Fuzzy Transition Numbers

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Many early Boomer Dentists are preparing to make a move. Hopefully, they are investigating all the transition offerings as the numbers being contracted are a concern to me. Is anyone reading the contracts prior to beginning a five-year buyout? There are many unfulfilled expectations, disappointment, anger and then attorneys are involved. 

Approaching a five-year partnership and ultimate buyout, the selling Doctor believes he will nuture a younger dentist who will pay 50% of his $1M price to start. He believes there is no concern about money because by bringing someone in, even without patients or a practice to merge, the selling doctor will be able to continue working on all his favorite patients, there will be no change in his net, and the practice will grow to cover all expenses. 

The purchasing Doctor believes, for 50%, she is buying half hygiene, half existing patients and half the new patients. She also feels she will grow into the larger treatments, have a say in the leadership AND receive half the net.

Math Problem: how can a solo practice of $1M with a net of $400K which has been marketing and is known in the community, suddenly acquire another Doctor with the expectation of each receiving half the net, and yet the selling Doctor is told he can continue as before with no drop in net? If the practice could grow to support two net figures without a drop, don’t you think the selling doctor would have accomplished that by now? Crazy math.

A $500K purchase results in $100K repayment a year, or $8K a month. Without growth, the net for each is $200K. The new Doctor’s payment is $100K, leaving her with $100K net. In two years, the seller would have given up $400K in net for half the practice and now has a partner.

In some of these transitions, the selling doctor tells his staff the new Doctor is the associate, rather than partner. The staff is loyal to the selling Doctor and patients are not steered to the purchasing Doctor. After a year or two of loan payments and little net, the purchasing Doctor is frustrated but has no one to talk to as she really was not represented in the sale. The broker worked for the seller. 

Both sides are frustrated because the expectations of numbers are not fulfilled. A beautiful transition turned ugly because the dentist did not do the real math and both parties were naive.