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Ontario Dentist - April 2000
by Timothy A. Brown, A.L.A.
I am often asked about the proper procedures that should be taken in the event of the sudden death or disability of a dentist. I have acted on behalf of many families who have been in these unfortunate circumstances and the greatest misfortune of all is that we are not always able to communicate the fundamental steps to protect a practice in this time of need. The following will outline some of the planning and preparations that should be taken before this happens.
Before I make my recommendations, I want to share a brief story with you. In the fall of 1998, a dentist passed away very suddenly. The widow was uncertain about what to do and she chose to allow a young dentist, who did not own a practice of her own, to cover the patients for the first few months after her husband's death. Their agreement stated that the dentist would treat the patients to the best of her ability and, after a month or two, she would tell the widow if she was interested in buying the practice. After a few months had passed and nothing had progressed with regard to selling the practice, I was contacted and an appraisal was done.
The problem that occurred was that, as an objective appraiser, I must recognize the passage of time and the fact that the associate may have begun to have influence upon the patients. It is a market reality that a practice in this instance is appraised at a lower value than immediately after the owner's passing. This is because any prospective purchaser will have serious concerns about the stability of the practice over the previous two months. What kind of patient retention has been experienced? Does the associate have lists of patients and are they on a proper agreement? Have the patients been given clear communications about the replacement dentist who will be buying the practice? What is the staff saying to patients? Why doesn't the associate buy the practice? These issues generally cause a purchaser to be skeptical and the result is a lower price to be offered. Do not underestimate the power of suspicion and how it affects a transaction of this nature.
As a result, I appraised the practice at almost $50,000 less than I would have if I had been contacted immediately upon the owner's death. The purchaser then used the issues mentioned to negotiate an even lower price. The end result was, had the business been put up for sale within weeks, not months, of the owner's passing, the practice could have sold for up to $75,000 more. And it certainly was not the intention of the owner to leave his estate in any financial need during this period of grief and uncertainty.
There is an easy way to prevent this from happening:
- Have your practice appraised now and keep a copy of the report with your valuable documents. At the very least, sign a document and put it in your will stating the name, address and phone number of the appraiser you want. Insist that someone take action to contact the appraiser within 48 hours.
- Place a "Letter of Direction" with the appraisal that clearly instructs your estate to contact the appraiser within days to get it updated or to get started.
- The executors or family should immediately make an offer to sell to any existing associates, if applicable, but the survivors should still have the practice listed with a broker at the same time. Give the associate a time frame in which to decide; otherwise, they will lose the first right of refusal and the open market will be given a chance to make offers.
- Give the associate a maximum of 30 days. No longer! Make sure the associates are aware that a broker is currently looking for other buyers in the event that they do not purchase. This will be certain to make them act quickly and prudently.
- If there are no existing associates, do not hire a dentist from the area to treat the patients, particularly one who does not already own a practice. No matter how nice local colleagues are, doing so can pose problematic challenges.
- Hire a professional locum dentist who is mature, experienced and will pose no threat to the practice. Purchasers will not be nearly as concerned if this is the interim scenario. Young dentists or local friends who come in to treat patients will indirectly solicit patients away - whether they mean to or not. Purchasers will perceive them as a threat and will ultimately offer much less for the practice. (A good resource is the ODA's Locum service. Contact the ODA's Call Centre at (416) 922-3900 or 1-800-387-1393.)
- Do not let probate, lawyers or other issues affect the offering of the business for sale. It is very important to get it on the market and get purchasers moving fast. Time is of the essence and value will continually drop unless action is taken quickly.
- Do not allow patients to start wandering to other dentists by giving them little or no information. There are scripts available that tell staff how to change the answering machine, what to say on the phone, and what to say to patients when they come in to offer condolences. I also have many sample letters that have been written by widows and mailed out in the interim that encourage patients to stay with the practice while a "suitable" replacement is found. All these little steps contribute tremendously to patient retention.
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Do not underestimate the importance of these procedures. I have seen many instances where friends have offered to help and they have ended up doing more damage to the value of the practice than service to the patients. This happens innocently with complete absence of malice. It's just the way the market works.
I have sold dozens of practices on behalf of a widow or estate. In each instance, the final sale price is directly related to the speed with which things happen. Do not hesitate to take action. Do not fail to plan to make sure that those who must make decisions are equipped with your clear and concise instructions.
Remember that you should know who you want to appraise and sell your practice when you decide to retire. Does your family or executors know who to call if you are unable to communicate with them? They probably don't. Please follow the first two steps at the very least - and do it now. I hope the rest of the steps never need to be taken but, if they must be followed, please leave sufficient information so it may be done quickly and your practice value does not drop. I would even go so far as to suggest that a copy of this article be put with your instructions or given to your spouse.
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