and the guy didn't want to pay for broker. you know, it took eight months to get it closed. The seller didn't want to hire an attorney. So he's calling me every night, just reading the changes he wants made.
43:46
He's been in a practice alone his whole life with his, you know, a couple of staff members. So the joke I always make with the client is, yeah, you're the first person to tell him no, and you're his professional life. And it took a lot to get the practice sold to my client at a price that was right with adequate protections. Yeah. And I always tell people that when someone doesn't want to hire an attorney, I get it. Attorneys are the worst, but they also don't want to hire a broker.
44:16
And they think that they can, you know, they think that they can just negotiate through it because they're an expert in everything. Yeah. It's just a barometer that it's going to be a tough deal. It's going to be a tough deal. Red flags back to the title. I know that's your experience. Do you look for, I mean, are you happy if they have a dental CPA to counter you? Are you happy if they have a dental attorney? Not so much CPAs, but definitely brokers. I would prefer
44:44
I know that sounds strange to folks out probably in the audience, but I would definitely prefer a representative on the other side. Now, obviously I'm biased because I want a representative for my clients. think it would, I think it's crazy not having someone like me, doesn't have to be me, but like me on the other side. Just the more people involved, the more eyes and it's not because we're just trying to get into your back pocket. It's because Tyler has the legal covered. Mike has the business covered. Your CPA has,
45:13
the tax stuff covered, the banker has their stuff covered, like insurance people with their things, like all of these people working together to make sure that a seven to a million dollar investment is being looked at, right? What a cheap insurance to hire folks to help you across the finish line.
45:33
I agree with that. And I'm also super respectful of the fact that, you know, 20 years ago, AFCO had a 12 page agreement that every person in the country bought and sold a practice with. so, yeah, it's hard for sellers when they see that leases are now 60 pages and, you know, non competes or five pages and the DSO that they're selling to has 110 pages of contracts. Like, God, I get that that's hard for some people, but
46:03
It's usually a barometer. I know I that were a couple times of who you're dealing with when they're confronted with difficult or someone not just saying yes to everything they want. But their response is, is I don't want to work with professionals to help me. Yeah. I use view that as kind of like whenever someone says, Hey, Tom, I'm buying this practice, but the seller doesn't want to use an attorney. They want you to draft the contracts and they'll read it. there's no brokers. You know, the client always thinks like, Oh, goal with no goalie or something.
46:33
But it's actually so much worse. Gold, no, that's 100%. And I also think that they think it's worth more. And they've talked to some brokers and brokers are also disagreeing with their value, the sellers. And here they are thinking it's worth 700. And it's really worth 450. And they've talked to three practice brokers and all the practice brokers are saying it's worth at most five. Like that, like why?
47:02
You know, that's a challenge. That's a challenge. So, um, well, my friend, it's been, it's been fun. Top five potential issues heading to closing when I will say when I write flags for your acquisition, five red flags for your acquisition. And, um, you folks, if you've ever done a transition, you're listening to this and you've gone through some of these scenarios, you probably know exactly what we're talking about. So please comment.
47:31
below. Tyler, thanks so much for being on the show, man. Oh, thanks for having me. Can I give you the sixth freebie? Oh, six go. seller has an AOL.com email address. AOL is definitely a red flag. Well, with that being said, Tyler, thanks again for being on the show. And folks, make sure you're following and getting on YouTube and and being a part of what we're trying to do over here. So
47:57
Until next time, I'll see you guys soon.
48:05
Tune in next time for another truth-filled episode of Acquisition Unscripted.
48:15
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