Who You Need on Your Dental Practice Transition Team

Welcome everybody back to another episode of the Dental Practice Sale podcast. I think we have a really cool show today because it's going to touch on something that every single transaction requires some understanding of. And it is who should be on your transition team when selling a dental practice? In other words, who are all of the players in invited into that transaction to help the buyer and the seller move along from inception all the way through to closing and on the show today, I've got my co host, Matt Odgers. Matt, welcome to the show.

Thanks for having me as always, Wes.

Just want to start off with a couple quick announcements. So Today, today is May 15th that we are live here. We will be posting this shortly, but we've got on Wednesday or Thursday the cda, the California Dental association in Anaheim. It's always a so many dentists there, a massive exhibition center, a lot of CE going on. We are going to be there. And in some ways it's kind of the official coming out for Practice Orbit as a technology, as a technology that is modernizing dental practice sales as a space that needs good technology bring together, sort of consolidate a market and get tools for buyers and sellers and all those really involved in that transaction a way to find each other and to go through that complicated process of a dental practice sale ultimately to closing. So if you're at the cda, would love to see you come stop by. The other thing I want to mention.

Too, do we have a booth number?

Wes, Good question.

At the CDA we do, but I'm.

Afraid to say I don't have it on on hand.

We'll post it in the notes.

Yep, we will put. Actually what I'll do right now is I will just go to Sydney who helps us with our marketing and we'll just do this live. What is our booth number at cd? All right, she'll get back to me in a sec. While I'm waiting on that, just a feature that we've recently added to Practice Orbit is a directory page, a professional directory page. And on that page you can find who are the professionals that are in the industry now currently helping dentists to sell practices. Specifically, we have dental accounts, we have dental attorneys, and we have brokers. And then we will have, we're adding it. The latest is bankers. Now right now it's very sparse. There's only a few people in there. And this is going to be built out. So we have a lot of CPAs, attorneys, bankers and brokers in there. And ideally as it builds out, we have that throughout the country. So you can find somebody local for more kind of geographically relevant for you as well. So stay tuned for that. That's obviously relevant for today's podcast because today we're talking about who are the professionals involved in a dental practice sale. Why don't we kick off? Matt, you ready?

Yeah, let's get after it.

Okay. The way that I have divided the people, because there can be quite a few people actually in a dental practice sale assisting it along. I partitioned it in three groups. The first is who's required, and at the end of the day, perhaps nobody is required. You know, one can self represent, do their own due diligence, try to manage their own legal stuff. But in practicality, there are three people or three types of service providers that are in every single deal that I've pretty much ever been in. Number one is the cpa. And I'm going to start with the CPA because I'm selfish and I'm a CPA and I've been in a lot of deals. And so I'm going to say the cpa. The CPA helps analyze numbers, due diligence. We're going to itemize out what they do. Second is the attorney. Yay, we got the attorney. Matt. I would never tell a dentist to sell or buy a practice without getting good legal representation. And I'll go even further and say from a dental specific attorney, just because the deal points are so unique to a dental practice sale, that's going to be very different than selling a dry cleaner store or a small grocery store or say a veterinarian practice. There are deal points, even from like an orthodontic sale to a general practice sale. There's even some specifics there. But a dental specific attorney. And then number three in our required list is the banker. Unless a buyer can come out of pocket on this or maybe has family money, which is very, very rare, there's virtually always a banker involved. So that's the first group and we're going to go through those. The second group I call optional but very common. So a lot of deals don't have these, but a lot of deals do have these. And that's the broker, which we will explain the escrow agent. And one that you brought up, Matt, that I thought was a good addition here is a supplier to help inspect equipment, which should probably be done in most, if not all deals. So that's optional but common. And then lastly we have the optional but less common group. So I don't see these as much, but they can play a very relevant Role number one is a practice management consultant, usually for the buyer on the buy side, somebody who is accredited in business valuation. So sometimes a formal valuation expert will help do a valuation of the practice and provide an official report with their credentials and signature on it. Sometimes the broker has one in house even or may refer it out. And sometimes the seller will get that. So it's on hand to say, look this, I've had this professionally done. This is why my selling price is what it is. And sometimes the buyer will get it just to have a check on what the asking price is. And then we have also under the third group, optional but less common, is a financial planner. Now I think as a, again, I'm going to be selfish here. I am a certified financial planner and one of our values over here at Practice cfo, which is our, our CPA and financial planning firm that at the end of the day we're trying to help doctors become financially independent sooner in life. And the practice sale is a huge asset on your personal balance sheet. But knowing how that's going to affect your retirement or that next stage of your life is really important, has a lot of financial implications. And so I think having a financial planner who isn't just a financial planner who's trying to sell you an insurance policy or an annuity or something like that, but somebody actually runs numbers and has maybe a software and forecasts things out and really gives you kind of a good picture of what the future would look like if you sold at a million versus if you sold at 700,000. Now for the financial planner, usually it's going to be what is netting after all the dust settles that's going to then go in your investment portfolio used to fund your future. And then the last thing I'll mention would be an HR attorney usually on the buy side to check out financial, I mean to check out the HR processes of the practice. So those are the three groups Required, optional but common and optional but less common. Let's go now starting from the top, the required, the cpa. And I'm going to talk about this one obviously, if you don't mind, get after it. Okay. Usually you have a buy side CPA and you have a sell side cpa. On occasion I have seen and have been involved in a situation where the buyer and the seller know each other. They know each other well, they trust each other and they want to prep saving costs and make the process go quicker. And so they will have the same CPA dual represent them. And then that CPA who was likely the seller's CPA in most cases will end up remaining as the buyer's CPA after the close of the practice. That's called dual representation. And we've done that a number of times, especially when you have a father selling to a son, or maybe you have an associate arrangement that's been around for four years and they're just really tight and have great chemistry and trust each other. The family arrangements are kind of the biggest ones that I've seen, or one where the buyer and seller have essentially come up with all of the terms themselves and they just need someone to sort of formalize it. Dual representation can be a good option there. Now, I have to be careful when I say that, because I had a case last year where buyer and seller came almost holding hands. I mean, they were just had great chemistry. The associateship had gone well. So I asked them, do you feel comfortable? How would you prefer to each have your own CPA or to do a buyer rep? And they said, buyer rep. Everything seemed to be good and happy. There were a few bumps in the road, but we tried to be as objective as we could throughout that process. And after the sale, things went south and the buyer did end up suing the seller for various reasons and actually brought us in that lawsuit. And we claimed to have represented effectively both sides, and we provided evidence of that and that sort of settled and done with and whatnot. So I've learned that it can be even a dangerous place even when both buyer and seller really feel like they get along. So I just say that's something that should be handled very, very carefully. And I would say even more carefully on the legal side for due diligence, but I'll let you talk about that. All right. On the seller cpa, what are they doing? Number one is they're preparing the financial statements to tell a story. And that story is what is the financial profitability or economic health of the practice? What's the true cash flow to a buyer? At the end of the day, that's what the bank wants to know. That's what the buyer wants to know. So good, clean financial statements, not these mixed financial statements that have a bunch of personal stuff inside of them that you can't decipher out. Financial statements that don't show good comparability year over year. Really important that these numbers tell a story. That's number one. Number two is they will help because it's an asset sale. They will help the seller propose what is the price allocation, meaning that the seller isn't selling the stock of the corporation, they're selling their assets like a garage sale. They lift up the garage door and they sell their chairs, they sell their furniture. And then anything that you can't touch is called an intangible asset or also known as goodwill. And how much is allocated to the equipment versus goodwill versus non compete versus supplies matters quite a bit to the seller, what the tax outcome is going to be. And the buyer usually wants it the opposite. And so the seller CPA will help propose an allocation across those assets in the asset sale that will achieve the ideal tax scenario for the seller. And that could save many thousands of dollars to the seller. So that's a relevant activity. They may give an opinion on the price. If they're a dental cpa, they might. They're more likely, I think, to give an opinion on what the price could or should be for the practice and then just provide general financial consulting to the seller for questions that come up.

So for the financial statements, is that something that is. Obviously it's prepared annually by the seller cpa, but coming into the transaction, are they any different, the financial statements than what's prepared annually in your meeting that you have with your cpa? And if they are different, at what point should those be prepared in the sale process?

They are the same underlying statements or documents. They're coming from the accounting software, usually QuickBooks. And some CPAs will do them annually. Why do they do them only annually? Because they're only doing it to prepare the tax return. They're not preparing the financial statements to be a source of financial data and information for the seller or the practice owner to make good financial decisions. And I, as a cfo, that's what we label ourselves as, is an outsourced CFO to dental offices. I sort of detest that style of accounting because it provides no substantive value other than to satisfy the irs. And usually those are the types of accounting reports that make it very difficult for the buyer and the banker to decipher what is the true profitability. Because the tax CPA makes some sort of adjustments in their work notes and then moves it to the tax return, sends it off. And that's that. There's never a discussion around the health of the practice. So what may have to happen there is you have to reformat the financial statements in a way that does tell the story. So it goes from being blurry to being clear. Now, good dental CPAs are usually preparing financial statements at least quarterly, sometimes monthly. We do it monthly, and those financial statements will have the core income and Expenses, the collections and the expenses, the expenses being labor, lab supplies, facility marketing and admin that every dental office has. And then they will sort of draw a line and they'll sift down below that those items that aren't related to the core business, like meals and automobile and travel and kids on payroll or spouse on payroll for 401k. You even move the doctor's own salary down below the line because the doctor's salary is a function of tax planning and 401k planning. And you need to sift that out so you can have an apples to apples comparison of this practice relative to the industry standards. That's really important for benchmarking purposes and for valuation purposes. So a good CPA will do it as if, almost as if the practice was selling right now. And they just prep the financial statements that way because that's always telling a story. Does that make sense, Matt? Yeah.

Oh, absolutely. And just kind of the final part to that is that from a seller's perspective, once they decide to list the practice, maybe the first thing that they do is talk with their CPA and get that process started to have those deliverables for the buyer or whoever else. So it shouldn't be. You shouldn't wait until you have the buyer and everything, you know, the transactions kicked off. Correct?

Exactly. You want to stage your practice to window dress itself as strong as possible. In fact, before this call, my colleague Paul and I were with a seller going through his P and L in detail looking at all transactions to see what is an add back. In other words, what's not an ongoing recurring expense, what's not a business expense that the buyer isn't going to assume. It's the more add backs to a seller, the better because the price goes up. And an add back is simply what expenses can you remove such that the profit goes up. Because if your expenses go down by removing certain expenses that the buyer isn't going to have to replicate, like your kids on payroll, for example, that's a very stark, obvious example. You remove your kids from payroll, which you might have just to be able to save in taxes and fund their Roth IRA or something like that, you remove that, your profit goes up. If your profit goes up, the valuation goes up. You're absolutely right. And this is why. Another reason why we're starting with the CPA is because the CPA is usually the first one recruited when deciding on a sale. And it's important that the CPA just make sure those financial statements are prepared well. And ideally they'll Have a list of the add backs already in hand so that when the letter of intent is received and you start to get serious with the buyer, you're ready to give them what they need. Great question there, Matt. On the buy side, the buyer also has a cpa. Now what the CPA should be doing, this is really, really important. We've done a lot of buyer rep is that the CPA ideally before the letter of intent goes in and sometimes they're not recruited until after. And the reason why is a lot of time associates don't have a cpa. They might have an accountant, they might be doing their stuff on TurboTax, that they may not even be keeping accounting records. They may be a W2 employee and don't even need to keep accounting records and they don't need a cpa. So sometimes if they know this process, they will recruit a CPA and ideally a dental cpa and before they submit the letter of intent to the seller. That doesn't always happen. Ideally this would happen first, which is analysis of the asking price, an analysis of the cash flows. And a good dental CPA is going to tell the buyer, if you buy the practice at a given price, what are you going to take home after overhead, debt and taxes. And does it make sense? How do you compare that with just being an associate where you don't have to bear the burdens of ownership? And they have that discussion again. Ideally that should happen before the loi. Sometimes it happens after the loi and that's okay. Well, but that's what a CPA is going to do for the buy side is that initial analysis and asking price assessment. They'll do a forecast of cash flows if they buy the practice at a given price. And then they will also do this is critical. They will also do the due diligence. So once a letter of intent goes in, the clock starts the second that's signed by both parties. There's usually even a time period that says you got three weeks or four weeks or whatever that is to do your due diligence buyer. And so the buyer, really the buyer's CPA is going to ask for bank statements, payroll reports, tax documents and the lease. What they're doing in the due diligence, the buyer's CPA is they are trying to recreate in some ways the financial statements through the underlying documents. But in that way they are validating that the numbers on the profit and loss statement do in fact represent the economic reality of that practice. And so when we do due diligence for example, we get the bank statements for the past two years and we verify that what's shown as collections on the P and L actually hit the bank account, the seller's bank account. Otherwise, if not, they could be cooking the books, as they say that term, cooking the books. We want to make sure they're not cooking the books. We'll look at the labor, the payroll cost, to make sure that the labor, which is the biggest expense to the seller and to the future buyer is we want to make sure that they're not understating what is the labor cost, that it's. That it's accurate. And you can look at the lease and verify that the rent payment is accurate there as well. We usually don't look too much at supplies and labs because we know supplies and labs are going to be a basic percentage of whatever the collections are going to be. So they're doing the due diligence on the underlying numbers by getting source documents that lead into the financial statements. Also, they are helping the buyer negotiate the price allocation. So going back to that concept, they want the buyer to have more allocated to equipment because they get to depreciate it faster than they do goodwill and therefore get tax benefits sooner. So they help with the due diligence on the price allocation. And then as you get ready to close on the practice, they can help set up accounting and payroll. So that is what the CPA does. Matt, let's switch it on over to you. Tell us what the attorney does for both the buyer and the seller and maybe address the question, do attorneys ever dual represent? If you have an opinion on that.

Yeah. So really, it's the exact same conversation as what you mentioned on the CPA side with the dual representation and that there is an absolute conflict of interest. You can't fully advocate for one party and fully advocate for the other party. It just doesn't work that way. So it takes a unique situation where dual representation is warranted, where both parties understand that as the attorney or even as the cpa, CPA is a little bit different because numbers are numbers. But on the attorney side, if both parties are comfortable with the concept that you're not going to be going, your attorney's not going to be going for blood to get the absolute best possible deal you could get for one party at the expense of the other in that scenario, then dual representation may be appropriate if both parties are comfortable with, listen, let's just have a fair deal. I understand that some things aren't going to go my way, but I'll make up for them in other areas, then dual representation may be appropriate.

Something that may be a good sort of check and control system on a dual representation scenario and trying to find a win win is when the seller anticipates to work back with the buyer for potentially years. I see that often 2, 3, 4, 5. I've seen up to 10 years after the sale. You know, you want to have good relationship because for the seller, this is your future employer. And so whether you lose out on a couple thousand here on some deal point at the end of the day isn't going to matter nearly as much as having a really good chemistry and repeat rapport maintained with the buyer through that. Now, when you don't have dual representation, which is in most cases, it can get very sticky. So a deal that I just was involved in that closed a couple weeks ago, it got very sticky between the attorneys. The seller, actually her husband was an attorney and had to really fight back on some of the terms in there and was very, very unhappy with one of the attorneys. And yet that attorney would probably say, but I'm going the distance to, to support and to protect my buyer. Credit to her for going the distance for her buyer. But my main point there is that it can get delicate at times between CPAs and the attorney, especially on the attorney side in these transactions. Door representation can smooth that out, but it does come with risks. But if the seller is working back, sometimes it can sort of create an incentive for that transition to go smoothly and not to get too worked up over small items.

Absolutely. And sometimes as an attorney, when you're advocating, like you were saying, going the distance for your client, you can actually be doing some harm. Because in going the distance, you may be killing the goodwill for how the parties perceive each other and all of the things that happen after the transaction. So there's a fine line there. My recommendation across the board is for each party to have their own attorney. But there are exceptions to that where dual representation does work and everybody benefits from it. And especially when the parties have been through transactions before, it's difficult when one party has never sold or bought a practice because even if the dual representation is completely fair to both parties, they're just not aware of that. Where if they've gone through it before, they can kind of say, okay, I understand all of these terms and everything looks good. So that's something to keep in mind as well.

Yeah, two quick comments on that. Most of the time we've done dual representation representation is when it's actually a partnership Forming. Yeah. And there's definitely some benefits there on dual representation, but not always. There's been other cases where they get their own attorney. The second comment is even in dual representation, I can encourage a buyer and seller to have an outside attorney. Just simply review some things as a final check is not a bad idea either.

Yeah. And one of the best scenarios for dual representation on the legal side is when the parties know exactly what they want. They've come to an agreement on all of the terms, and they're looking for their attorney simply to memorialize that in a binding contract. And when that's the case, it's great. And I'll step in and I'll weigh in on some things if they look too far off and have a conversation about it. But that's where dual representation really is ideal.

Great. All right, carry on.

Attorney responsibilities, timing wise, when to bring on an attorney and both the buyer and the seller. Generally, I say when you're at the stage of letter of intent, bring your attorney in, whether it's to review and help draft on the buyer side or whether it's to review on the seller side. So that's usually the timing as to when to hire the attorney. And then as far as what the attorney does, the first thing they do is they're going to look at the letter of intent and make sure that it looks good and make recommendations on what can be added for a smooth transaction or what should be taken out. Once the letter of intent's in place, then the attorney is going to contact the landlord and contact the opposing attorney and start to negotiate or draft both the lease agreement and the purchase and sale agreement for the practice. So on the seller side, seller side, attorney generally drafts the purchase and sale agreement. So you work with the seller to put everything into the contract, and then once it's finished, you send it over to the buyer and their attorney. Buyer's attorney generally reviews and negotiates it on behalf of their client. So that whole process takes. You know, it varies on timing, but I would say two to four weeks is a. Is a reasonable time frame to get the purchase and sale agreement done for both the buyer and the seller.

Comment on that one, if you don't mind. We just referring everyone to our letter of intent podcast, which we. Which you and I did. Now, we did two episodes on the letter of intent. What is it? And what are the specific deal points? Usually we recommend to be in the letter of intent. That's comment number one. Second comment is there are three primary documents, right, Matt, in the legal process of a dental practice sale. You've got the NDA, the non disclosure agreement. That's number one. Basically, buyer signs that saying that they won't share their information when the seller releases it. Then you have the letter of intent, the loi. Then you have the the psa, the purchase and sale agreement. Am I missing any legal well, I guess you have the lease. That would be definitely a fourth document there any others I might be missing?

Potentially if there's a work back the seller work back agreement. But that's not in all. That's not in all documents. Other than that, I would say possibly a promissory note if there's a carryback from the seller. But I think for podcast purposes the big three are really what what is in every transaction and should be focused on Great.

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Okay, so I discussed the purchase agreement and your attorney's going to negotiate that and get that in place on the lease. If there's already a lease in place, the attorney's role is going to be to review that lease and make sure that there's no terms that are just completely red flags and should be avoided at all costs. But generally, if there's already a lease in place, it's difficult to have that lease changed. So your attorney is going to negotiate an assignment of that lease and attempt to negotiate some additional terms that could help you as when you step in as the new tenant on that lease, outside of the contracts, your attorney should do legal due diligence. And what that looks like is that if there's any contracts that you're going to assume is the buyer, you want to make sure that those contracts are all reviewed and make sure that you're comfortable taking those over. That's going to be a big part of it. And then if there's any other potential liabilities that can come up, if you're the seller and you've had past litigation, or if you're the buyer and the seller's had past litigation, you want your attorney to take a look at what's going on with that and see how it's going to impact the transaction, if at all, and make sure that everything looks good on that front. And then the last thing that the attorney does, and not all attorneys do this, but they should be involved in communicative with everybody else on the team. They should be in contact with the bank, with the CPA and kind of help coordinate the transaction to make sure everybody gets the legal documents they need as the transaction goes on so that there's no delays on that front. So once you have a signed purchase agreement, making sure the bank gets a copy of it, once you get to the allocation section of the purchase agreement, make sure you reach out to the dental CPA to get their input so that you can negotiate those terms. So it really is the dental attorney needs to be kind of involved with everybody in the transaction to make sure everything goes smoothly and gets done.

Great. Can I Just drop a line of recommendation to any seller or buyer out there listening to this, getting ready for a transition. Make sure to set up formal meetings with your team because CPAs are busy. Attorneys are that times too. Everyone's busy and sometimes it's just sort of a juggle with these practice sales. And you need to set up a meeting, schedule it for an hour and probably plan for three or four meetings. Maybe do it every two weeks, every, even every week if you want to forget a 30 minute huddle. But those are just so important to bring everybody together, know in whose hand the baton is at a given moment and to address items that come up. So have those formal meetings. All right, Matt, thanks for all of that on the attorney. Moving on to the banker. The banker is pretty self explanatory. Here they are providing the financing or the money to pay the seller and the buyer will pay them back. I'll just make a couple comments on the banker. Bankers are party enablers and they're party crashers. I love the bankers. They do such a good job. They service provide very well. I say they're party enablers because these deals wouldn't happen without them generally. But number two, they can be party crashers because they will sometimes provide, in their opinion, what is a value a lot less than what the seller wants. And that's because they have their own underwriting team who looks at all the numbers in their own models. They have their own models and even among the banks they have a little bit different models. There's generally some similarities there. But their models may come up and say we're only going to lend $900,000 on this practice, not the 1.2 million that you want. Dr. And then the seller has to decide, okay, am I going to drop the price or am I going to like stand firm and request a carryback where the seller will act as a bank for the second unlended portion of the loan. And if they do, does that affect the primary lender's cash flow analysis too, the buyer? And does that adjust the lending amount to that bank? So it's sort of a circular reference there, but that's the role of the bank. The banks provide to the buyer really two letters. One is a proposal letter and that's them saying here's what I believe we'll be able to lend on. That doesn't go through full due diligence and underwriting. And then they will provide a commitment letter. And the commitment letter, it's gone through underwriting, they are committed. It might stand available for two months or something like that before they can rescind it. So that's the letter you want, if you're a buyer, is a commitment letter, because now you know you've got that in hand. Any comments on the bank on that?

And with the commitment letter, generally, they're going to give you a fixed interest rate that you can count on for the term of the commitment letter. It might be 90 days or maybe 120 days. That's incredibly important right now. So once you get that, make sure that your team and everybody knows, knows that this is the deadline, because with interest rates changing and going up, if the practice doesn't close within that period, you're going to have to reapply and run the risk of your interest rate going up.

Yep. And I will say that most of These loans are 10 years, some do 15 years, but the majority are 10 years at a very competitive rate relative to what the industry standards are. Because dental practice loans default so rarely, there's such low risk that banks are very eager to lend to dentists.

Yeah, and this goes for everybody that we're talking about today. But I want to start with it on the banker side. It's incredibly important to work with a dental specific banker and somebody who just does dental practices or who's done a lot of them in the past. I can't tell you how many times I've worked with a buyer who works with their local banker who does general business lending or SBA lending. And, you know, we spend two months going through the process, getting them everything they need. And there's just something that they didn't foresee going into it. And at the 11th hour, they're not able to fund the loan or it delays it if they are able to fund the loan. So by working with a dental specific somebody who's familiar with this from the very first conversation they have, they're going to know the questions to ask and they're going to tell you what needs to be done to get the deal done. And just their closing on time, I would say, goes up hundreds of percent. So it's well worth it to find somebody, even if you don't know them previously, to reach out to them and work with somebody who's done these before.

Yep. Go on the directory on practiceorbit.com to find bankers. You can search healthcare bankers, and some of the big ones have them, of course, bank of America, Wells Fargo, Citi, a lot of regionals have them. There's provide, formerly Lendevr, there's a lot of These good banks out there, there's so many I didn't name out there. And a lot of bankers really take a lot of personal care in those relationships and are just really good service providers. One of the things I will mention too about that is if you get a banker who's not a healthcare specialist or dental lender, the rates usually aren't nearly as good. They're usually variable rates. They don't know how to risk it very well. And whenever a bank doesn't know how to risk assess very well, they give you a product that just isn't nearly as desirable because they're trying to protect themselves. Where the dental lenders understand the risk so well, they can bring down sort of the interest rate or make the terms more favorable to the borrower because they can better assess their risk. Second comment is big practices practices doing north of three and a half, four million, maybe they're a multi specialty practice doing five, six million dollars are going to find it very difficult sometimes to find a traditional buyer and a traditional lender. Not always, but often because it becomes a bigger loan, sometimes the risk gets higher there. So a lot of these ones are selling to larger managed entities, institutional dentistry, DSOs, DPOs, that kind of thing. Just FYI there. Okay, let's move on to the second category. I think this will go a little bit faster because the CPA and the attorney and the banker are required in every deal. There's a lot with those ones optional but very common. The broker. Let me start with a comment here about the broker, Matt. We are agnostic as to whether a seller should use a broker. We believe that there is absolutely a place for a broker in the dental transition space. We are not anti brokers and here's why. A lot of times sellers think that they will go ahead and sell their practice on their own. What they come to find is that it's hard to sometimes find buyers. Even if they can find buyers and practice Orbit is intending to make that easier, of course to find buyers, but they have to vet buyers. They have to manage a lot of communication. A lot of times there's confusion about what the listing price should be, just confusion on the overall timeline and sequence of events. Brokers can create education and clarity around that. So here's what I see brokers doing. Number one is they can sort of do an initial price assessment. What should you sell the practice for? Now I find that brokers come in different shades as CPAs and attorneys do. And sometimes they will come in promising way too much just in order to get the listing. Once they get the listing, the seller is locked in for a period of time, sometimes it's six months or more and they can't go to another broker. And if they sell it on their own, they find their own buyer, then the seller still gets a commission for that even though the broker didn't make the market. So you have to be realistic. I would say leverage your cpa, maybe a dental banker that you know to find out what is a reasonable price that you can expect. So but brokers can help you come up with a price. They will help find and vet a buyer. They will help negotiate the price. They will handle communications and just as importantly, emotions. And they can move it along. One thing I really want to highlight with brokers is that they represent the seller. Some of them are just generally good people. I think they're all generally good people, but some of them will take the buyer's sort of situation in more consideration and try to find something that feels closer to a win win. But in reality, sellers are paid exclusively by this. I mean, brokers are paid exclusively by the seller. And there is no, in the industry, as far as I know, there is no buy side broker like you have in real estate. So when the seller's broker gets paid usually his or her 8 to 10% of the sale price, the seller's broker retains 100% of that. The other thing that brokers will often get paid for is when they refer a buyer over to a bank. Some banks will pay a point or 1% of the loan amount to the broker. So the broker could theoretically get 10% plus the 1% point from the bank at 11%. And they very, very much want that 1%. As far as I've seen, they pretty much all take that 1%. Now we at practice CFO have had a broker to help some of our clients. Historically we have decided not to take that 1% because we want to maintain objectivity for who we recommend for buyers to get loans because we want the buyers to get the best loan possible. At the end of the day, as long as the bank can lend and get the seller their sale price, then all is well. All right, those are my comments on the broker. Matt, why don't you chime in here?

Yeah, so I think you hit the nail on the head with all of what the broker does and what the value is. One of the things that I really appreciate brokers deals for is their ability to, they're the one party to kind of help coordinate and make sure the deal gets to the finish line. And so they call and get updates from everybody and just kind of make sure the transaction's moving along. Your attorney can do that, your CPA can do that. You can do that as a buyer or seller. But the broker really helps to make sure everybody's meeting the deadlines and making sure the transactions progressing, which is always helpful.

Yep. Want to just send out my my love to brokers in some ways because they have to have a thick skin because it can get very emotional and heated in these deals if the attorneys sometimes and no offense, Matt, I think you do a great job at avoiding this, but attorneys can really stir up emotions. CPAs can oftentimes stir up emotions and make mountains out of small things. What a good broker will do is help so of distill down these points in a way that says here's how you should take this in. Here's what matters, here's what doesn't matter. We shouldn't get emotional about this. This is fair. This is not fair. A good broker will do those kinds of things and it can be very valuable. And so I just want to emphasize that we believe that there is a place and will continue to be a place for brokers for a lot of transactions. Now, brokers will admit, I think it's around 50% or so of dental practice sales don't use a broker. So clearly there are plenty of practices that feel they can do it without a broker. And if you have a good dental CPA and attorney, I think you're more likely to be able to move through the sale process relatively smoothly. But there are definitely reasons for a broker. Now I mentioned practice CFO has a broker on sort of its peripheral business for some of our clients. Just to reiterate, practice orbit, the technology is not a broker. It is not intending to replace the broker. It's simply intending to help both sellers and brokers and buyers and bankers, attorney, cp everybody to have a technology that makes that process much more effective, much more smooth, with a lot more clarity for all parties involved. And like any good technology is intended to do, it's intended to take a process and make it just a whole lot easier and better and enjoyable to do so. That's the broker. A lot of good comments there. Now let's talk about the escrow agent. I actually am only going anecdotally on this, but it feels to me like half of the deals, maybe a little bit more, have an escrow. And what the escrow is doing is acting as an independent third party to hold funds on the Sale. So the bank would, if I'm correct, the bank is going to have send the money over to the escrow company. The escrow company holds it until the purchase and sale document is signed and all sort of any liabilities, title, all that stuff is clear and released and clean, and then it remits the money to the seller, and then they provide an escrow document itemizing out every expense sort of related to the point of sale that the proceeds on the loan are going to be allocated to, because it's not 100% of the loan proceeds go to the seller. A lot of the loan proceeds will go to pay off the seller's debt. So it'll go directly to the seller's bank. It'll go to pay some of the title company and maybe some of these other costs. Sometimes they'll hold back a little bit of money until sort of this happened recently, until the state of California releases a seller as saying that there's no payroll tax issues. And once that's cleared from the state of California, it will release this final amount. So all of those things that the escrow company will handle, and then the CPAs will get that document. And it's very helpful then to accurately report the accounting in what's called the general ledger and in the tax return for the taxes on the sale.

Yeah. One quick note. Escrow also will run lien searches with the state and county and make sure that there's no underlying debt that the seller might not even be aware of. So they'll kind of do an additional level of due diligence, which is helpful in most transactions.

Yep, exactly. All right, Matt, we've got a choice to make here. We are 45 minutes into this. We've gone through the required. We've gone through the optional but common, which is the broker, the escrow, and really the equipment inspection person. The supplier is extremely valuable. And I recommend that every buyer in the deal have a supply rep who they feel good and confident with to go in and look at the dental equipment. How many out in vacuums? I don't even know what these are, exactly what they do, but how many vacs break a year or two after the sale? It feels like every single time. And they look at the quality of everything. And that would be the last one. So, Matt, do we jump in, take five more minutes and talk about optional but much less common, or do we want to punt that for another podcast?

I'm okay. I've got another five minutes.

Okay, great.

I say we knock them out, because I don't think there's too much that goes into them going to the supply person. I'll quickly say, from the legal standpoint, in the purchase and sale agreement, there's a provision that most of the time says all equipment is purchased as is, meaning that as the buyer, you get to go in and you get to insp. And if you find anything wrong with it, that's the time when you can have the seller fix it. But after the sale is finished, generally that's your equipment. And if it breaks down the day after the sale, you're responsible for fixing it. So having a supply rep come in and inspect all the equipment for you and give you their opinion really is going to go a long way to make sure that everything goes smoothly.

And sometimes I think the buyers will use that to evaluation to negotiate the price a little bit. If they know they're gonna have to come out of pocket $70,000 to sort of get equipment current and everything, then they may negotiate down the price a little bit. Okay, on to number three, then. Let's rock through these. You and I both run very busy days with our businesses and our clients, and that's why I asked. I know you had something here right now, but let's see what we can here. So the next one is a practice management consultant. I personally love it when a buyer brings in a practice management consultant consultant because they will do what I call the clinical due diligence. And the clinical due diligence is they will look at patient records, do a sampling of the patient records, see how much treatment is left. Did the seller, as I've often heard it, say, take all the meat off the bone just before selling? They can look at case acceptance rates. They can look at the processes or the operations around the billing in the practice and just get a real good flavor for how the practice is running internally. And then go to the buyer and say, here are some things that I'm noticing that are good. Here's some things you're going to want to be aware of, and some things you want to get in action right away. One of the things I sometimes rely on the practice management consultant for is if this is a Delta Premier practice where the seller is still getting, say, $1,200 for a standard restorative crown, and the buyer is not going to be able to get that because Delta Premieres is going away at the point of sale, the buyer is not going to get that. How much of a reduction in collections are we going to see because of this Delta Premier issue? I don't go into practice management softwares, nor do I look at contracts between the dentist and the PPOs. And so I rely on a practice management consultant to help quantify that. From a cash flow perspective, I find that to be very helpful. Any comment down on the pmc?

Yeah, they generally have all of the business advice, you know, from the legal side we look at, you know, how the practice has operated in the past and make sure that liability is taken care of and that you're getting exactly what you pay for and similar on the CPA side. But when it comes to business discretion, you know how much money is being spent into advertising and how effective that is, what their production is. On certain types of treatment, things like that, you really want somebody who's very familiar in the business of dentistry and how to increase those and to be able to advise on whether it can be increased and what it's going to take to do that.

Yeah, and on the practice management consultant, there's some big ones out there where you sort of sign up for this a year and you definitely pay a chunk of change. But you get this kind of very experienced big firm. And then there's other sort of small boutique, one person practice management consultants, many of whom used to be front office managers, that kind of thing, or even dentists who can come in and help you in more of a kind of a unique, tailored sort of way. All right, onto the next one, which is the valuation expert. I sometimes see these in deals where the seller or even the buyer will hire what's called an abv, which is somebody who's accredited in business evaluations, who will prepare a formalized report stating the value of the practice. And they'll do these different methods of valuing a practice called the market approach, the income approach, the asset approach, and then they'll come up with what is the value? I've seen that a few times. The financial planner, straightforward seller should have a financial planner. Personally, I think a buyer should have a financial planner. What is this going to mean for you financially if you, if you buy this practice? On the personal side of things, what's your budget? Is this going to support your budget? And the financial planner is probably going to have to rely on information from the CPA in order to answer some of those questions. HR attorney is the attorney who can come in and say, is there an employee handbook? Are they following the laws of the state around breaks and lunches and overtime? Gosh, overtime has been a sticky issue for a number of clients, especially when they're paying bonuses and how they allocate the bonuses and whether or not they have to pay some overtime rates on bonuses. There's a lot of little rules around this. And I know you're not an HR attorney, mat that's from my understanding, it's not your scope, but there are dental specific HR attorneys who can come out there.

Yeah, absolutely.

My only comment on that is sometimes you don't want to rock the boat on day one. Sometimes that's like a, like a tier two thing. Like you get in the practice, just understand it, get your feet settled, let the staff know you're not changing anything up right away, that after six months or a year, you're going to lift your head and you're going to, you're going to revisit some of these elements of the business. I think that would be one of them. The other one I'll mention too, would be a lease specialist. Now, Matt, I know you as the attorney will look through a lot of the terms of the lease. I know the accountant or CPA financial advisor may look at the lease cost, but there are people out there who will help who know lease negotiation and will represent the buyer to the seller's landlord or the landlord's representative to negotiate the terms of the lease. I don't see this very often at the point of sale because usually the seller is locked into an existing lease and there's nothing to negotiate because they can't get out of it. Hopefully they can just assign it to the buyer. They're still on the hook as a guarantor until that lease ends. It's at the end of a lease term sometimes that I'll see a lease negotiator come in to the discussion.

By lease negotiator, I would say it's just a commercial real estate agent who's familiar with dental office leases. And the major benefit there is that they're able to use as leverage that you potentially would move to another location. So it gives them a little bit more leverage within the negotiations. They can say they can bring up comps, they can do all of this other stuff to try and get you the best deal possible.

Yep, exactly. All right. Hey, I've got the booth number.

Of our exhibit at the CD8 is booth number 1380. So we're going to try to release this on Wednesday, which is the day, I think the day before cda. So if you hear this by chance, come Visit us. Booth 1380, practice orbit. Matt, I think that summarizes it. Do you have any closing comments on the individuals involved in a practice sale?

No, I think that's kind of it. Whoever you work with at the beginning, it's always a good idea to ask for recommendations because, you know, some people work good together and it's a small community. So ask for recommendations and interview multiple people before choosing your team.

Yep. And I know, Matt, you are an active dental attorney still representing buyers and sellers. My firm, practice cfo, is an active CPA and financial advisory firm representing buyers and sellers on the CPA site. So we stand open for business. There's a little pitch for ourselves. Lastly, on our show notes, we'll have the list of these three groups, the required, the optional but common, and the optional but less common groups. Refer to the show notes. And Matt, thanks for being on the show.

Oh, absolutely. Thanks for having me. We.