Friday, July 27, 2012
Here is a guest post from a friend of our firm, Eddie Tuvin, recounting his valuable experiences/perspectives as being the part owner of a practice that failed.
Lessons I Learned as a Partner in a Dental Practice
Life looks great, you have saved a few dollars. Paid down the student loans, and opportunity comes knocking on your door in the form of a dental practice for sale. Statistically, the numbers show that less than 1% of dental practices fail annually. It’s your dream to own your own business and become the master of your domain… but you just don’t have enough to pull it off solo, so what do you do? Find a partner.
Partnerships are a great way to start a new practice especially during the ramp up periods when most lenders will require a dentist to affiliate elsewhere for some period of time to insure an income stream to repay their loan.
But despite how excited one may be about the opportunity - stepping very cautiously forward is critical to protecting your investment and your professional future.
RULE #1 – Get everything in writing. Everything should be prepared by an Attorney. Everything should be witnessed and even notarized. Once the analysis is done and you have determined the purchase price is reasonable for an existing practice (or you have a solid business plan and reasonable budget for a start up), find a business attorney. It is absolutely critical that your business is properly established, that you have a proper operating agreement, and that you have provisions for purchase or sale between the partners in case things do not work out. Plan in advance for the worst case. If it happens, you have an exit. If not, you have the security of knowing it was there. If you do not have non-compete provisions with your partner, you have made a huge mistake. When things blow up, which is hopefully rare, the non-compete will save you from potentially losing your entire goodwill and client base. It is critical with a capital C. If your partner complains, explain that he/she are the only party who can make a decision to cause this to take effect.
RULE #2 – Do not take anyone’s word at face value.
I am sad to say this, but in business you just never know. I myself learned it the hard way. Words to the wise, even if you are entering business with your best friend of 30 years, the best man in your wedding, your traveling and golf pal… make sure every document is signed, witnessed and notarized. Yes, notarized. I entered into my business with exactly the person I described above, and 8 years into our business when things went awry, I presented certain documents given to me by my partner as having been signed by our landlord only to be informed by the landlord’s attorney that they were forged.
RULE #3 – Never, ever, ever let someone else handle the “finances” of the business: You must personally be involved as a manager of your own business or you open the door to loss. It’s that simple. Sure you have to spend your entire day, and often evenings and weekends for emergencies, but you have to watch the cash like a hawk. In my practice, the dental assistant was also responsible for submitting the time cards. She falsified her time for years and no one checked her until a retired dentist was retained to provide a practice valuation. And guess what? You can argue that you overpaid an employee but despite the facts, you still owe them all their current pay or the State may come after you. The only way to get your overpayment back is through expensive litigation.
RULE #4 Insurance payments never come to the practice plus entity naming rules:
My hard learned lessons are your education. In my practice, my partner the dentist, decided to help himself to the insurance checks and cash them for his personal use. It was a nightmare I uncovered when I saw the accounts payable rising. The reason was the insurers were paying but our administrator had no idea so we kept billing the patients. An inquiry to the insurers found that the funds had been deposited to a personal account. Sub tip – never name your business similar in any way to your name or your partners. Always create a name like DC Family Dentistry to avoid giving someone with the same name as your practice the ability to cash corporate checks personally. Why? Because even if you present the cancelled checks to the bank, prove ownership, prove fraud, and demand reimbursement – you are highly unlikely to get it. Another tip is to ask your bank about Lockbox services. This is a mechanism to have all your check payments sent to a PO Box, deposit them, and actually get the funds in your account faster. Even better, the banks will even provide reconciliation services. They charge a fee for this but it separates a portion of the payment process away from your staff which gives them more time to do other things and reduce the risk of fraud.
RULE #5 Hours of operation, hours for each dentist to be on duty, revenue generation expectations, holidays --- MUST ALL BE SPELLED OUT!
Put all these details in writing and have provisions to provide for a separation of the partnership if one side does not hold up their end of the bargain. What you do by planning ahead is avoid endless wasted dollars in legal expense later. One of my close friends owns 50% of a practice and his partner is not there enough to make it work financially. He tried to buy her out, she refused. He offered to sell his interest to her, she refused. He went to mediation but to no avail. Now they are in the midst of an ugly lawsuit and the entire value of the practice has been spent. Even the best laid plans do not always work out so prepare for the worst. The extra you might spend now is nothing in comparison to what it could cost if the proverbial breaks. Spell out everything especially who owns the goodwill, patient lists/records, have non-compete agreements and make sure your lawyer covers all the bases.
RULE #6 The stove is hot so don’t touch it. There are lessons to be learned here from my misfortune. In hindsight, the lesson I learned was that no matter how close you are with someone, things can change. In my situation I was dealing with an embezzler, a forger, and a con artist who even had the ability to convince a bank teller that he could deposit corporate checks into his personal account (this is a huge compliance issue at any bank but he got away with it). Fortunately, after 6 or 7 years, I took the matter to court. I won a large 6 figure judgment. That is not always the end of it as you then have to collect on that judgment. So now I am seeking a file sale of the practice to liquidate the business and the dentist is filing bankruptcy and claiming the patient records are his personal property. I have my Security Agreement in place that specifically states these records are collateral and I have a properly filed UCC-1 with liens on the property. I even have three dental practice brokers who have docs willing to purchase the files for upwards of $250,000. The issue is that I need to first gain control of the records which the dentist has locked away and is refusing to give me. I also need to insure that the existing dentist will not steal these customers for then the value of the sale is diminished. The Sherriff states these are civil matters and that means legal fees. The lesson here is that when it comes to business, the investment you spend up front with a high quality business attorney is well worth it and can reduce the pain in the event of a catastrophe like mine. I use my real life lessons on a daily basis as I advise numerous practices as to the best mechanisms for financing their business and, where I can, add additional value from the insights of my work as a COO of a practice gone raw.
Wells Fargo Bank