The Dental Domination Podcast

"Dental Deals" - How to Buy or Sell a Dental Practice (feat. Michael Burger)

DentalScapes Season 1 Episode 9

Attorney Michael Burger of NC Planning joins the podcast to share what dentists need to know about buying or selling a dental practice. From setting up corporations to negotiating a sale price, planning ahead to considering partnerships, and everything in between, Michael has what you need to know about how to structure a deal and protect your investment. Don't miss this must-listen episode for dentist entrepreneurs and be sure to check out the show notes to connect with Michael.

All right, welcome back to the Dental Domination podcast. My name is Dan Bryan. I am the co-founder of Dentalscapes. We're a full service digital marketing agency specifically for dental practices. And I'm so excited to be here for episode 10 today with a very special guest. Michael Berger is a business attorney and managing partner at NC Planning. He has been handling corporate law and business law for over 20 years. And he's specifically focused now on dental practice law, all aspects of the legal process surrounding startups, surrounding practice acquisitions, partnerships, mergers, succession planning, you name it. Michael knows what's going on. And so I'm really excited to have you here today, Michael. Would you mind just taking a few minutes to kind of introduce yourself in more detail, share where you're coming from, how you got involved in. legal services for dental practices specifically. And I also want to hear about this current obsession I've seen on your website that you have for music theory and learning guitar. Thanks Dan. Yeah, we'll get to the guitar stuff and I could probably go on for hours about that. I'm gonna I'm gonna ask you to play a song. No, not really, but I want to put you on the spot We will need to plan that a little bit more in advance and I can be ready. Um, but no, thanks for having me on the podcast. Uh, as Dan said, I'm Mike Berger. I'm one of the partners with NC planning. We are a law firm. Um, I've been in the, uh, commercial law space for about 24 years now, and I've been in private practice for 20 of those, which is hard to say out loud, but it is true. Um, I focus my practice now and lead a team at NC planning. really dedicated to the dentist and the dental practice or the dental group. We are business and corporate attorneys by trade, but really think of ourselves more in that advisory context to be the legal and business advisory team to support the dentist and the dental practice through each stage of the life cycle of a practice. And what I mean by that is, you know, I look at a business or a professional practice like a dental practice in sort of stages, right? You sort of start up or start out or open doors. There's a lot of legwork that goes into that process, just sort of designing the foundation around it to make sure that the business entity is set up to launch for success and open doors. As we move out of startup, there's really that kind of operations phase that we work in to serve effectively as outside general counsel to be that legal team for. as things arise in the nature of HR or employment or vendor contracts, or thinking about procuring the next location for growth, right? Growth almost in its own phase. And there again, it could be a de novo startup or it could be an acquisition. And our team, we average about one to two dental acquisition deals a month that we close as a team, that's sometimes on the buyer side, also frequently on the seller side. which really starts to transition to that later stage of the life cycle where you're thinking about succession planning, exit strategy, and understanding as a dentist that you've built something of value. And then how do we approach it from a valuation perspective and attract potential interested buyers? So that's a long way of saying, we are a soup to nuts turnkey platform available for the dentist or dental group that can serve their business law and advisory needs. Cool. Well, that's excellent. And such a needed service, there are so many complicating factors when it comes to managing the business side of a dental practice that, quite honestly, dental students in dental school just don't get a lot of exposure to. And so it's kind of a blind spot, I feel like, and it's great to see that you're filling that niche. Actually on a recent podcast that we had here, we talked a little bit with a different guest about student debt. and student loan debt coming out of dental school and how the prospect of starting one's own practice now can be pretty daunting and can be pretty scary. That is not to say, however, that there's not plenty of opportunity for dentists out there to start their own practices still in today's environment. And so I wanted to start there. I think there's a lot that I want to dig into today. So I want to talk about the startup phase. I want to talk about potential acquisitions. I want to talk about Um, you know, running the business, but then also the succession planning, potential mergers, partnerships, that sort of thing. But let's start at the very beginning. So let's say you are, um, a student newly out of dental school, or at least you've completed sort of your foundational, um, work and training and you're ready to dive in and start your own practice. What would you advise from a legal standpoint that dentist start considering? Yeah, so step one, my mind always goes to assemble the team, right? Think about this, like the, the Marvel movies, right? Avengers assemble and I'm a lifelong, you know, sci-fi comic book kind of geek myself, so that's where my mind automatically goes, but that's really what it boils down to is that as a, as a dentist, a dental professional, a practice leader, a practice owner, you are very much in an executive seat position and you should think of it. as surrounding yourself with a team of advisors and experts who can help answer questions for you and guide you in the right places. And what that means is, you know, from a financial perspective to your point on heavy weighs the student debt. And as a former law student and now practicing attorney, I too understand that burden, although we have moved along a couple of decades and dental students are getting saddled with quite a bit of debt. But just To use that as an example, I think there are strategic ways to approach repayment of that debt. And something like that should be analyzed with, I think of three people, I'm not gonna self-serve and say your lawyer needs to be in on that decision because frankly, we probably don't. Happy to be in on the discussion, but you should be talking to a wealth advisor, right? Somebody that helps manage your finance as you grow an investment portfolio. You should be talking to a CPA or an accountant tax advisor. who can help you as a practicing dentist maintain the books of your practice. Yeah, absolutely. you should be talking with a commercial lender, a commercial banker, because those three fields really are gonna help you look at how to manage your dollars as a practicing dentist, as well as. may have cut out there. Still there? Yep, you're back. That's okay. What I was saying there is that, you know, as you go to open doors or acquire a practice, what you're going to be looking at is what is your credit worthiness, right? Or eligibility for borrowing capacity. In other words, taking a loan from a bank. And so I think you need to understand what that looks like with your commercial lending team and then how that impacts your operations for. debt repayment and things. So very, again, baseline sort of economics around it. There is one perspective of pay all your debt back as quickly as you can, right? Avoid interest over time. And I think that's a conservative approach. Probably financial advisory team is gonna advise you in that way. But your commercial lender might also say one of the things they are going to look for as far as eligibility of a borrower. is what the liquidity is as it pertains to that borrower. How much cash do they have on hand in the bank? And so if you have two potential dentists looking to borrow money from a commercial bank, one of those dentists has repaid their total student loan debt. That's somewhat favorable. But if they have $0 in the bank, that might be problematic. Whereas if they've paid down some of the debt, but not all of it, and they've managed to accrue and save 100,000, 150,000 or so in cash, that liquidity is going to help them in that sort of loan application process. Absolutely. Now, beyond building the team, those superheroes like you mentioned, and beyond, you know, obviously taking a look first and foremost at financing, which is obviously mission critical for starting a practice. What are some of the legal considerations that you direct clients to look at first? So maybe it's organizational structure or, you know, you know, it's not my area of expertise. So what do you say to those clients walking in your office saying, OK, From a legal standpoint, where do I start? Yeah, that's a great question. So first place that we start is helping them understand, sort of through an educational process, of what it means to form a legal entity around your practice. You, as a practicing dentist, are a professional. And so it puts you into an eligibility for a professional limited liability company or a professional corporation, which is different slightly than any regular old LLC. or ink that's out there on the street. Yeah, for us, for folks like me who are low-educated and trivial. I'm only entitled to the old school LLC, man. That's right, just the straight up LLC. But one of the benefits there of having a professional designation is, for instance, they may not have an annual filing fee with their secretary of state. Whereas a regular LLC or corporation off the street has to pay annually a filing fee to keep the secretary of state in a happy and compliant and open company, right? Not administratively dissolved or something like that. But it is a compliant step that needs to be Um, massaged through with both the secretary of state, the filing entity that creates as well as the licensure board. In this case, typically the dental board that resides in whatever particular state the dentist is. So for instance, here in North Carolina, uh, we've got the, you know, the board of dental examiners and, um, we call it the dental board and you've got to go through a process there to have the dentist approved, um, have their name appear in a particular fashion in the actual corporate designation. And then. get that box checked, move it over, and confirm with the Secretary of State for the filing process there. And then help them do all the sort of pedigree foundational needs of a business, like generate a federal EIN, the entity identification number, with the IRS so that it's essentially a social security number for the business that helps them set up bank accounts and books and records and... tax deduct things that are relative to the practice. And then again, help them assemble that team so that they have the right financial people in place to help them keep the books pertaining to the business distinguishable and unique from their personal life. You don't want to mingle funds and things like that. So as we help them from sort of step one, it's a little bit us taking on the legal side of things. managing the setup of the company, educating around what it is, as well as connecting them with other people in the space that we've worked with before, who we know are very, very good in the dental industry and can help set them up for success. That's great. Now, as far as challenges associated with this, because I'm certainly no attorney and this all sounds complicated. I'm sure it is. Uh, but you know, what are some of the sticking points that clients often run into? Maybe they've even tried to do some of this work, some of this legwork on their own before coming to you. What are some of the more common pain points or sticking points that clients have experienced or may experience along the way, um, as part of this journey of setting up the business? Yeah, that's a great question. I think number one is, you know, we're not, um, unaware that there are different functions out there on, on the web, right? On the internet, things that you can go about trying to DIY it, right? Set up your own company yourself. That's where I see the most mistakes made, right? A filing is incorrect. The box was checked incorrectly. There's a typo or maybe they, um, set up a company, obtained a federal EIN, maybe even got it approved with their dental board, but forgot to put together the appropriate compliant, you know, with the state statutes operating agreement or shareholder agreement and bylaws. That can become problematic in a couple of ways. Number one, if you're open doors and you're practicing dentistry, and God forbid there's some malpractice claim or just a simple slip and fall, and then a lawsuit is either imminent or you've been served. One of the first things that's going to happen in that legal proceeding is the plaintiff's counsel is going to request a litany of documents, right? Through a process we call discovery. So this is interrogatory questions and requests for productions of documents. And in that request is going to be your standard sort of corporate filings, corporate minutes company documents. And a creative plaintiff's lawyer, if you don't have the appropriate documents to respond with, What they are going to try to do is essentially disqualify the entity and say that you have been practicing just as yourself because your entity is out of compliance. And therefore, that limited liability shield that we work so hard to create when we create companies to distinguish between business activities from individual activities, that limited liability shield can become compromised and potentially expose the individual dentist to risk. Yeah, that I've heard at least, you know, in running my own LLC, you have to be aware of these, like breaking the corporate veil, you know, rules and that sort of thing. So so many things, you know, to keep in mind, which I think only underscores the importance of consulting with someone like yourself. How does the process differ when you are considering acquiring an existing practice? So, you know, a lot of younger dentists out of school. know, it can be a really attractive option to buy into or purchase rather, acquire an existing practice from maybe an exiting dentist or one who's at or near retirement. What changes the calculus there? Yeah, this is the part that I get really passionate about and I go on for hours. So just throw something out. if I have my way about it, I'll drag you back on in the future. I appreciate it. Appreciate it. Again, my background being a business lawyer for a couple decades now, I've seen a lot of different models, going concerns, business ideas. And one of the things that has always been a challenge as businesses start is getting funding or getting financing. And that's pretty much true. What intrigues me so much about the dental space is because of the model with reoccurring replicating revenue. And because... Dentists on the national level have a very low default rate when it comes to Banks if you borrow money as a dentist the banks will look at it as your likelihood of failing Right or the borrowing going into default. I believe historically has been less than 1% Don't fully quote me on that number, but that's the number that I've always ran into when we go and we look at these things It might be an uptick now. You know, we might be looking at somewhere around 2%, but still, right, if you're so very, very low. So what that means is banks look at dentists as a very bankable relationship, meaning it will pay dividends. On top of all, dentists traditionally are high income earners. So as they get into relationships with banks, I think the banks generally like them because there's this opportunity for long-term growth of the relationship. Yeah. So because of the business model and the bankability, it creates this almost sort of perfect storm for dentists to be able to acquire. And that is a different function than a business starting up, a dental practice starting up, opening doors de novo, right? so in your mind and from a legal perspective, a financial perspective, this sort of business counseling perspective, you find in many cases that option of acquiring an existing practice to be very attractive. I do because when you start a practice just to boil it down to the bottom line, I think there is a longer burn to profitability. You start a practice from day one. What you just need to be prepared for is that you're on like the three to five year plan before that practice starts to really potentially become profitable. Now, Yeah, you're dealing with the same immediate overhead that a fully functional practice is dealing with, except you may not have any patients or very few patients. Yeah. Right. it is done, but it is a different way of life and it is a different slower build. Whereas if you contrast that against acquiring a practice from a retiring dentist, those patients generally have about an 80% stick rate, meaning if you've got, yeah, it is. And again, it really speaks to the uniqueness of the dental practice model, but because patients come in and there's reoccurring touch points, there's this opportunity to transition the practice and the patients to the new dentist who is the successor for the retiring dentist. Depending on where you're located and what state and city, that's gonna determine somewhat of availability and is it a seller's market versus a buyer's market. But if you're a young dentist and it's attractive to you and you have the opportunity opportunity to pick up a practice from where it has been a going concern as opposed to starting up, I think it needs to be evaluated obviously, right? On a case by case basis with your team of advisors. But that's something that should be entertained and explored because you could become profitable from day one, even when you factor in the debt service that goes into repaying the loan that you've had to borrow. in order to buy the practice from the exiting dock. So definitely a different process, definitely some unique considerations to be made. In your experience as a practicing attorney within this area, what are some of, again, maybe the things that a acquiring dentist needs to watch out for? What are some of the pitfalls involved when you look at structuring the deal, say to acquire an existing practice? What should dentists be aware of? Yeah, so again, I come back to it's an educational process is the way I look at it. I lead a team at NC planning. They're fantastic people. And it's really a team of advisors to be there to, to guide the young dentist or the seasoned dentist through their acquisition sort of journey. Um, it really starts with understanding the terms of the deal. What is the purchase price for the practice that's being proposed or asked by the selling dentist? What is their timeline for closing? What does a transition plan from the exiting doctor to the acquiring doctor look like? How much? all of those to just I'm sorry to interrupt but all of those can be can be written into formal and should be written into formal legal agreements, correct? Correct. It's all, sir, it's all negotiated right up front. So I'd say everything's negotiable, right? Is the... you participate in negotiating, say, the sale price, for instance? Okay. mean, we will plug in and play in a deal as key merger and acquisition counsel at any point at the desire of the dentist. But if people are asking me, I say, get us involved early and often, because I really think we can help bring value in those early stages of negotiation. For instance, you know, you may look at it as a dentist and say, I think that's a fair price, but we may need to get into the details of the financials and say, hmm. You know, they add added back some things. Um, we have a little bit of a concern of this trend. Um, this is how your financial team may look at it. This is how bank may look at it. And so we think there are some strategic ways to go back and negotiate that price point, not always, I don't want to pay this much for your practice. It, it might be, I like your practice. I think there's value there. My financial team has advised me that, you know, it's a little bit lower value. And I really think I'm only going to. qualify for this much lending on your practice with my bank. And so we have just an issue here to iron out on price term. And that can be done in a variety of ways. We can reduce the purchase price. We could set up a seller financing piece. We could build it as sort of a metric earn out structure on price. There's a lot of tools available in the toolbox that we've deployed on deals in the past that should be thought through or discussed before you pull the trigger on committing to a purchase price. As I was going to say, I think the structure of the deal too is something that needs to be considered. Is this going to be an asset purchase versus a stock purchase? And that's something I educate young dentists on quite frequently because when they hear the word asset, your mind automatically goes to just those tools, equipment, the chairs, the inventory, the hard, tangible things that we can touch. But assets are also things like patient goodwill, referral relationships, domain names, doing business as names, phone numbers, things that are transferable as a part of the business. And the reason we like to execute on an asset purchase particularly from the buyer's side, as opposed to a stock purchase for instance, is that we're able to compartmentalize and sever liability. We can leave behind the liabilities of the prior practice. with an asset purchase because we're creating a new company, a new PLLC that is buying from the old Docs PLLC, just their assets. And we leave behind liabilities unless we specifically assume or take those with us. For instance, let's say there's a dentist that's leasing space, well, we may want to continue obviously practicing in that same physical location. So we would assume that lease as the new. acquiring company. If you contrast that against the stock purchase arrangement, when you buy the stock of somebody's existing company, you're acquiring all the assets and all the history, all the liability. So there's a decision point that needs to be made very early about how we're going to structure the deal. And then there are things like tax implications that come from that, that we need to work through with financial team and the client to make sure. everybody is copacetic with how the tax treatment is going to play out. Yeah, absolutely. Well, there are so many things that we could get into here. And unfortunately we have limited time, but before we close out, I wanted to get into, um, you know, yet another stage of the life cycle of a practice. And that's when you are considering transitioning out. Maybe the dentist is retiring. Maybe they, who knows? I, most of the dentists I talk with love their profession, but sometimes you fall out of love with it. Maybe you just want to move on. So, uh, we could all go become guitar players for that matter. But as far as transition planning, when someone comes to you and says, okay, I'm considering exiting the business, I'm considering selling, what do you advise up front that they start to consider? And what are some of those key decisions that need to be made before proceeding ideally? Yeah, first thing I ask in that setting is what their timeline for exit looks like, because that's going to dictate a lot of how we proceed. When should a dentist, by the way, come to you to start planning that process? Like, what's ideal there? Ideally, I say three to five years before they're looking to exit. Sometimes they're not thinking of it in that fashion. And there's a very real world reason that we talk about that. It's because when you go to sell your practice ultimately and enter into the negotiations for purchase price and ultimately a letter of intent, you wanna have a clean practice when it comes to financials and corporate records. You wanna be in a place that you are prepared to turn over the package in due diligence under a non-disclosure agreement, which we helped prepare, to the buying team, right? To the buying dentist and their CPA and their banker, so that everything is clean and it shows that this practice has been performing historically for at least the last three years, which is about the look-back period generally. Can they look back further? Yes. But for due diligence, what they generally look at on dental practice deals, is about how has the practice performed over the last three years. Where we sit right now, it's an interesting time because the COVID-19 pandemic happened in these last three years. That's somewhat treated as an anomaly, but what financial analysts and lenders are looking at is how did the practice perform on a trend as we came out of the pandemic? Did it uptick or did it continue to plummet? That's going to be important and impactful when it comes to what is the value of the practice. So if we can get involved early in working in sort of a coaching and advisory role with the dentist who's looking to exit, we really can drive value help them set up for success to number one, have their corporate records, pristine, clean, ready to go, but also work as a part of the team with the financial folks, CPA, you know, maybe their banker, their, their wealth advisor on the strategic plays that need to happen over the next three years. in order to continue to increase the production of the practice, the revenue collection of the practice. What that might mean for the retiring doc who wants to take a little bit of a break is they might need to hire somebody part time so that production numbers continue to climb and they can get year over year increase in value to a prospective suitor or purchaser that really is going to justify a higher dollar amount for the practice. sometimes you've got a build to wind down. Exactly. That's, I love that. You should coin that. That is exactly what we're talking about. And when you're in that final three to five years, it's time to push and some folks aren't either desiring to do that or able to do that. And so it becomes, all right, let's game plan on how we can do it then and still get you to have, you know, your, your trips with your family and things like that and take some R and R time. Yeah, absolutely. Well, there are so many considerations that go into the business operations of a modern dental practice, and you know it better than anyone, Michael, and I can't thank you enough for stopping by and sharing your expertise, and because there are so many topics to delve into, I do hope you'll come back and share your expertise again in the future. I would love that if you're up for it. I'm definitely up for it and I will bring a guitar next time with me. Awesome. Maybe we can have call in requests. That would be pretty awesome. Ha ha ha. Fair enough. Thanks for being here. So Mike, what can you tell folks, Dennis, listening to the podcast, who may be interested in consulting with you? Where can they find you? What's the best way to get in touch? Sure, yeah, reach out to us at ncplanning.com. That's our website. You can reach me at 919-900-4720. That's our firm number. Or my email address is michael, M-I-C-H-A-E-L at ncplanning.com. You can also find us on socials like Facebook, Instagram, LinkedIn, all those good things. Sounds great. And I'll have all that information for listeners in the show notes. And I wouldn't be a marketer if I didn't ask for a review. So if you've enjoyed what you've heard today, please take a moment, go to where you download your podcasts and leave us a five star rating and a review. I can't tell you how much we appreciate it. The reviews drive the algorithm and the algorithm helps us reach more folks like you. So thank you so much for listening and Mike, thank you so much for joining us today. I can't tell you how much I appreciate it. And if I have my way about it, you will be back on here in the near future. So we'll talk soon. Thanks Dan.

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