Tuesday, June 23, 2009

Bait and Switch by the Seller of Dental Practice

As the buyer of a dental practice, if you haven't heard the message yet, here it is again, do your due diligence!

Can there really be bait & switch when selling a dental practice? Absolutely, here are a few examples of items a buyer NEEDS to address early on in the due diligence process to ensure that the seller or their advisors won't pull the old bait & switch:

1. Seller compensation as an associate of the buyers - Many advisors will prepare forecasts of the target practice in the hands of a buyer and list the sellers compensation at say, 35%, showing how wonderful cash flow will be. Then, during negotiations, they will ask for 40% + other seller expenses.

2. Seller owned real estate - The valuation was prepared with a certain rent rate per square foot as are the forecasts. Then, during negotiations, IF real estate is not to be sold, they ask for a higher rate per square foot. Seems to me if it was "fair" for valuation and forecasts, DON'T suggest now that the rate should actually be higher....unless you plan on revising the valuation DOWNWARD to reflect this increase in expense.

3. Seller has a spouse as an employee and earning $x per year. Valuation and forecasts do not adjust the compensation with the explanation that the compensation is fair. Then, during negotiations they ask for a higher compensation for the spouse to bring them "in line" with the current market for pay.

4. Forecasts indicate seller is willing to reduce their time to working 2 days per week, down from 4, so that the buyer can ramp up their production & accelerate their time with all the patients. Then, during negotiations, seller decides their not ready to reduce their schedule more than 1 day which throws a wrench into the buyers plans.

5. Valuation and forecasts reflect staff wages at $x and they've been fairly consistent for the past couple of years with normal increases. Then during negotiations, the staff, or certain staff members get significant raises, like a parting gift from the seller which the buyer will ultimately be stuck with.

These are just some of the examples of bait and switch I've seen representing buyers. Be aware of these and any other areas where numbers can change after purchase at the hands of the seller. If there are any numbers that the seller can control OR can negotiate, address them early on in your due diligence process.

For example, if the valuation and forecasts show rent expense at $10 per sqr foot, first, do some due diligence to make sure that is a fair rate and second, ask the seller and their advisors early in the game if they believe that to be the fair rate and to declare that it is fair and it will be the rate used in your lease agreement....unless of course you determine that it's actually higher than market.

This first appeared on NewDocs.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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William said...

I experienced the bait and switch first hand. The seller and I signed a letter of intent in which we spelled out the basic terms of the purchase, and I put a "down payment" of several thousand dollars in an escrow account. The seller then decided he did not care for the terms of the agreement, didn't want indemnifications in the purchase contract and completely stalled the agreement past the deadline. At the last minute the seller almost completly re-wrote the purchase contract, so I backed out of the agreement. The broker never returned my escrow payment either! I am starting my practice from scratch instead and am much happier about it.

Tim Lott, CPA, CVA said...

Its too bad things like this have to happen which makes you suspicious of all sellers and pushes you in a different direction.

Good luck with your start up and let us know if you need any help.

Tim Lott, CPA/CVA www.dentalcpas.com