THE EDITOR'S CORNER
In the sale of an orthodontic practice, most of the advantages have to be with the buyer. Even if the seller receives top price for his practice, he will only be getting one year's gross plus undepreciated value of equipment, furnishings and fixtures plus the cost of his remaining supplies. This is not nearly what his business friends would expect to realize from sale of a business with a similar net income, and not an amount on which one would plan to retire. In addition, most practices are not sold for a top price.
As far as the buyer is concerned, he is getting at least the temporary advantage of not having to invest up to $30,000 to establish an office; he is getting a reasonably certain income for the ensuing two years, even allowing for a small attrition in the transfer; he is getting a known number of pretreatment observation patients, of which some are bound to become active patients in his practice; he is getting the advantage of time he will not have to spend building a practice to its present level; he is getting the opportunity to establish a relationship for referral of new patients among a large number of present patients and their dentists; and he is paying for all this usually over a period of time and out of the very income that he is buying. If ever there was a formula for instant success, that is it, if the buyer does not take on a practice too large for his ability.
As far as the seller is concerned, he is receiving the agreed-upon selling price and he is relieved of the obligation of completing the treatment and retention of his patients. He is receiving between three and four years of time. The most critical ingredient in completing the sale of a practice is probably the anxiety of the seller, how badly he wants to sell.
Many think that the seller has the best arrangement for the smooth transfer of his practice and possibly at the best price if he plans for it in advance by carefully selecting a practice associate and building him into a full partnership practice. The terms of the sale of his interest in the practice are written into the partnership agreement and the full value is preserved by the very nature of the partnership, whether the buy-out is by the existing partner or by a new orthodontist coming into the practice.
On the other hand, there are disadvantages to partnership practice and many orthodontists prefer the singular satisfaction of solo practice. If they do, they must realize that their negotiating position in the sale of their practice is far better when drawing up a long term agreement for a partnership practice than it is when offering a practice for sale for reasons of retirement, health, death, or change of location. You run out of dickering time either actually or psychologically or because protracted negotiations can have an adverse affect on the referral pattern of a practice.
If one considers going the long term full partnership route as against an immediate sale of an orthodontic practice merely to assure a 100% selling price, he must realize that this can only occur if the practice doubles in the time the new partner is there. If the practice were to remain the same, then the original orthodontist would be a loser. He would lose the time, he would have had the increased expense of the partner's salary or share and the other increased expenses attendant on a second orthodontist in the same office. While earning substantially less during the time between taking on the potential partner and selling out one's share in the partnership, the original orthodontist would also get no more than one half of whatever basis in assets is chosen to derive the value of his share of the partnership. As against this no-growth situation, one could contemplate any way station in between no-growth and doubling, but if the contemplated period for building this equity is only a few years, in the present economy in most areas it would be unwise to contemplate doing better than doubling. It would be realistic to contemplate doing less than that. So, it would appear that a partnership established for the purpose of sale is not advantageous and that if one decides to sell his practice, he should sell it at the going market. He will probably not do worse financially and he will buy himself a good deal of time.
In presenting material on the sale of an orthodontic practice in JCO (December 1973 and January 1974) and future material on partnership agreements, we are trying to shed some light on important areas of orthodontic practice about which very little has been written. It is our intention to stimulate our readers and to inform them on some of the considerations and mechanics of such agreements. It is important to understand that details of law and custom may vary from time to time, place to place, and deal to deal. Therefore, while journalism may provide some information, that is all that it is meant to do and no one should undertake to complete an agreement for sale of a practice or for the establishment of a partnership practice without the services of his lawyer and accountant.
