Understandably many buyers are nervous about what the Coronavirus shutdown means for their plans to buy a practice. Are practice values going down? Should I wait? How will I know if a practice’s patient base is still loyal? Will treatment acceptance rates go down?
All excellent questions.
And the answer is: no one knows.
I’ve already written about 3 reasons buying a practice NOW is still a good idea, despite the shutdown. The feedback I’m hearing from most buyers is, “Wow. I thought my corporate job was safe, but I’m realizing that if I’m an owner my income can only go down. As an employee, my income can go to zero through no fault of my own.
So the vast majority of buyers are moving forward with their plans. But they’re protecting themselves.
So some buyers, working closely with their attorneys and banks, are protecting themselves with a slight change to their deal and using what I’m calling a “Contingency Clause.”
The way a contingency clause works is that a buyer keeps an agreed upon price in place (or, a future buyer agrees to a valuation performed without knowledge of how the shutdown affected a practice). But a portion of that price is contingent on a practice meeting certain production or collections targets.
Here’s an example of how this would work:
Let’s say a current associate is looking at a practice with a sales price of $750,000. The numbers all check out and in normal times, the $750k would be a totally fair price, but no one is sure what’s going to happen with the practice after the shutdown. The seller and broker, understandably, are saying, “Relax! This practice is totally solid. The patients and staff are the most loyal you’ll ever meet. You’ll be just fine.”
So the associate submits an offer with $750k as the offer price, but with a contingency clause in place that says the price paid is $650,000 at closing, an additional $50,000 6 months from closing and another $50,000 12 months from closing contingent on the practice meeting certain production or collections targets.
This is the buyer’s way of saying, “Awesome! I can’t wait to pay you full price for your practice as long as we all see that the patient base is as loyal as you promised.”
Keep in mind a couple of things with this approach. First, sellers are understandably reluctant to accept this type of offer relative to the cash upfront. It’s not their fault the economy shut down, either. Tread carefully here. Second, you have to work closely with your attorney to draft this language AND closely with your bank to make something like this happen. After all, they’re the ones releasing funds and they need to be on board.
My advice: waiting an additional year or two to buy a practice because you’re unsure of what’s happening in the world is losing time you’ll never get back. True safety in your career comes from being in charge, and in dentistry, that means owning your practice. But be smart about how you approach it.
Read More:
Business Insurances You WILL Need After You Buy Your Practice (and 2 you MIGHT need)
Ask This About “Own Occupation” Disability Insurance When Buying a Dental Practice
Should You Use a National or Local Bank in a Dental Transition?
