Trade secrets – selling to your associate

PFM DentalPFM Dental explains the process of selling a practice to your associate.

The background to associate sales

Selling your practice to an incumbent associate is probably the longest established sale method within dentistry and remains hugely popular. Many practice owners have either a written or unwritten agreement to offer their associate(s) first refusal on the practice sale. On the face of it, this seems a natural progression – especially where a well-established associate has built a strong relationship with both staff and patients.

However, in recent years we have seen an increasing number of problematic associate sales, largely falling victim to one of the following:

  • The associate confirms they want to buy, 12 months pass and nothing progresses because either there is no real intention to buy or the associate can’t secure the necessary finance
  • No agreement is reached on the price and there is no prior agreement as to how the practice should be valued.

With the expansion of corporate dentistry and many more dentists buying multiple practices, selling to your associate is now far from the only sale option. However, there is no doubt that an incumbent associate sale has distinct advantages for both parties. These might include the lack of disruption to staff and patients and the option for the principal to remain working at the practice on a flexible basis. The latter can be an attractive alternative to the rigid terms and conditions imposed by a corporate buyer, which I detailed in the first article in this series (Dentistry 18 September). Selling to your associate remains a viable option but the process needs to be handled with the same care and attention you would apply to an outside party buyer.

Case study: the following describes a sale to an associate

The dentist’s key sale priorities were:

  1. To ensure the associate was offered the practice in the first instance
  2. To realise an open market practice value
  3. To maintain a good working relationship with the associate during ‘arms length’ negotiations.

Was the practice valued specifically with the sale to the associate in mind?

No. Crucially, regardless of the purchaser (whether this be the associate or an external buyer) the value should not differ. We are in a very active practice sales market at present and values being achieved are historically high. As such we would not advise our client to accept a lower value.

How was the sale approached?

After undertaking a formal valuation for the principal and discussing the sales options, we adopted the same approach to selling the practice as if it was on the open market. A sales prospectus was issued to the associate and followed up by us, rather than the principal dentist. This was the first step in the arms length negotiations and involved talking the associate through the details and explaining why we had been instructed (ie to facilitate the sale in a professional way).

How did this go down with the associate?

The associate was aware that we had been instructed to undertake a valuation and that we would be in contact. They appreciated us explaining the financial situation regarding the practice sale. We have often found that associates are new to and do not fully understand practice accounts. The opportunity for them to ask an expert is invaluable and offers reassurance that they are making an informed decision to buy.

Were there any complications?

Prior to discussions, the associate was under the impression that raising finance might be problematic or prohibitively expensive. It is imperative for the purchaser that a fully costed proposition, including projected profit and loss accounts, is provided to their bank. We put together a proposition to a number of potential lenders on behalf of the associate and secured the required finance.

Did the associate buy and was the asking price achieved?

Yes. We explained to the associate that we are very much in a sellers’ market and the asking price was achievable on the open market. They were advised they had first refusal on the practice and that if they did not make an acceptable offer (in terms of price, tie-in period, timing of sale) within two weeks we would proceed to a sale on the open market.

Is selling to your associate still a viable sales option?

Yes. We have undertaken large numbers of this type of sale transaction, achieving an open market sale price with all the advantages of an internal sale. However, the potential for this type of sale to go wrong is relatively high. Maintaining a normal working relationship is important and this is difficult to achieve unless the principal adopts an arms length approach to the sale.

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