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					     ROUNDTABLE


     Dollars and Sense
        Most orthodontists will admit that the business aspect of running a practice is the most challenging. Whether you are finishing
     your orthodontic residency or busy providing excellent treatment to your patients, it is not always easy to set aside the time to
     prepare for the future, particularly a practice transition.
        Because a practice transition encompasses every area of your practice, we asked our panelists to share their insights into
     important considerations for practitioners on either side of the transition process. Sonny Elliott of Elliott & Associates, Reno, NV,
     emphasizes open lines of communication; Bill Sutton of Sutton Consulting, Greensboro, NC, discusses the importance of recall
     value; and Randall K. Berning, JD, LLM, of Berning & Affiliates, Inc., Naples FL, advises about the most common transition
     pitfalls. (Provided below is Mr. Berning’s Roundtable article content as it appeared in the magazine - with permission.)


      Avoiding Pitfalls                           earnings based valuation, have a
                                                  signed employment agreement with
                                                                                                     Going First Rate. Don’t incur
                                                                                                significant discretionary expenditures
          Randall K. Berning, J.D., LL.M.         a covenant not to compete. This is            prior to securing the valuation or
         President, Berning & Affiliates, Inc.    true even if you like each other and          you’ll suffer the consequence of a
                                                  practice together swimmingly. A part          lower value. For example, don’t go
                                                  of time honored earnings based                for the neat facility build out or the
                                                  valuation theory is that if there is a        fancy new equipment just prior to
                                                  threat to the ongoing earning stream          securing the valuation (but its fine to
                                                  of the business then the                      spruce up with paint and new
                                                  capitalization rate should reflect the        carpet). Most professional valuation
                                                  threat — consequently, the value              analysis will focus on a 3-year
                                                  would be discounted from what                 retrospective look at the expenses
                                                  would otherwise be indicated by the           and earnings of the practice. With a
                                                  current revenue stream.                       stable earning and expense history
                                                       What a mouth full! In the context        for practice entity, projecting the
                                                  of orthodontic practice transition, it        result of a buy-in, buy-out, or sale
                                                  means that when you start with an             can be very straightforward. But
                                                  associateship, it can be helpful to           interject a recent sizable expenditure
     Without a defensible practice                have a written employment
                                                  agreement with an arguably
                                                                                                — one that can have longer-term
                                                                                                payback leases or a note to the
     valuation there will likely be no            enforceable covenant not to                   owner — and once again, the
     practice transition consummated              compete. If the associate leaves, the         valuator must factor the risk of
     between a practice owner and a               orthodontist would presumably not             potentially lower earnings. This can
     prospective buyer or partner. Yet            set up within the patient drawing             be the case even with an
     even with the importance of this             radius of the practice. The revenue           orthodontist or a group saying that,
     linchpin to transition success, I            stream of the practice would be               with the additional expenditure, the
     routinely see parties that take little or    preserved since there would be no             practice will likely experience more
     no time to understand and avoid              credible threat. Even in the minority         starts with a new marketing plan for
     common valuation pitfalls. To help           of states that do not provide for an          the new doctor. The valuator can not
     secure a good valuation work                 enforceable effective covenant not to         rely on good intentions, just actual
     product and a smooth practice                compete, a well drafted                       numbers.
     transition, keep the following in mind:      non-solicitation and trade secret                   Understanding A Good
         Owners & Associates. To avoid            provision can help, avoid a discount          Valuation. Once a buyer or a
     an unexpected discount to an                 to value.1                                    prospective partner and his or her


60   OrthodonticProducts September 2003
ROUNDTABLE
advisor reads, calculates, and                   The Important of Strategic            Reference
considers the supporting information,      Planning. Ben Franklin had a                1. Berning RK, Transitioning the
you either will move on with the           favorite saying that I believe applies         Orthodontic Practice: Seller’s Concerns
                                                                                          and Perspectives, Seminars in
specific terms for the transition or be    to astute practitioners, “Forewarned           Orthodontics, 2002;8:243-248.
stopped. If you are stopped, it can        is forearmed.” In the context of any
generally be traced to a couple of         CEO looking out at the future,
areas. It might be because the owner       including orthodontists, it means be
secured the valuation from his or her      alert to how others have traveled the       ___________________________
own accountant or financial advisor.       transition and valuation byways. The        Randall K. Berning, J.D., LL.M.,
The buyer may feel, rightly or             most effective orthodontist CEOs            attorney and consultant, is president of
wrongly, that the work product is not      plan years ahead for any major              Berning & Affiliates, Inc. The firm has
objective and so will seek an              initiative. To do otherwise is to end       served orthodontists and dentists for 24
independent valuation. You might be        up taking what you get rather than          years in planning and implementing the
                                                                                       transition and expansion of their practices.
stopped because the valuator did not       what you want. The method for               Mr. Berning has authored over 100 articles
use a recognized valuation                 approaching significant practice            and notes, is the co-author of two ADA
methodology. Odd ball approaches                                                       publications, Associateships and Valuing A
or rules of thumb just don’t cut it                                                    Practice, the co-author of the AAO
                                                                                       monographs on valuation and practice
anymore. In both the American
Association of Orthodontists’
                                              “The most                                financing and is the publisher of The Expert
                                                                                       Series for Dentists™. He is past Adjunct
monograph Practice Transition
Alternatives for Owners "Guide to
                                               effective                               Professor of Dental Jurisprudence and
                                                                                       Director of Practice Administration at the
Orthodontic Practice Valuation for
Residents and Practitioners" and the
                                            CEOs plan years                            University of Illinois, College of Dentistry
                                                                                       and is adjunct faculty at UCSF School of
American Dental Association’s                 ahead for                                Dentistry and the University of Maryland
                                                                                       Baltimore College of Dental Surgery. Prior
publication Valuing a Practice: A                                                      to entering private practice Mr. Berning
Guide for Dentists, the earnings              any major                                served as an Assistant Attorney General for
                                                                                       the State of Illinois. The firm has offices in
approaches are highlighted and for
good reason. There is a recognition           initiative.”                             Naples FL, Chicago IL, Washington DC, and
                                                                                       Burlingame CA. He can be reached at
that earnings-based methodology                                                        800-999-8121 or e-mail at
versus the much less sophisticated         objectives, such as implementing            RKBerning@BerningAffiliates.com or at the
rules of thumb or asset-summation          practice associateship, buy-in,             firm’s web site www.BerningAffiliates.com.
approaches gives a more defensible         buy-out or phase-out, is though the
valuation work product. Another            knowledgeable use of strategic and
                                                                                                   © 2003 Randall K. Berning
potential road block can be owners         business planning. When a
that do not recognize that, rather         well-developed multiyear plan is
than just a strictly financial analysis,   executed, productivity is targeted
the entire practice will be examined       and profitability is maintained for a
including practice location and lease,     reason — to ensure the future of the
design and condition of the office,        practice and to provide a valuation
analysis of patient categories and         result that reflects the true vitality of
percentage of patients with                the practice. As a result, the futures
insurance, staff stability and             of current and prospective doctors
continuity, management systems and         are assured. 
marketing.




                                                                                        OrthodonticProducts           September 2003 61

				
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