Transition Decision-Making and Strategy

By Randall K. Berning, JD, LLM

With the advent of practice management companies and management service organizations, the already complicated area of practice transitions has become even more complex. This article discusses some of the key information a dentist will want to have in hand before making a decision on any transition, whether new or traditional. The key to all successful transitions is to enter into them with as much information as possible, rather than relying merely on feelings.

Article copyright 1998 Journal of the California Dental Association.
Photographs copyright of the authors.

Opportunity

Powerful currents of change are affecting dentistry and causing increasing numbers of dentists to ask the question "What do I do?" When I wrote for California dentists "Practice Transitions in the 1990s,"1 the discussion focused on what I now call "classic transitions," i.e., associateships, buy-ins, buy-outs and a variety of solo-group options. They are still valid transition strategies, particularly for younger professionals. Some of these strategies are discussed in two chapters I prepared for the excellent new publication A Guide for New Dental Practitioners, developed by CDA's Committee for the New Dental Professional.2 Yet, here we are in 1998 faced with transition formats that pose significantly different choices, some not even mentioned a few years ago.3 Most recently, practice management companies and management service organizations are the latest entrants into a growing field of opportunities that present themselves to younger professionals entering practices, midterm practitioners deciding on how to secure their futures, and end-term practitioners evaluating their exits from practice strategy.

All health care practitioners who value being prepared are looking ahead and actively weighing their choices. A health lawyer from a national law firm recently observed that of all the group medical practices he deals with, about a third seek business advice rather than just legal counsel. I find at least the same is true in dentistry, but not just for group practices. Although I deal with a lot of groups, groups in formation and specialty practices, my work still reflects dentistry's demographics, which is largely solo practice. What is so fascinating is that what I call "advanced solos" are in step with groups in trying to evaluate choices and seeking to plot a strategy that allows them to control to the maximum degree possible and allowable the drawing area of the practice. Such a strategy involves actively evaluating the demographics of their patient base, competitors, practice growth rate and the potential for maximizing return with the addition of associates, partners and additional office locations.

Three Keys

This article will highlight a core of material relating to opportunity consideration. Most people would agree that opportunities are only that, unless and until they are evaluated, sorted and prioritized. Action must be taken by the decision-maker, in this case the dentist, to take advantage of or to decline a given practice development opportunity. The action should not be capricious, but instead should follow a standardized decision-making format and be driven by getting all the pertinent information possible to make a good decision. This is no different from a doctor performing a well-conceived radiologic examination. Consider this statement by Dr. Olaf E. Langland, "The dentist must have a dental radiograph that will provide the maximum possible information concerning a particular anatomical region."4 Dr. Langland goes on to discuss each aspect of what maximum possible information represents, including, density, contrast and geometric characteristics. A dentist should use this same meticulous approach in evaluating practice transition opportunities.

The process of evaluation of the type of transition opportunities mentioned here has three distinct keys or parts. I use these three parts daily, with additional factors not discussed here as I deal with the futures of practices and practitioners. It is this structure that is helpful in answering the "What do I do?" question and provides the basis to guide a decision-maker to a well-considered decision, given the unique facts of his or her life and practice.

Key 1: What is the time frame for decision-making?
Key 2: What are the perceived benefits vs. potential negatives?
Key 3: How thorough has the investigation process been?

Key 1: What Is the Time Frame for Decision-Making?
We can't have a meaningful discussion relating to the future of a practice or a dentist's career unless a time frame is set. The time frame allows us to give a structure to the planning for both the practice and dentist(s). However, we have to define terms that are meaningful in that practices' and dentist's view. For example is "short term" a year or less? Is "long term" five years or 10? I could find dentists who would chose less and those who would chose more. The key is to decide what is meaningful for that practice and dentist. Many doctors view three to five years as short term and 10 years as long term.

Why do I mention both the practice's and dentist's time frames? Because they both have time lines; sometimes they are the same, and sometimes they are different. Dentists, as noted above, are either starting out, midterm or end-term. Their life/career is relatively predictable. Dentists in groups will still have individual time lines; but, with proper age blending, the group can come closer to matching the underlying practice time line, which can be much longer.

Let's explore a practice time line for a well-established practice in a mature community. I've worked with practices like these in nearly every part of the country, but one area I've worked with for 18 years is particularly rich with them: the San Francisco peninsula. More often than not, such a practice on the peninsula offers a solid fee-for-service history. The expectations of the patient base is for a higher level of dentist competence and personal attention to care. The time line for the future of those practices, absent radical changes, would be either a comfortable plateau of performance or a continuing climb depending on the leadership, marketing and capacity of the dentist(s).

But take one of those practices, add a new practitioner or a new style of operation under perhaps a management service organization, and watch what happens to the life (time line) of the practice. If good planning and execution of the plan occur, the practice may be reborn with a new time line and different set of expectations being offered to the patients. Or, the practice may find the change does not meet with local demographic market expectations, and the practice could face the prospect of imploding.

Key 2: What Are the Perceived Benefits vs. Potential Negatives?
Many of the newer opportunities being presented to practitioners today sound good. Some offer to set up a practice or purchase an existing practice, offering improved management, reduced overhead, marketing, the ability to attract managed care contracts, and even access to capital. This panacea, of course, is no different from some of the classic transitions in which a seller makes what seems to be a too-good-to-be-true offer dependent on a glowing picture of all the new patients available if the new dentist implements a marketing plan.

But, whether the offer is for the newer opportunities or the classic transition, dentists must weigh the perceived benefits against those they may give up. In the case of the newer opportunities, there may be a loss of autonomy or practice management control and even the prospect of decreased income if the projected growth of the practice does not occur. And in the case of the classic transition, there is the often substantial debt that buying or buying into a practice represents, which can be driven higher if real estate is part of the purchase.

Key 3: How Thorough Has the Investigation Process Been?
Before any decision is made on a future relating to a practice or dentist transition, one must do his or her homework and seek the facts behind any proposed opportunity.

In December, I participated in a debate-style exchange sponsored by the Northeastern Society of Orthodontists that pitted the CEOs of all the orthodontic management companies -- Orthodontic Centers of America, Apple Orthodontix, Omega Orthodontics and OrthoAlliance -- against three responders: an orthodontic consultant; a concerned orthodontist who had been approached and had evaluated an offer to sell his practice; and me, a health care attorney and practice consultant. The room filled with 700 orthodontists bristled with tension as various viewpoints were aired. Time and again the observation was made by the management companies that the doctors were responding to various offers to transition their practices based on feelings, not facts. But I find that in dentistry feelings are facts. This is because a high percentage of general care and specialty practitioners are not accustomed to taking the time and energy to dig for facts, relying instead on their instincts. The problems is that although a dentist may use his or her feelings to make a final decision, feelings can never replace facts. At the least, the following must be investigated and, if possible, secured to make a sound decision.

Private Classic Transitions

Where the intention is to use a buy-in, buy-out or sale:

Gather all financial information, see the list of 10 items to secure at Figure 1, Page 14, of the Valuing a Practice, ADA.5 The list includes the following: a balance sheet reflecting current assets and liabilities, the most recent income statements, a copy of practice income tax return for at least three previous years, a year-to-date income statement for present year with breakdown of all revenue and expenses, estimates of the fair market value of equipment, the cost of leasehold improvements and date for each, year-to-date total and the three previous full years' monthly production and collections by dentist and hygienist, average accounts receivable and any accounts written off over the foregoing period, and a schedule of all practice expenses.

Investigate the owner's past, present and proposed future strategic plan for advancing the practice.

Investigate the owner's past, present and proposed future business and marketing plans and proposals to increase patient flow.

Meet with all staff to evaluate the team

Practice Management Companies

Investigate, where publicly traded, annual report key information.

Investigate management philosophy.

Investigate business strategy.

Investigate growth projections and check them with advisers.

Investigate and talk with other practitioners who are part of entity and take into account any biases or financial self-interest that may color their comments.

There has never been a time of so many choices relating to practice and dentist transition. This unprecedented range of opportunities for the futures of both translates into an increasingly heavy burden for any dentist decision-maker. Decisions need to be investigated and weighed. Outside advisers can offer valuable assistance in the areas of financial affairs, tax, health care law and consulting expertise.6 The difference between a dicey future and rock-solid future seems to be good planning using well-developed planning models to secure the success desired, a consistently applied marketing strategy that is responsive to the drawing area of the practice, and a well-conceived practice transition plan. Well-advised groups and advanced solos are tackling each task and reaping the rewards of making good decisions.

Author/Randall K. Berning is a health care attorney, educator and consultant. He is adjunct faculty at three dental schools: the University of California at San Francisco, the University of Illinois and the University of Maryland.

References

1. Berning RK, Practice Transitions in the 1990s. J Cal Dent Assoc 18(6):21-3, 1990.
2. Berning RK, Evaluating Employment Agreements and The Challenges of Becoming an Owner of a Dental Practice. A Guide for New Dental Practitioners, The Committee on The New Dental Professional, California Dental Association, 1997.
3. For a discussion of an unusual new group form of practice, see Berning RK, Coming Soon: The Virtual Group. J Cal Dent Assoc 25 (10):715-9, 1997.
4. Langland OE, Radiologic Examination. Clark's Clinical Dentistry, Vol 1 Chap 4, 1996.
5. Valuing a Practice: A Guide for Dentists, Council on Dental Practice, American Dental Association, 1996.
6. Berning RK, A Brief Guide to Using a Lawyer's Mind in Healthcare Business Situations. J Am College Dent 64(2):9-12, summer 1997.

To request a printed copy of this article, please contact/Randall K. Berning, JD, LLM, 3400 Tamiami Trail N., Suite 201, Naples, FL 34103.