Story Time! – War Stories and Spectacular Deals

Foreign.

Welcome back, everybody, to another episode of the Dental Boardroom podcast. Today we're going to launch into some war stories that practice owning dentists have experienced. These are real life stories that I think will be deeply valuable for you practice owners as you experience different challenges. Let's hear how other dentists have handled some challenges. And for this podcast, I've got a guest. This is a dental attorney named Justin Morgan. Justin, welcome to the Dental Boardroom podcast.

Wes, thank you so much. I really appreciate this opportunity to join you on this podcast. And I've got some pretty good war stories for your client.

I think some of our best podcast episodes are dentists telling actual real life stories that they've had. Now, you're not a dentist, but you were in the yoke with these dentists for fighting certain battles that we're going to talk about today.

Yeah, I started my practice of law almost 13 years ago. I've been working almost exclusively with dentists for the past six years. I spent some time at bank of America helping finance these deals. So we see a lot from the transaction side and on the litigation side as well.

So some of these stories will deal with practice sales moments, transitions, and some of them are just sort of standard practice owning items. And I say we, we jump in. But before we do, I'd love for you to give a little introduction about your, your book. Tell us a little bit about a book that you wrote that gives you some authority on these matters.

Yeah, I wrote a book named Shit Dentist Should Know. And it's for buyers and sellers in the dental space. And it talks about everything that a doctor should know. Right. So if you are a younger dentist or if you're midstream in your career and you want to learn about the fundamentals that you need to understand from both the financial piece and the legal piece and also the players that you need to get involved with. It's a great primer. And likewise, if you're on the sell side or if you're looking to sell or expand or make other moves in your career, there's other sections of the book that's going to do a really good deep dive that's going to provide you with great information all in one comprehensive book. And it doesn't waste a whole bunch of time. It's like 100 pages.

I'm going to in the show notes include a link to the Amazon.

Page where your book is sold after the show. And I just want all my listeners to know that, like Justin is here on his own time. I'm not paying him. And I want to give him some good exposure and a shout out because he has a great reputation. And so really quickly, how can people get in touch with you as a dental attorney?

Yeah, so it's justin themorganadvisors.com yeah, great.

Easy enough. And many of my listeners are clients of mine. And hey, clients, you can always reach out to me directly or your CFO advisor, and we will get you in touch with Justin for any legal needs that you need as a dental practice owner. All right, let's jump into these war stories. So the first one relates to tax liens and refinancing practice debt. Give me the backdrop on this one, Justin.

Yeah, I call it the taxing extraction. Right. And I a couple of clients that owned a big building.

In California, and they, they had built this building together. There was numerous dentists in one building. And they went to refinance this building, and one of the partners had a lien on his interest and did not disclose that to these other partners. And so this lien caused their refinance efforts to be stymied. And they later learned about the lien at the very end. And so they lost, you know, a hundred thousand dollars, let's say. And so when that, when the group went back to try and recoup some of those losses and settle out with their partner, the partner got kind of irascible and refused to do so. And then that ultimately ended in litigation. And, you know, this took four years to resolve. And so at the end of that four years, the partner that had refused to provide his notice of the tax lien had ultimately sued his partners and then lost that dispute and ended up having to sell his interest back to his partners at a 40% discount after paying his attorney's fees, or after paying everybody's attorney's fees. So is a really important lesson to know a few things, right? One is, I think the offending partners counsel.

Got a little bit over aggressive and really didn't advise their client that, hey, this could go really, really negative for you. And the other piece is that you should really speak to your partners, like if you're going through death, divorce, disability, talk with the other partners so that everybody can be on the same page. And this circumstance, this tax lien, arose out of, you know, one of those three kind of challenging circumstances. So it wasn't like an intentional thing, but it really led to a terrible result. Right? This person started out with maybe $30,000 of debt or something, and it ended up compounding over time. And that became a really large loss for this person.

Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow dental Practice sales. In such a fragmented market, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com practice orbit is modernizing how dental practices are bought and sold. It's a platform technology. Y' all know them Zillow, Airbnb, Uber, and OpenTable, just to name a few. These technologies do two things. First, they help match buyers and sellers by centralizing the marketplace. Second, once the match between buyer and seller is made, these technologies help them navigate the sale to a successful close. Here are a few of the features inside a Practice Orbit users can determine a reasonable sale price for practice in just minutes. All they need is the most recent business tax return. Practice owners can use the directory to find important service providers like practice brokers, attorneys, accountants and bankers. Practice owners and their brokers can invite those service providers into the platform. So all parties are coordinating the sale together. Practice owners will have a beautiful digital listing of their practice, like a home on Redfin. And importantly, the listing will be anonymous and personal information like your address, name and pictures are only released after an NDA is signed and approved by you or your broker. Practice buyers can create saved searches to be auto notified when new listings come on the platform that fit their desired specialty and location. And hey, dental practice brokers, you can list all your practices on the site for free. By doing so, you'll get access to Practice Orbit's large pool of buyers, all of whom have created profiles and saved searches to be auto notified when new listings come for sale. You can use the platform to introduce your listings to a targeted set of buyers. Additionally, and optionally, you can use the platform tools such as a built in NDA, a customizable loi, and a workflow tool to navigate the sale from LOI to closing. In fact, you can manage all your listings on the system, from listing the practice to NDA to LOI and finally to closing the deal. Create your free account today at www.practiceorbit.com.

Can we talk about a couple things here? Number one is partnerships. We work with partnerships here at Practice CFO. A partnership of two doctors is three to four times the work on our end for these doctors because they're typically set up as, you know, a partnership of corporations where you have the partnership and then you have each doctor owns their own wholly owned corporation which then owns their interest in the partnership. And I did about a six part series on partnerships about eight months ago for those interested in partnerships. But in it, I emphasize partnerships can be extremely profitable because you have multiple producers with shared overhead and they can be extremely complicated and emotional because you're sharing a bank account with somebody else. And how you distribute profits is a function of the partnership agreement, which isn't just equal dollar for dollar split. It can be any way you want to. And doctors tend to view their own input to the success of that practice differently than others view their input because it's so subjective and it creates for a lot of controversy and partnerships. I've always said if they get along, so good chemistry, if they have shared clinical philosophy, and number three, if they can have a good model of sharing the bank account, meaning how do they distribute profits in a way that feels commensurate for both of them? They can get those three things right. They can have a just a wonderful experience with a partner. There's so many benefits to having a partner in business. I love it. They're just sensitive and a lot of doctors go into it without. They usually get the first two right. They get along, they have a shared clinical philosophy. They think they have trust in their friends. So they shake hands, not really understanding how they're going to break out the money. They have some generic sort of concept in their head. Then reality hits and unique issues come up like a tax lien. And it affects the other partners. And oftentimes that leads to a dispute which has the potential of essentially dissolving that corporation in time and in certain cases through a legal dispute, which can be nasty, ugly, costly and long. So now let's go on to this concept of a lien. Would you just kind of explain or define the term lean for our doctors? L, I, E N. Yeah.

A lien is going to be formal notice of a debt on certain assets. So when the federal or state taxation authorities impose a lien, they will record that lien. It will provide notice to all creditors that the federal or state government has a right to certain assets. Okay. And a tax lien is especially pernicious because it doesn't just attach to everything in the past, it'll attach to stuff in the future too. So this particular person had a tax lien on their membership interest which flowed through to the business they had with their partners and that showed up on the bank's.

Lien search when they were about to close the loan.

So are all liens extended from a government entity?

No, liens can be imposed by an individual, a person, a corporation, or a governmental entity. It's established by the filing of a document with the recording office locally or county at the county level. And that provides notice to all creditors that there's someone else for the claim. Right. And so banks will impose liens when they lend and they'll usually want to be in first position. And then you may have second and third liens, just like a first money mortgage on a house and then like a heloc.

Great. And explain for our doctors, when you say membership interest, explain what that is.

That's, that's how we define the ownership interest in an llc. Right. When you own a corporation, it's going to be stock. When you have an interest in a partnership, it's going to be a partnership. Interesting. So when you hear attorneys talking, we use really precise language because it means something very discreet within our world.

And that's how we, we explain that.

Great. And thanks for taking the time on some of these basic variables. Doctors are extremely intelligent. My clients are extremely intelligent, but they're also so busy and they've spent most of their life learning a very specific area professionally. And so I like to go through basic definitions on a lot of these things. So thanks for taking the time on that. So in this case, the one of the partners who had a ownership in the business, or as we call it, the membership interest in the business, had a personal life event that cost him or her.

A certain amount of assets or money in order to.

Make good on that obligation. And maybe it was a divorce, and maybe in the divorce agreement, the courts ruled that X amount of the of the dentist's assets were given to a spouse. I'm just going through a hypothetical here. I don't know the exact details, but it was a lean was placed on that partner's interest in the practice. And therefore when that practice went to go get a loan to a traditional loan from say, bank of America to refinance their existing loan, they couldn't, because of this lien that the other partner or partners did not know about, suddenly surfaces because the bank saw it when they did a lien search and said, we can't actually refinance your practice. And I don't know what the motive of the refinance, was it just to save an interest or was it needed to sort of expand and grow? Do you remember?

Yeah. The refinance was for several reasons. They could lower the interest rate, which would save them money on their monthly payments. The owners could also draw money out of the business because there was an increased amount of equity. So the bank was willing to lend them more money, which they could have taken as a distribution and then redeployed or reinvested for themselves. Okay, and so when I'm talking about this, it's when you refinance the business, a lender may say, oh well, this business is worth $1 million. We can give you up to $800,000 on the business and you can take that money and do what you will with it. And so there was a couple of different benefits to this refinance and it was also time for them to refinance as well. So it was at the end of that loan's term. So they were forced to refinance by the end of the term and they were unable to or they were delayed in completing that refinance because of the tax lien. So they ended up getting hit with penalties and interest from that, the original lender.

So I want to go through a few concepts here. I'm one of the main reasons for these podcasts, Justin, is I'm really keen on my clients and dentists becoming savvy business owners. And to be a savvy business owner, unfortunately they have to learn a lot of stuff on their own because they're not going to learn it through college classes or formal continuing education. They have to be intentional about learning the concepts of business ownership beyond doing dentistry. And so I like to really call some things out as just sort of modules of education. So the three things I want to call out, where we are right now in this war story is.

Is number one.

A lot of times we'll refinance with a doctor.

Let's say they're halfway through a 10 year loan and they're out of the prepayment penalty, which is usually four or five years, and they can refinance. Maybe rates have dropped, but the monthly payment could come down for two reasons. One, the interest rate drops, as you mentioned. But also when you refinance, you're usually essentially getting a new loan and extending the term back out to 10 years. So not only did you lower the rate, but now you lowered the payment. Because instead of a million dollar loan, let's say you're at 600,000 left on the balance and the 600,000 over a new 10 year period, especially if it's at a lower rate, you may see your, your monthly payment get cut by 60%. And a lot of times when rates are low, I don't mind using debt that's at a 4 or 5% tax deductible rate in order to free up more cash flow, to do things like expand or to fund their retirement plan, which will get tax deductible deferred growth. And so it's a very strategic thing. The next point I want to emphasize here is. So point number one is that debt restructuring can be a great strategy when it comes to cash flow management.

Number two.

Is the equity cash out loan, which is this is like a HELOC on a house. You've got equity in your house. Let's say you've got 500,000 equity. You can go to the bank and say, hey, can I get 200,000 as a line on the equity of my house? Because I want to go buy a vacation home or a boat or whatever that is, do a remodel, et cetera. In the business world, we call that an equity cash out loan. So we don't call it a heloc. We call it an equity cash out loan. So that's what was happening here is if the dental practice owners were saying, I would like some money to actually take off the table, some of my sort of equity in a way to take off the table. Then you go to the bank. The bank says, yeah, your practice is doing 2 million a year. You've only got 400,000 in debt, will absolutely lend you another million dollars. You can use 500,000 for build out of three more ops, that kind of thing, and take $500,000 home to go live on. This leads me to my third concept. So the first one was extending the refi, or the refi extends the loan payments and significantly lowers them, which is a great cash management strategy. Number two, equity cash out is a specific type of loan that dental practice owners can get equity cash out loans. And number three is a concept called excess distributions. Now, when a bank gives a practice owner a loan and it's an equity cash out loan, so let's say it's a $500,000 loan and they literally drop 500,000 in the practice checking account, $500,000 lands. Can the doctor then transfer that out to their personal account for living or savings, new car, whatever they want to do? The answer is maybe. And I have a episode I did about three months ago on this concept called excess distributions tax. It's in the tax code. And what that means is if you're piggy bank, think of your practice as a piggy bank. You have money, let's say you have $50,000 to start that you put in. You got $50,000 sitting in that big piggy bank. Then during the year you net 500,000 in income on your tax return, 500,000 goes inside that piggy bank. Let's say you took out.

All $500,000 and you moved it to your personal account, you still got 50,000 in there. So your piggy bank is still positive. In that example, if you took out 600,000, you only had 550,000, 50 original contribution, 500,000 of net profit after all expenses. You took out $650,000 or $600,000. You took out $50,000 more than was in your piggy bank. That's not good. And the IRS will charge you a 20% tax on that. And California or whatever state will charge their state tax rate. And so it's about a 25 to 30% penalty on that extra money. So if you took an excess distribution of 100,000, you're going to pay $30,000 in a penalty. And sometimes what we CPAs do is we reclassify that as a loan and it's called a loan to shareholder. And up to about 100,000, it's fine. It's under the radar. You go above 100,000, you're setting yourself up for audit risk. Because on the 1120s tax return of the corporation, it specifically says are there loan to shareholders and that you got to be careful about. So my main point there is if a bank, if you want to go get a loan from a bank to take out money and spend personally, you've got to know what's in your piggy bank, which is a tax number called your basis. Ask your cpa. What's my basis in my corporation or my partnership? And can I pull out $200,000 without triggering this excess distribution penalty on my dollars? Okay, those are a few sort of business and tax concepts I wanted to bring up as it relates to this scenario here. Let's carry on. So who sued who in that example? Do you ever feel lost in your practice finances? And how about your personal finances? Ever wonder where your hard earned money goes and why you're not seeing the financial progress you've worked so hard for? If so, listen up. As a dental CPA and financial planner, I've created our company Practice CFO just for you. With almost two decades of experience, Practice CFO integrates great CPA services like accounting and tax with customized financial planning, both business and personal. Think of it this way. Our dental focused CPA services give us the x rays we need to clinically plan your global finances and be effective financial planners. It's a highly customized approach we call the CFO model. Historically, having a CFO or chief financial officer was an advantage of large corporations only. But today, practice CFO gives that same advantage to private dental practice owners. As a client of practice cfo, you'll be assigned one of our dedicated CFO advisors. You'll receive insightful financial reports each month, have regular financial review meetings, reduce taxes, grow your wealth, and feel more in charge of your numbers. Because we believe that in the competitive landscape of dental practice ownership today, you have to be an effective business owner, not just a capable clinician. Reach out to learn more@dental www.practicecfo.com.

In this example, the the individual with the tax lien ended up suing his partners that did not have the tax liens. So just to restate this, the person that caused the problem ends up suing his.

That's why I was confused. Explain that.

It's confusing. And it was because the partners had. They thought they had come to an agreement. They said, okay, we'll take this distribution from you as compensation for the amount that you owe us, and we'll all move forward. So what happened was you have the business, they had to give distributions to their shareholders or their members. And the person with the tax lien was supposed to get, let's say, $50,000 as a distribution. He owed about $50,000. So his partner said, give us this $50,000 and the debt is clean and we can move forward in the future. The next day this person said, no, I want you to give me my $50,000 in cash so I can write you a check for the same amount and we can move on then. This doesn't make sense. Because it does not make sense. Okay. And that was an attempt by this particular offending partner to take the money and run. So his, you know, his partner said, you know what? We're holding on to the money. And so the offending partner sued his partners so that he could get the money so he could then pay.

So it sounds like one of the partners sort of controlled the purse strings mechanically, even though they all, as a shared owners, should have access to it. One of them was the sort of the gatekeeper of the cash flow distributions. Is that about right? And the offending partner couldn't get it and sued him for it.

Yeah, so. So the other partners said, no, no, no, let's just do it this way. And the offending partner said, no, no, no, I want you to give me the cash so then I can pay you back.

And the other Partners didn't have the trust. They're like, I will give you the cash, but we don't trust you that you're going to actually pay us.

There was, there was no trust and there was no reason for trust at that point.

Yeah, that makes sense. Okay, and how did that wrap up? What was the outcome?

So let's just say that, you know, these partners had 2 million bucks each in value that they had. Okay. And so the offending partner got bought out for basically a million bucks, but he also had to pay $600,000 of attorney's fees. So he had a $2 million bucket of money in equity with recurring revenue because they owned a business that was profitable. And the value of that fell to $400,000 as a result of the conduct, as a result of a dispute over, like, how this little bit of money should be handled.

Whatever financial obligations originating in that offending partner's private life, whether that was a divorce or whatever, just got dramatically compounded by the loss of the value of their share of the estate in the practice, from 2 million to 400,000. So.

What'S the takeaway lessons here as I'll make a first stab at this as a dental partner, if you're in a partnership, first of all, don't get into a partnership unless you have strong trust and an agreed on method of allocating profits. That's number one. Number two is.

You are married together. When you share a tax ID and a bank account, make sure you have very strong trust and a good code of conduct that you all live up to, which includes transparency about things going on in your personal life that are going to affect the other partners. That's an inevitable fact of life when you're dealing with a pass through entity like a partnership and you have other partners. What's your takeaway from that for dentists?

You know, I think the takeaway is if you're having some difficulty in your family life or in your personal life, make sure you have good advisors that can help help you make good decisions in your business life. Right. Because this person was so convinced that they were right, they were doing the right things. I'm not sure his council and his people were really fighting back against him that he brought this upon himself.

Right, Great takeaways. All right, let's go on to war story number two. This one relates to a practice sale, three clinics. Just to be clear, this is. I'll, I'll just share pretty openly this was a dermatology practice. But you dentists, I want you to know that Dermatology and dental practice practices. There's a lot of similarities here. And this could absolutely apply to dental practice ownership. So kick us off on this war story.

Yeah, so I want to call this one Bad Botox.

So my clients were looking to acquire Med Spa, Derm clinic, right? Three different locations had great marketing, had great apparent profitability. You know, we were looking at the. The profit and loss statements. The tax returns probably did about $4 million in total revenue, and they were willing to pay about $4 million in cash or financed money. Right? And.

As I got a hold of the deal, I said, you know, guys, like, why are we paying this much? You know, the banks aren't going to come in with this amount. You know, is there. Is there other competition on it? And so as we go through the process of looking at it from a high level in terms of value, profitability, investment value to the client, you know, they're like, oh, there's. There's this much profit. This is unusually profitable. And that kind of sends a little bit of a red flag off the pole, right? Or puts me on alert. And so as we go through it, I'm looking at it and it's like, well, how is it this profitable? How. What are the other practices or the other small businesses that do this? What do they look like? Right? And it's like, well, they're not as profitable at this as this one, okay? And so we just say, hey, look, you guys should be on high alert here. This could be problematic. And then as we proceed through the transaction, we've got a pretty irritable, irritating attorney on the other side, right? Really impressive. Won't change certain. Certain language. That's pretty standard. Like, we ask for, hey, are you guys complying with all of the applicable laws, rules and regulations that apply to this type of business? And, you know, they really wanted very simple, like two, three sentences in terms of the reps and warranties, which are promises about the quality or condition of a certain aspect of a practice. Right? That's a rep and warranty. And so that, again, sent a red flag up, which is like, hey, you know, we usually want to have better documents, especially when we have a lot of money at risk. We want to be really clear on this. And so my clients, they acknowledged it, said, hey, look, we think we can move this forward. We think we can take care of this and handle it. We're going to assume the risk. Okay? So we finally closed this transaction months later, and it finally gets across the finish line after a whole bunch of hemming and hawing and negotiating and going around in circles. And three months later or two months later, I get a call from my client saying, well, we finally figured out why this practice is so profitable. And I say, what happened? Right? And like, oh, well, the Botox that this practice relies on is not FDA approved and was purchased overseas at a deep discount. So there's the extra margin. Right. And everybody in the practice knew that they were ordering illegal Botox. And so I think my. I. I think it probably will work out for them in the end, whether that gets resolved through litigation or not. But.

When we see something that's too good to be true in terms of profitability or a hockey puck like growth in a dental practice especially, we should start asking questions, right? And they need to hire people like you and other consultants and people to jump in to provide detailed forensic analysis and investigation.

Let me do what I've been doing. The other story. Just share a few educational concepts out of this. The main one is around this concept of due diligence. Whenever you buy a dental practice, you want to do due diligence on that practice. And usually before the offer letter goes in, it's marginal due diligence. It's maybe looking at a P and L and tax return and just seeing if the car looks healthy. We'll use the car analogy, kicking the tires, maybe even a little test drive. That's pre post NDA, pre loi offer letter, letter of intent loi. And once the loi goes in, now the due diligence starts. And this is my way that I've always cataloged due diligence is I say there's financial due diligence, there's legal due diligence, and there's operational due diligence. And the financial due diligence is going and getting source documents that validate the numbers on the P and L accurately represent the economic reality of that practice. So if it says it does 2 million in collections, let's go get bank statements for two years. Let's add up all of the deposits, look for even deposits that might be owner contributions and not collections. Sip those out and add them up and say, does this match close pretty closely? What's on the P and L that we used to determine a price for labor, which is the biggest expense on a dental P and L. Let's go look at the, at the payroll reports and validate that their labor cost, which they say is 30%, is actually 30%. So in this case, the financial due diligence is going from top to bottom on The P and L and validating that, that is all real lease, under lease documents, bank statements, tax returns, payroll reports, production reports, all of that validates those numbers. That's the financial due diligence, the legal due diligence. That's where you're drafting up these legal documents that have the warranties, how you're going to agree on different items like redos and these sort of, I call them deal points. There's like 20, 25 of these deal points. What are you going to do about architecture, for example, that kind of thing? And that's where the attorneys are redlining back and forth and making sure that document, along with a lease assignment, is being structured correctly. I just call that the legal due diligence. And then the operational due diligence is what's the state of the equipment.

What existing treatment plans are there that are unaccepted, has the doctor taken all the meat off the bone, so to speak, right before the sale and that kind of thing. So on the due diligence, what I would have looked for in this specific situation is let's say this were a dentist and the dental supplies were. I, I would, I would say normally dental supplies are around 6 to 9% of revenue, depending on what kind of supplies they're buying. But let's say it's 7%. If I'm looking at a dental practice P and L, and if it says supplies are at 2%, I'm going to be like, how is that possible that you're at 2% of dental supplies? All right, so you're buying. Who's your vendor? Okay, it's all from Patterson. All right, let's go look at some of these invoices. And then we would uncover that they were buying from China at 10, a tenth of the cost. And then we'd say, okay, buyer, can you, are you legally allowed to keep doing this? Because if so, great seller found you a nice little nugget. But if not, then we have to do an add an adjustment to the profit to show what the buyer will pay in supplies. And we would need to add, you know, $150,000 to supply costs because they're going to be compliant with the FDBA on that. So that's where good due diligence. On the financial side, this is attorney, you're not going to really get into that. But the, whoever the buyer's accountant was, I think should have known that these med spa derm clinics have an average of X amount of revenue going for their Botox costs. And it doesn't look right as a percent. So let's dig into that. But sounds like that never happened. So bottom line there, do some good due diligence and have a good team to help you out if you're buying a dental practice. Awesome. Okay, any other takeaways from that story? Justin.

Understand that each transaction has risk. Right. And I think that the buyers in that situation assessed the risk and they kind of knew that something was going to be off. And they also saw the, the investment potential or the upside potential of the deal. And so I think they'll be fine. Right.

I would think that that should have been disclosed. And because it wasn't disclosed, I would think that is a. What's the. What's the word? A. It has legal recourse for them to go back to the seller.

Yeah, they certainly are. They've certainly initiated a civil action.

Okay. I. I hope and suspect they will get something out of that for sure. All right, I love these stories. Let's go on to story number three. And this one deals with patient credits. It's also about a practice transition as well. Give us the backdrop on this war story.

Yeah, this is the case in the phantom credits. Right. This is also. This is a dual office dentistry practice. My clients were the buyers. And just like seeding story, we saw some irregularities on the profit and loss statements and the tax returns. Rather than being incredibly profitable, this practice was not very profitable at all. Okay. So when that happens, my clients, they understood practices pretty well. They saw the clinical opportunity with respect to the practices. They saw the opportunity to tighten up expenses. They anticipated that maybe some other people are on the payroll that shouldn't have been. Maybe there was some accounting irregularities or some aggressive tax saving strategies that were being employed by the selling party and decided to move forward with that transaction. Now.

To put this all in context, we may have had like $3 million in revenue on these two offices and maybe like $50,000 of net profit. Right. And so when we look at the expenses, it's just kind of over the top.

And so again.

This particular practice was on the market for over a year. The big banks couldn't finance it, so we had to come up with an alternative structure. A promissory note, cash down payment, which dramatically reduces the amount of buyers that are available for a particular practice, especially in Southern California. And, you know, it also puts me on high alert, and it's the direction to the client. It's like, hey, we. You really need to be careful here. Right. Because we can't get traditional finance. Everybody's kind of concerned about this. The practice has been on the market, but again, it's. Let's assume the risk. We know what we can do with this practice. We're already getting a great deal because this sold at, let's say, 55 or 60% of revenues in terms of the purchase price, which is a little bit depressed compared to maybe 80 or 81 or 2% if it had been managed appropriately. And so we take that transaction to closing, and two months later, we find out that there's $200,000 of patient credits that were deleted from the books four months before the closing date. And this is discovered because patients come in and they say, hey, I've got a credit on your books. Or I had a credit with the former owner. Like, I would like to have this work done now. And they go look at the books. No patient credit was transferred at closing, and it's not even on the financial records. And then we later on find out that one of the staff members said, I was directed to delete these patient credits in April.

So this, too leads to litigation. Right. And it's a big headache for everybody involved, especially the seller, because on the sales side, and I don't have a window into what this person did or did not do, you know, it becomes a question, were the patient credits stolen by the staff or were they stolen by the owner? Right. And if you're an owner and you're trying to unload your practice and head into retirement, the last thing you want is to be sued two months after your closing date. And so this one will hopefully work out and resolve, and the parties will come to an agreement so they can go their separate ways. But again, this also presented a really big opportunity for my clients, too. So they had a riskier deal. They may have had some headaches on the litigation side, but they also got potentially a really good set of practices at a discount that they can take off and grow over time.

So let's go over some of the financial education components of this war story. Number one is dental practices buy and sell, just like houses buy and sell, as dentists know. But they are what's called asset sales. And asset sales means that the buyer isn't buying your. Your tax ID. They're not taking over the seller's tax ID which, let's say it's a single Dr. S corporation. They're not buying the stock of that corporation and carrying it on. Instead, it's like a garage sale, and the seller's lifting up their garage door and saying, here's all my dental chairs and my X ray machines, my CAD cam, you know, my leasehold improvements. And let's say that's all valued at 300,000, but I'm going to sell it to you for 1.2 million. That extra 900,000 is just the reputation, the goodwill. That's. Goodwill is an accounting term for an intangible asset. You can't touch it. And that's what most of dental practice values are, is they are really goodwill because you can't really sell your stuff for that much. And so.

Because it's not a stock sale, the buyer is not by default entitled to money that comes in for work before the sale closed. So the seller's doing this work and then they're collecting. You know, ideally they're collecting within 30 days, but there's a certain amount of uncollected but already completed treatment and that's called accounts receivable. And if you're a dentist practice owner, you should know what accounts receivable means. You did the work, you haven't collected the money because you're selling your assets. Account receivable is an asset. It's something that you are entitled to get. That's an asset for the seller. You're going to get that AR when the money comes in the door. Usually when we value a dental practice, we don't include the value of the accounts receivable. So if it's a million dollar practice, we might say this is valued at $750,000. There may be an extra $100,000 of AR that's going to come in the door in the month or two after closing. And typically the seller keeps that AR in addition to the sale price. And the seller keeps whatever cash is in the account on the day of closing as well, because they're keeping all assets other than the assets they sell. And they're usually selling the download equipment, leasehold improvements. They're selling the goodwill to the buyer. Now sometimes the buyer will say, well, let me go ahead and buy the goodwill. I'm sorry, buy the accounts receivable. And let's say the accounts receivable was valued at 100,000. So instead of paying 750,000, they pay 800,000. Then every dollar that comes in after the sale date goes to the buyer. But there's, there's pros and cons when the buyer buys the architect. You know, there's pros and cons to both of those scenarios. Now, the opposite of AR is AR credits basically, or patient credits. AR is when the patient owes you money or the insurance company credits is when you owe the patient money. And so in this case, the seller decided to just wipe out everything that seller owed patients legally on the books in order to not have to pay that and let the buyer deal with it. And they didn't disclose that they were doing that, which is completely illegal. So let's learn a little bit about here about ar. How do you handle the AR credits on file number one is you should quantify those. And there's reports in the practice management software that will tell you, here's how much you owe your patients. Where it gets tricky is that some of those AR credits, those patient credits are like 8, 9 years old. Patients long gone probably will never have to fork out that $150 patient credit. Is the seller supposed to lower their purchase price dollar for dollar for a credit that is likely never going to be paid back to a patient that is long gone, maybe even moved out of the state, maybe even died? That's why it gets a little tricky here. Same thing with AR that is over 120 days. Is that AR actually ever gonna come in or is that patient that owes you money long gone at this point? So usually what we do is you can net the two and say what are patient credits and what is our ar? And you can sort of net them and then pay for a price. And when you do that, you always pay more for younger ar. So AR for treatment that you did in the past 30 days, the buyer should pay probably 90% of whatever that AR is because it's a very high probability on collecting if it's older than 120 days, either the buyer just doesn't buy it or they pay like 5 or 10% of that balance because it's unlikely to get collected. And so it's this tiered percent based on the 30 day, 60 day, 90 day and 120 day plus of how much the buyer would actually pay for that for that ar. I have done hundreds of deals. I've never seen a deal where a seller essentially hid the credits. I've never seen that before. So I think the buyer absolutely has the right to legally go after the seller on that one. Any other takeaways you want to give to our listeners on this subject of Arnhair credits in a practice sale?

Oh.

No, I think you're spot on right with aging ar. I think when you're going through a transition or an acquisition or preparing for a transition, mind your accounts receivable and your revenue cycle management. Try and tighten that up, optimize that so that, one, you don't have a whole bunch of AR at closing, and two, you reduce your stress level about getting that money delivered to you after close. Um, and then also on the buy side, look at those AR statements. Look at the patient credits. The. The tighter those are, like, the less amount outstanding old AR there is, the better the practice management of that business is going to be. Right? So I think those are really two big bellwethers that give me a lot of confidence in deals. I always like to ask for that aging AR report up front.

Agreed with you on that one. I think we have time for one more war story. You up for it?

Yeah, I will keep it punchy.

Okay. Do we want to do the staffing shortages war story?

Actually, I have a different one.

All right, tell me about it.

I want to call it the bitcoin blowout.

At this point in time, in our day and age, I think anything on bitcoin is going to be interesting.

Yeah. Simply put, I got introduced to a client, her brother was an attorney, found me online, said, hey, talk to this guy about this really unique opportunity. And the opportunity was, practice generated $600,000 of income, and it was being sold for 150 grand. And I said, what's wrong with it? There's nothing wrong with the practice, but the owner had been indicted by a governmental agency over the use or misuse of certain governmental funds. Okay. So what happened was this individual took those funds that they had borrowed from the government for one very specific purpose and invested them in bitcoin. Okay. And bitcoin crashed insolvent immediately and couldn't pay the debts back. And then also got something triggered. And so they found that this person had taken those governmental funds and wired them into something pretty unique.

You know, I don't know if it was a random audit or not, but, you know, this person got indicted, pled guilty, serves a little bit of time, but also has to unload his two or her. His or her two practices. And that resulted in both of these practices needed to be sold in 90 days. And it went to the person that was able to see through and understand that there was little risk associated with what his conduct was and the ongoing operation of practice. And so it was an interesting place to be because here I am working with another attorney who's taking care of. Trying to take care of his family member. And I'm saying, look, she can buy the assets in this practice. It's unrelated to this criminal case. And as long as the patients are still Coming in, they don't really care about it. This is the deal of a century, because you couldn't even build out this practice with old equipment for $150,000.

So they got that practice on a steel, and immediately you're cash flowing and making great money, and they'll end up making. It's the deal of the century.

All right, couple things on this. The loan that you're talking about from the government, I'm 99% sure it's the Eidl loan. And the Eidl is the economic disaster injury loan. And that came out from COVID to help dentists get through the storm of COVID with a lot of office offices being closed down and supply costs going up, yada yada, along with the erc, HHS grants, ppp, all that stuff. Eidl was a loan. The other ones were more like gifts, pretty much. This one was, was a loan, though.

And for most people it was $150,000 loan. That was kind of the max at a 3.75% interest. And many of my listeners right now have that sitting on their balance sheet. The ideal loan. Certain clients were able to get more. I have a client who literally got a $1.5 million loan and has been able to use that to get a return on investment in a business investment. He literally put it in a certain business savings account, getting more interest than he's paying, and he's arbitraging three or four grand plus a month just off that. So it wasn't necessarily used for an economic injury disaster. But I'll tell you what, these things have been used for everything under the sun, from taking it out, buying a boat, putting it in a 401k, and relatively few of them used it for getting through the disaster. I found that the ppp, HHS grants and the ERC were more than sufficient for people to get through Covid. But a lot of people did get that it is at a great tax deductible, 3.5% rate. I mean, that's hard to beat. It's close to free money. And so now what triggered the government, the SBA finding out about this? Was it that he, the. The owner defaulted and could not make the payment and that triggered a, an audit?

I was not on the sell criminal law side, so I don't know what triggered the audit or the review.

Okay. I bring that up because I suspect half of dentists who got an Eidl, if they were audited, probably could be traced back to that Eidl not being Used for economic injury. That said, it gets a little diluted when the Eidl money goes in the same checking account as collections and then labor cost comes out of it. So it just gets sort of mixed into this bag and then they take distributions out. So if they took the Eidl and it landed at as 150,000 and immediately pulled it out as 150,000, that's easy to trace, but generally that's not what happened. And so it gets sort of laundered inside of the P L overhead and they're taking distributions all the while of 10,000 here, 20,000 here. That the reason why they're able to take those distributions is because they have extra cash thanks to the Eidl. But I think that laundering can hide it for a lot of people, but not everybody. And I certainly wouldn't want the IRS coming and sniffing around the balance sheets of my clients accounts on on this. Not that we're EVAs evading taxes, but we here at practice CFO are fairly aggressive in helping our clients beat the tax friction. Anyways, that's a fascinating story on the Eidl. Let's go ahead and wrap up with that one. Justin, these have been great stories. I love to extract what learning lessons out of actual dental stories. These are highly valuable as I attempt to educate my clients on all things business as they are business owners. Any final comments or words of advice for our dental practice owners out there?

Don't be afraid of the business piece. Right. You have people like Wes, you have people like myself that can walk you through a lot of things and serve as guides and training wheels as you grow and develop into a business person. And I found the path to be really enriching and a really enjoyable thing to do.

Amen to that. Now tell everybody what areas of law you can help dentists with.

My firm focuses on M and A. We do a lot of transitions, so purchasing, selling, we do a lot of real estate, whether that's going to be leasing, new leases, startups, acquisitions. We do partnerships, DSLs, private equity transactions. So really a corporate development, corporate department. And we have two junior kind of legal attorneys. We have another of Counsel that's a 13 year veteran as well and then an office manager that helps keep everything on track.

And people can find you at Morgan. Your company's called Morgan Advisory Group. They can find you at the Morgan M O R G A n the morgan advisors.com A D V I S O R S And again, this is Justin Morgan, J.D. mBA. You got an MBA? Yeah. Hey, I love that. That means you can get my language with numbers.

Yeah, absolutely.

That's a great combo. Well, you're highly credentialed in the area. I love your communication style. You've got great experience. I will be sure to add you to our list of great attorneys. And really, you're here in Southern California with me. So you and I are going to be doing some work together, I am sure.

Yeah, man, Absolutely. Thank you.

We'll have you again back on the show. Thanks for joining the Dental Boardroom podcast and excited to get this out to our listeners.