Episode 114: Buying a Dental Practice - The Negotiation and Letter of Intent Process
In the third episode of Season 4, the Dental Amigos discuss common misconceptions about the negotiation process and establishing a letter of intent when buying a dental practice.
Rob and Paul give a working definition of a letter of intent and emphasize the importance of buyers having strategic communications with sellers during the initial stages of negotiating the purchase of dental practices. The Amigos also explain to listeners how to navigate the non-binding nature of a letter of intent. See the full transcription of the episode below.
Welcome to the dental amigos podcast with Dr. Paul Goodman and attorney Rob Montgomery taking you behind the scenes of the dental business world. All the things you didn't learn in dental school, but wish you had. Rob is not a dentist and Paul is not a lawyer. But since Rob is a lawyer, we need to tell you that this podcast is for informational purposes only and shouldn't be considered legal advice. listening to this podcast does not and will not create an attorney client relationship. As is always the case, you should formally consult with legal counsel before proceeding with any legal matter. Learn more about The Dental Amigos at www.thedentalamigos.com. And now here are the dental amigos:
Rob Montgomery 0:39
Hello everyone one welcome to another episode of The Dental Amigos Podcast. I'm Rob Montgomery. I'm joined as always by the head Nacho himself, Dr. Paul Goodman.
Paul Goodman 0:47
Thanks. Thanks for having me on, Rob. Excited to chat.
Rob Montgomery 0:49
Yeah, it's great to have you Paul talking dentistry here in our season concerning things to think about when you're purchasing a dental practice.
Paul Goodman 0:59
Only the biggest decision of your career.
Rob Montgomery 1:02
It could be, it could be, it could be the best and the worst, right? As you say, and I quote you on well, I guess I don't quote you on this. I've stolen your line a lot with this Paul.
Paul Goodman 1:12
I've stolen many of your lines, it's okay.
Rob Montgomery 1:14
Okay, I usually try to attribute things to you, This one I do frequently, but it depends if it's sort of like a condensed version, I don't have a whole lot of time for the setup. But you know, these are one transactions for most people right
Paul Goodman 1:24
Don't mess up on your ones things. Also, Rob, I want to just interject at the time of this recording your main joke would really have come to fruition if the games had turned out differently because you said a dual rep brokers like someone saying, I'm a Cowboys fan. And also my other favorite team is the Eagles. Right? And you know that that doesn't go together. So it was close just becausethe cowboys didn't make it but the Eagles are playing in the NFC Championship.
Rob Montgomery 1:47
Well, I mean, I'm going to get there just to say like occasionally I will mix that up and say that you can't you can't be a fan of both the Giants and the Eagles because that's also pretty good too.
Paul Goodman 1:59
I just think that the cowboys and the Eagles have a special kind of I think, you know, disdain for each other
Rob Montgomery 2:05
No doubt so no doubt. And you've come around.
Paul Goodman 2:07
Yeah, I'm an Eagles fan now. Recovering recovering Giants fan.
I was glad they were in the I was glad they were there playing but they did not show up well. So I'm glad you know, Jaylen Hertz and the crew are on their way to, hopefully a chance at the Super Bowl.
Rob Montgomery 2:21
I feel like you know, in you know, correct me if I'm wrong, because I you know, a good college buddy is actually a dentist, who grew up in Tampa and he was a big Buccs fan. He still is a Buccs fan. But I think like, once you if you're a fan of another team growing up, like once you have kids, I think it's really hard to like, kind of have that. Yes. You make allegiance to the other.
Paul Goodman 2:45
So I grew up it's a good point. I grew up in central New Jersey, where you could go giants or eagles. My my dad was from New York. So it was it was on brand to be a Giants fan and Pennington, New Jersey. But I don't want to turn my daughters into these kind of this quasi odd Giants fan walking around the city in a giant
Rob Montgomery 3:03
dropping him off at school. And it's like, oh, look at Daphne's dad, the Giants fan I want to get his players
Paul Goodman 3:07
lives in our building was incredibly, incredibly nice and just just really good guy. So it's kind of like there's good, better camaraderie. That's why I did it. Yeah, good.
Rob Montgomery 3:14
Good. Well, welcome. Welcome to the nest.
Paul Goodman 3:16
I appreciate it. Okay.
Rob Montgomery 3:18
So today, we're talking about the negotiation process of a deal. And how Letters of Intent also known as loi eyes fit into that into that mix. So, Paul, you know, today if you're going to have two hats on two helmets, so to speak, but not have opposing teams, where you're going to be talking about dentist, more clinical things, but then also talking like a, like a broker, you know, I mean, because you obviously are involved in both of those worlds. So let's walk our listeners through what the early stages are of the process. Somebody you're helping somebody you represent a practice seller, and a potential buyer stumbles into this opportunity and calls you up and says, I understand that you may have a practice for sale. Paul, tell me about it. Let's let's let's talk to the audience about what what the early steps are. This
Paul Goodman 4:24
happens to us on a regular basis through calls, texts, emails, social media messages. So first, I discussed location what I tried to do you know, as a new dentist, you sometimes we get yourself stuck with difficult patients because you didn't know what questions to ask first, and now 20 years into my career, I know what questions to ask to streamline the process. So I dig into the location of the practice. Are you able to share that without NDA in a general sense right counties, right if I guess my town Mercer County, hey, this is in Mercer County. I want to share with you as the dental world has evolved, you know, when my My dad came back from the Air Force, his requirement was I only need to work in New Jersey, the entire state Cape May to Union County because that's where their family was from. Now, just for context, dentists, spouses also have sometimes high powered jobs or jobs in an area. So I will have people in New Jersey say, I can only work in Middlesex County, Mercer County is a deal breaker. So I first say, hey, let's kind of give me your location, flexibility. And sometimes it is the state of New Jersey, sometimes it's the Northeast. But interestingly, just for our listeners, I think it has to do with both spouses often having very, you know, I don't want high powered jobs, but important jobs that they can't necessarily pick up and move to Pittsburgh, because there's a good practice. So first we, we drill in pun intended to location things I can share without an NDA. I have had you've excuse me, someone I've probably looked at 50 Plus practices in my life only purchased for, I'd say four or five. So I'm constantly, you know, on the other side of that, so then we look into collections, what does the practice collect? Where's it located in OPS, and I will share if this is a value as someone who plays both sides like the player coach, if someone after this podcast Rob said, there's a practice in Mercer County, Merced County does a million dollars a year. It has six operatories, I want to see it. Now. I don't need to see the Ebro, I don't need to see the p&l. So if our listeners get value out of working with brokers, brokers really like open minded buyers, where they're at least willing to learn more where they don't close themselves off. If the practice doesn't have a CB CT, so that's kind of my start to the process. And then we decide from that point, do they want to sign an NDA, to learn more a nondisclosure agreement, I can kind of kick it back to you. And you know, you're my advisor. In general, I haven't asked you a lot of questions about signing an NDA. I will if there's a dual rep broker, I might even not sign it because of that. But maybe you could tell our listeners, what are the risks of signing an NDA, as my grandmother might say, willy nilly.
Rob Montgomery 6:59
I mean, not much when it comes to an NDA, I mean, an NDA, a nondisclosure agreement, sometimes referred to as a confidentiality agreement, is just an agreement with the seller that you're not going to misuse or publish or disseminate. Right information about the practice. And really, other than to your advisor. So you sign an NDA, it says you can share it with your attorney with your accounting, you know, your, your bank, you know, and all that, oh, that's fine, that's fair game. So as long as you don't take the tax returns, and post them online, or put them up on Facebook, you know, and do things that are really, you know, it's somewhat intuitive, you know, common sense, like what you can and can't do, and the kind of operate like, you know, a good person, a normal human, then there shouldn't be anything in an NDA, that poses a problem for you. And generally speaking, the NDA is going to say, at the conclusion of negotiations, if it doesn't lead to a closure have a deal, that you agree to return and or destroy the documents and the confidential information that you that you received. And again, it's confidential information. So the NDA is going to somewhat define what is confidential information. So like the name of the practice, for example, or, you know, the, the logo or things that are known to the public, or that's not confidential, the phone numbers, not confidential, the URL is not confidential. But you know, things that are not known to the general public is probably the best rule of thumb are confidential. And that's the confidential information that you agree not to just, you know, throw out there into the public. So there really shouldn't be anything that's too bad in there, where the the action so to speak occurs or the differences in those documents is really more with the remedies like what happens if you breach the agreement breach the confidentiality agreement, and you know, barring something that's really far out, you know, it shouldn't be too bad. Because again, this is like the angel don't worry if you if you don't like the like the old Beretta we're going to age myself here probably even beyond you right. You know, it's the was the the the TV detective that drove the was it it wasn't a Camaro. It was
Paul Goodman 9:20
like be slightly before me. I
Rob Montgomery 9:21
don't know. Yeah, I
Paul Goodman 9:22
Rob Montgomery 9:23
okay. This guy so Beretta you know, he drove this cycle it was a white wasn't a Camaro is like a TransAm. Maybe. And he had a cockatoo that he used to, you know, sit on his shoulder, and I'm just kind of his thing. And his tagline always was, you know, you know, if you can't do the time, don't do that. And so that was Beretta. Yeah. Instantly learned. So with this, that's like, if you really don't like the rent, yeah, the remedy or the penalty for violating these things. It's sort of like wow, you know, what, just don't violate it. Within reason, obviously, but generally speaking, you know, the NDA shouldn't be this monumental thing. Yeah, it should be. So yeah,
Paul Goodman 10:03
in general, there's so you keep walking through this. And then after that, they sign it, then I will share the practice location, the practice owner, I'll start to tell a deeper story. Let's just say we're looking at a practice as a million dollars, I'll say, from our analysis, this dentists, their seller, discretionary earnings, basically, you know, what the, the owner makes as a solo operator, if you took over their life, they make $375,000 here, right? And then now I'm deepening the story. And then I really share Robin, I think this is my value as a dentist broker knowing this and playing both roles, they say, now's the time to have a conversation or connect with the owner, would you like to call the owner on the phone? Would you like to go and visit the practice? And then it really shows me how motivated the buyer is to purchase. So if they say, Paul, I'd like to see the dentrix reports from 2019. Before I do that, I say, I'm not going to give them to you. Because there's nothing inside of those dentrix reports. That's going to prevent you from needing to meet this owner, right? Yeah. So then I see if they're motivated, they say, Sure, what's their number, and I just, you know, kind of want to share it. It's a relationship building thing. And you're usually on a certain side of it. But brokers are managing both sides, we only work for the seller, when we spent a lot of time talking to both sides. Sure. That's the value when I start to develop a relationship, you know, talking with someone on the phone, just saying, Why are you selling this practice? You know, I mean, one of the things that kind of said on many of our podcasts, brokers don't live inside the head of the seller, you got to ask them. Yeah, you know, the seller says I'm tired. But I've worked for 30 years, and I'm just ready to retire. Maybe they tell you throughout it, that they're going to have a surgery soon. They never even told me, right? That can happen. So do meeting these, they should tell us that they should give us all the information. But I know you know, as an advisor, so then I encourage them to talk to the seller meet them, I really encourage them to go see the office because you're going to work. This is the place you're going to work right. Imagine, Robin, I know this must happen with people moving across the country for apartments, but apartments are different than buying a home, you're renting it for a year, you're signing up for 30 for this whole go see the inside of where you are going to spend a significant portion of your life. Yeah. And if you don't want to go see it. You're not that serious. Yeah, yeah. And great litmus test. Yeah, great. Thank you. I was just saying a litmus test from science. And then, you know, then I'm also trying to help them with best practices, building their team, I'll use a basketball team, your dental focused, you know, attorney is really to go to an accountant or start to develop those relationships. Because once we do turn over these documents, they're the ones who are going to help you with it, they're gonna help you analyze the cash flow of the practice. So then I'm hoping that phrased and then I'm encouraging them as we get into the LOI process to say, it's not required to have an attorney. But to me, it's recommended, because then you can maybe share with listeners, because a lot of things that you've helped me with as they go in the LOI set the tone for the deal, for sure,
Rob Montgomery 12:46
yeah, loi again, letter of intent is what we're talking about, typically, and it should be a non binding agreement or non binding document, you know, which means that if one party doesn't follow through with the deal, that the other party isn't able to sue them, ya know, for money damages, or to compel them to do that. Now, there are some provisions in the LOI that are typically binding. So when you say it's non binding, it's non binding, and that one party is not forced to sell and the other one forced to buy. But binding provisions in an LOI would be sometimes we do see confidentiality language in that, obviously, that's binding. Exclusivity or no shop provisions we talked about. And that's just saying that, once the LOI is signed, that the seller agrees that they're not going to negotiate with other parties for a certain period of time. So, you know, from a buyer standpoint, the buyer wants that to be a long period of time, or as long as possible to give them as much leeway to, to negotiate the deal and get the documents done. The seller would like for that to be as short as possible, because if things aren't going well with the negotiation, or they may want to hold that over, the buyer said, hey, I can get some other people in here in our exclusivity is running up next week, what are we going to do, right, and so that gives the seller of leverage. So you know that that's an important thing. And that time period really matters. You know, we've seen ello eyes with exclusivity provisions, and they're there as long as one year, which is
Paul Goodman 14:24
totally nuts for the seller. I also want to we kind of totally gloss over this, I think is important for our listeners. So first thing this buyer asked me is, what does the seller want to sell the practice for what price and what the seller says to me? And I really just I want to hopefully be authentic and share with reality. Sometimes the seller we have these long conversations about the purchase price, right? Like it's set in stone, and I say to them, if we get four people interested in this practice, you might get more than $750,000 we get one person interested in moving to where you are, you might get less than the seven 50 We put on the asking price, right? But to me if we can have dialogue on this, it it's good to have an asking price, but it's important understand that a the loi, what's the language, it gives them the opportunity to recenter their deal or to contingent on financing. Right?
Rob Montgomery 15:18
Oh, one of the things that would be in in a live would be a financing contingency. Yeah.
Paul Goodman 15:22
And to some degree, I wish, I wish there was a world where I was selling my dental practice, Paul and Jeff Goodman. We had a broker. And I was getting just saying, What's the best offer I get from people without sort of this contaminated? 1.9 million and 2 million, but I've heard someone else get this. And I know, it's
Rob Montgomery 15:41
just like, it definitely doesn't work that way. It's it's interesting. I mean, it's it's honest, let's, let's put the practice out the auction. But yeah, not the way usually, it just
Paul Goodman 15:49
winds up causing sometimes disappointment, emotional challenges for one side or the other. So I do strive to counsel the buyers to make a strong offer that they're realistic with, I think sometimes and I don't know, if brokers do this intentionally or not intentionally, you know, to make the seller happy. But I think if they say, we're gonna get 900,000 for your practice, and it winds up at 675, the sellers pretty disappointed. Yeah, you know,
Rob Montgomery 16:13
well, unless, unless, you know, you've counseled them properly, and train their expectations to say, okay, we can ask for 900. But, you know, if we get anywhere near 700, you know, let's
Paul Goodman 16:23
also also, finally say, it's like, sometimes they go, let's ask for a million. So then if they say, 800, I go, it's not always exactly like a garage sale, because they do need to ask this bank for money, right? You know, what I did sit down with someone once Rob, it was a sell. And he said, I want to sell my practice for 700. So great. What's the deal? We said? He said, 500, I said, usually doesn't work that way. He goes, but there's a lot of potential here. He works along with a principal. And I yeah, that was when I used to go out to every office in person for these visits. And that moment, I was like, I'm not gonna take this guy's practice. Yeah, you know, so I just think there's a lot of the LOI helps,
Rob Montgomery 16:56
you can only fail. Right, exactly.
Paul Goodman 16:59
I go, that's not a thing. I go, somebody has to give this person money. Right. Yeah. Yeah. So I think it's a good between the negotiation and Ally process, just a lot of managing expectations of both sides. Right? Seeing if they're serious. I mean, I don't know, where do you guys usually come into most of these deals?
Rob Montgomery 17:16
All depends, you know, different different times in different places, depending would you prefer to come into the deal as soon as possible? You know, like, I like to be involved at the outset. And we don't have to be consistently involved in the back and forth. And it depends who's involved, you know, who the broker is, depends on the client, depends if the client also has a good CPA, a lot of times, we'll let the, if a client has a good dental focus, CPA will let them kind of oversee and manage the purchase price negotiations, because I feel like that's really, those numbers have to be rooted in, you know, something that's, you know, there has to be some basis for them, you know, and so I always encourage clients that when you're negotiating, you need to have a data behind you reasons, you know, it's more compelling and more persuasive. If you say, I won't pay this, because but I will pay that because and here's the way this works out. And then then people say, Well, okay, yeah, I get it, you know, and maybe they want to agree to it, but you have a lot more credibility than we just come in and say, Yeah, I know, it's 900 700. Right? Where do you get that from? 700? That sounds like a fish. So it's like 700, because here's the overhead. This is what the cash flow looks like. These are the problems. This is you know, after the person services, the debt, this is how much they're gonna make for being a dentist. And then somebody says, okay, yeah, well, that makes sense, right? But otherwise, it was,
Paul Goodman 18:39
it was it. Sometimes brokers really mismanaged expectations. And when they do, they're sometimes back of the napkin what this practice is worth, the seller never forgets it. And they have not asked a dental focused accountant. No one's asked him, right, or no one's even gone to a bank, right? The bank is I always say the banks, like the mom of the deal. We had plans as kids, we'd ask our mom if they were going to work out well, right. So my brother, I might say, well throw the ball. I was like, I'm not driving you. That was the end of it. Right? We're gonna have access to a car. So I think it's kind of like some point, connecting with a bank and discussing financing is important, because you can have these people talking about what they're going to purchase something for. Yeah. Without any real confidence that someone's gonna give him this money, right? I've seen hours of time and 87 emails, angry text messages to my phone, right? How dare they offer this? And I say, Have you talked to the provides the Bank of America's the Huntington banks, you know, yeah. And so I just think that's actually I was gonna say, Rob, this is curious, because sometimes sellers get upset with brokers, when someone submits an LOI, and they can't get financing and they say you should have known about this. I'm actually asking this and curious question. Where does the bank come into that this process most of the time, you
Rob Montgomery 19:48
know? Well, I think my understanding is most lenders will lend up to 90% of revenue.
Paul Goodman 19:57
On a practice they'd like though, yeah, right, right. I mean, doesn't million only profits 200? They might not.
Rob Montgomery 20:02
Yeah. But I, you know, my impression and observation over the years is nothing against the bankers out there. Right? They'll generally lend to something that may not be absolutely ideal for, for the buyer borrower
Paul Goodman 20:17
and ask them to per year, you can ask the bank to protect you. Yeah, because the bank has asked me zero times in my life, how much money am I making on something or ask them later, they just want their $2,372 a month, right? For 10 years, right? So as long as they get that check, there's no more questions they need to ask, which
Rob Montgomery 20:32
is usually like when you see situations where the banks like, No, I'm not gonna lend them out. Like for that reason, like that should be a little bit of a ah, then is what am I doing? I
Paul Goodman 20:43
always think it's like your friend who's like one of those Daredevil friends and like, they might jump over canyons, they might jump out of planes. And if they said, This is too risky for me, I think you should pay attention. Yeah, right. Exactly. Yeah, gotta like to stay on ground level at all times. So I'm not a big risk taker in that regard. But in business, I can be fairly risk taking. So I think it's a really good point. And that's why I also say, connect with the banks really, for relationship building, because sometimes Banks has to, and I don't, I don't want to, you know, be discouraged. But they say I got a letter from the bank, that they'll give me a million dollars, I go on what practice. I actually think the mismatched expectations so bad, because we talked about the dental migos of what you didn't learn in dental school, I might have been the same way where I might think they'd give me a million dollars. And if I bought a practice for 600, maybe they would just give me the 400. Because I'm so handsome. They kind of make it seem that way. Right? Well, yeah, that's a
Rob Montgomery 21:31
great point. And let's just talk about that. It's a little off topic in the loi, but let's, I think it's an important one, nevertheless, that when people get quote, unquote, pre approved, that just means that you don't have bad credit, right? Dental Practice loans are, you know, there's a threshold issue, you have to have good credit. And then, you know, the amount of the loan is absolutely tied towards the cash flow of the practice that you're buying. So, you know, the fact that you're approved really doesn't mean anything, until you've been a premium.
Paul Goodman 22:05
It's a gift certificate divided practice, yeah. Like, here's my gift certificate, can I use it here? And then let me defend
Rob Montgomery 22:11
the dentists job? Because, you know, I know, you're not taking over at the dentist's. But, you know, the, I think it's that just in the world, and just, you know, we're all sort of used to, I'm going to get approved to buy a house, right? And so how much money can I afford to pay? Because a house doesn't throw off? You know, income? So, you know, that's, that's how much are you able to afford to pay? No, you still have to get an appraisal, right? So the bank won't lend you, whatever, you know, a million dollars to buy a house that only appraises for $500,000, regardless of how good your your money situation is, but you know, because the house doesn't throw off income, the bank is not as concerned about, about, you know, the performance of the actual real estate, you know, but in practice, it's all about what the practice does, and that and that's so getting pre approved. This goes for buyers and sellers, even to when somebody says, yeah, the buyer has been flat for a while. So why, you know, like,
Paul Goodman 23:15
I would practice, I use this team theme with the ROB to the accountants and attorneys. And this is like, if you said to Steph Curry that he said, We should shoot three point shots, every shot, and the tall guy might say, well, that's not going to work out for the team all the time. So I think with the bank, it's why you want a team on your side, to cross check each other. Because you might say, I know the bank is incredibly positive about your success here. But make sure that this is the right deal for you. Because after they give you this, this loan, they're not going to be part of this transaction anymore. Or I think that's just why it's like responsible decision making. And I can see other dentists can get overwhelmed. I've made decisions. I've worked with bad decisions, worker deals where brokers before I met you I have overpaid for practices, I've not understood exactly what that meant when they pre approve you. So that's why I think this loi portion that we're digging into, is such a key term and I just think, you know, don't print one off the internet, send it in and sign it, because you really can get yourself in some Burnt not just
Rob Montgomery 24:12
Yeah, and like just again, we're, we're we're gonna get back on to the nuts and bolts of the loi, but they're these these are really, I think, important topics to, I think understand to what a role of a good lawyer plays in any transaction, you know, that and especially when it comes to loi size, and representing somebody who's buying a practice, a good lawyer is going to provide services beyond the mere preparation of the document itself, right there is counseling that goes into, into the into the representation, there's management of the transaction, doing the things that need to be done making sure that liens are paid that you know, information is being collected, the things that need to happen to get you to closing in a way that you're protected to the to the utmost. So like, you know what one of the things we do as lawyers is to prepare documents, you know, but again, in the world that we're in and moving towards, there's a lot of things that people can try to do themselves. But it goes beyond just like the documents. So sometimes people say, Well, somebody's gonna do it for a lot cheaper, you know, but they're just gonna, you know, that much just to do the document, like how much to prepare the agreement. Like, that's like, I wouldn't say a small part, but it's somewhat is it's really
Paul Goodman 25:27
making you aware of what the impact is, on what you're signing me and whether it's a associate agreement, and loi and asset purchase agreements, you saying, This is what this means here, you know, it's made me think mister is in Ohio lecturing. And the waiter was I ordered this dish, and he was talking about the spice factor. And he's like, I think medium is good. And I got him to be like, I know what he's saying. Because if I picked the spiciest one, I'm probably not ready for it. So it was making me aware of ordering this dish. He was good server. Yeah, instead of me just saying I'll take the spiciest one and not be able to have tastes have my taste buds. Okay. So I think what lawyers do is very similar. It's like, Hey, this is what this means. This is the impact that this has on you. It's not just a bunch of words on a paper, you know, and I just think, exactly, I don't understand why dentists, they, they never really like to pick the cheapest option when it comes to other things that they do. But for some reason, when they're building their team, to make the biggest decision of their life, that's when they become like my grandmother clipping coupons from the 80s. And I wish she was a wonderful grandmother. But yeah, you gotta save money on paper towels, the paper towel stink, you buy new brand, right? Your Practice stinks very hard to return to return policy and a practice very bad row.
Rob Montgomery 26:36
Yeah, yeah, they're in fact, there is not that it's it's really good. It's a good point. So let's just Okay, so loi, it's generally a non binding document, which means that either party is not compelled to proceed. There are certain binding aspects of it. Confidentiality, perhaps exclusivity. But you know, even though the key terms are not binding, it's still a really important document to get right. It's very difficult after you have agreed to something in an LOI to go back and change it in the actual agreement without disrupting or jeopardizing the transaction. So we'd like to say it's hard to put the genie back in the bottle. Write that out, even though what you're asking for may not be that unreasonable. And let me just give you an example, if somebody is negotiating an LOI for purchase of a practice and they agree, as a buyer to a two year five mile non compete in and generally speaking, most non competes in practice sales are like five years. Yeah. And maybe it's an area that's more justify a 15 to 20 mile non compete well, and then they come to us and they say, Well, here's the LOI or like, Well, Jesus kind of needs to be five years and 20 miles, and then we put that in the document. And then the seller, rightfully so says, we have a two year five mile on the loi, what are you doing, you know, and
Paul Goodman 28:02
you're awkward. You're saying such good things, because I've talked about this with a lot of, and I'm a big fan. You know, I'm big fan of Gary Vee, and he says, I changed my mind. But like, changes the most people are so threatening, but blank slates are not right. So it's like, if you say to the if the if the, if the seller says I want to work for three years post sale, and you don't ask anybody, and then someone goes, you can't have this person for three years post sale. It's a one dentist practice. Yeah, you go, I want you to do six months. Now, their whole expectations are different, right? But if you just say, hey, why don't we figure this out together with our teams? It's the corollary to the financial part. Right? Here's the reason because it's a one dentist practice, right and you seller have never had an associate for one day. What makes you think there's enough for two of us here for the next 36 months. Right? You know, so let's expectations
Rob Montgomery 28:47
we I mean, we're probably going to say that word, you know, 20 times today, you know, expectations once you set those expectations, you know, it's hard to hard to walk them back. So, you know, the best way to deal with that is make sure that when you set those expectations you're offering something that you know understand and are prepared to be that's my
Paul Goodman 29:08
feature I have two daughters and the four year old who's totally insane I never mentioned we're maybe going to get ice cream because if I mentioned it we better be getting ice cream are starting to get upset because I would never not given loi for ice cream right so it's like it's such key to say or do you want to fulfill those things? I think what you've said many times over the past few years most doing this is like attorneys can't like battle this out like it's a courtroom drama right for you where you want to kind of get this going in the right direction Yeah, from the start
Rob Montgomery 29:37
right I mean, if there's there's too much brain damage at this stage, like that's oftentimes I'm not gonna say a red flag an orange ish flag
Paul Goodman 29:46
but you also mean visit dentist is and a broker you get to learn some answers to questions that might just be deal Enders, right I mean, and good don't invest more time don't invest more money and just move on. Yeah, you're gonna you're gonna do seller is gonna give you a lot of answers. Was it that question that time and prior to So, I think, you know, it's a, it's a perfect example of I think the process of buying a practice is actually often a really good one. It goes in, like up steps with more meaningful interaction, kind of more meaningful. Buy in and quotes, you know, you did mention I mentioned to them, I don't usually get involved with deposits during the loi, because that seems to be a hassle.
Rob Montgomery 30:25
Yeah, yeah. I mean, that's something that within this unenforceable document, from a legal standpoint, the deposit becomes this like, weird thing if neither party is compelled to proceed, what happens to the deposit? Just holding it?
Paul Goodman 30:38
Where's it going? Where the term putting $5,000? Somewhere, right?
Rob Montgomery 30:41
What if there's a dispute? And if there's a dispute how much you're going to spend disputing the 5000?
Paul Goodman 30:46
Like, what they're asking, like you said, is, is really insignificant? The deal anyway, so it just seems to be a hassle factor, so to speak? Yeah.
Rob Montgomery 30:54
Yeah. So we don't even want any parts of it. The, but let's talk about purchase price, too. Because now, you know, as we say that it's important to train expectations in this loi, and it's hard to walk things back, we are, you know, here we are in 2023, still very much a seller's market. So in a situation where you have a you're a buyer, and there are competitive offers, you may not have the luxury of kicking the tires in the practice and doing sufficient due diligence to know that when you offer that number, that that number makes sense. So in the perfect world, you may have a lot of practice information, financials, kind of a good grasp of what you think things are worth. But that takes time. You know, it's not like you just call up the dental focus, CPA, and you're like, Hey, Jared, you know, I've got this thing. Can you take a look at it? Yep. I'll look at it tomorrow. Next day, like, you know, people try to accommodate that. But you don't always have the luxury and I think lining up all your ducks before you make that make that you're making
Paul Goodman 32:02
a really good point. Because I know, people who are friendly with counselors, I said, Why didn't you ask me this question? I mean, they'd lost out on a really good practice over like, $100,000. And it was foolish, right? Because they could be in that practice doing dentistry, it would have I just so everyone understands, you're gonna have 120 payments, to pay off that extra money. It is insignificant to your income. And they said, one of our advisors said it wasn't worth it. I said, sometimes the accountant is looking at it like an endodontist. That's a root canal specialist. And you need a general dentists, you might need a coach, you might need a consultant, because they're not necessarily wrong, because they think about the root canal and the and the financial. Right, right. But you haven't really told them that, or am I Oh, this is where you want to live? Yeah. And there might not be another one of these opportunities. And if you would ask this to me, I would say thanks. Give me the money, give it to the seller. Yeah. Because especially once it gets over seven figures and practices like that, I mean, you I think what you said Rob was right. But as a broker, I'll say it's a seller's market for practices that are substantial and income regard for the 600,000 our practices, but you're talking about what the practice is, 1.4 million collections are gonna get a lot of interest from multiple buyers and types of buyers,
Rob Montgomery 33:09
right. But then to your point to I mean, if you could say, well, it's not worth that. And so, you know, 18 months later, you find another practice that is, quote, unquote, worth it. And, you know, if you make $200,000, last year, i Congratulations, I'm not sure of what you what you gained by that. I mean, obviously, you can't vastly overpay for things, but so, you know, in so you may be in a situation where you have to just sort of trust sort of the vague representations that have been made as to the value of this practice, throwing that offer, and then do your due diligence. But it can be tricky, because, you know, sometimes it is real, and they say, you know, it's like you have an LOI for 925. And the accounts looking the same, like, this is 675 On a good day, you know, and now,
Paul Goodman 33:54
it's always the delta in the difference, right? So it's like, right, you know, the higher the practice gets in purchase price, the less $100,000 matters, but you know, a third of it always is gonna matter. Sure, no,
Rob Montgomery 34:04
and but that's tough, because now, now you've got an LOI for that higher number. And now you're gonna come back and say, Well, you know, it's non binding, my CPA did the cash flow analysis. And, you know, we think it's 675. I mean, I'd be surprised if two out of 10 times that happened that that deal hasn't, you know, just completely died. And
Paul Goodman 34:23
I always want to say, you know, what we've absorbed but like, it's always interesting to me that the valuations could be drastically far apart. However, I did go to a broker conference once and this was a fun game. Rob, they played it for like, a gift ticket. It was pretty amazing. So they got all the brokers in different teams, they do this every year, and they give them this deal. And they tell all the teams to come up with different prices, and then they tell you what the practice would sell for. They're all way different. Yeah, I saw one that was from 750 to like, 1.4 million by broker. So it does kind of share, show you that even people who do this every day, can have wildly different assessments of value.
Rob Montgomery 34:59
Yeah, well, I mean, it's because it's hard to assign value to this, and it's worth different things to different people. It's not like, you can look at a high rise condo building and you know, kind of develop with the comp sales on what the value is on the appraisal pretty, you know, pretty close to what it's gonna take there, but not productive.
Paul Goodman 35:16
I wish I could do the visual of this because I think the real estate market contaminates tennis mindset because you think, Oh, I live in Center City, Philadelphia, Mara, and I wanted to buy a home. We could go on Zillow and have 20 Different options by tonight. And I think Dennis, if you look from a bird's eye view into Philadelphia County, and you saw how many practices were for sale right now they did over a million dollars, you would see so few dots, that it should give you some context, right? There's not a candy store. It's not a real estate market, where if you don't like the one on 15th, and walnut, yeah, there's gonna be one on semithin Cheston.
Rob Montgomery 35:48
Yeah, yeah, no, that's a great point three point. So yeah, with purchase price. Obviously, that's important thing in the loi, if there is going to be some sort of seller note, you know, where even on if real estate is involved with the transaction where possibly the seller is selling the practice, and the real estate you may have, where they're holding a note for what it would be that downpayment, essentially, on the real estate, you would want the terms of that note in the loi, is it a 10 year term, 20 years, is it a five year term with a 10 year amortization? What interest rate like those types of details, I think are good to capture there. Because they're very much business points. In if it's a practice that would justify the seller staying on for some period of time after the closing as an associate, how's that seller going to be compensated percentage of collections production? Per Diem? How long will they stay? And a lot of times, we like to see the Covenant Not to Compete, expressed in the in the LOI as well. And then, you know, lastly, I would say to if the seller owns the real estate, and the real estate is not going to be sold in connection with the practice sale, then we'd like to see some mention as to what the lease term is going to be, we'd want to see a good, you know, 10 year at least lease term with some renewal terms. Is it a gross lease, which means that you pay the rent and utilities and nothing else? Is it a triple net lease, which means that in addition to the rent, the buyer tenant is also responsible for paying for the expenses, the maintenance, the insurance, the real estate years ago,
Paul Goodman 37:31
I had a great consultant, sadly, want to pass away, but it's great early in my life, and it really inspired me, and he would say, triple net lease offs, and I would never have the courage to ask what that meant. But now that I live, it just means you pay more as the tenant means you're expensive as the tenant. Yeah, I mean,
Rob Montgomery 37:48
sometimes it can be, you know, as much as $9 a square foot or more, you know, so somebody says, well, it's $21, a square foot looks pretty good. The triple nets are 950.
Paul Goodman 37:59
And I also think like the red being someone who has rented places in Philadelphia and having good landlords, they sometimes trip over themselves to be good customer service people, right? Because they want you to keep staying there. So they say, Oh, we will come and you know, do this light and things. But if I don't like where it right, it feels like they want nothing to do anything. It's
Rob Montgomery 38:16
all commercial leases are very different. Right? And that's just my context was way off. Right? That'd be your context. It's just like everybody else's. I mean, you know, people are doing these deals for the first and maybe only time as we said, so. You we all bring our experience to the table and you think well, it's a lease a lease is a lease, right? Well, your apartment lease, your residential lease is entirely different from what your practice and leases are. commercial lease is just economics, the terms in there? Who's responsible for what I mean? A, generally speaking, a residential lease is somewhat consumer tenant protective. And the commercial lease it's, it's flipped around times 10 ethically? Sure. So, you know, these are some of the things that we would typically like to see or expect to see in letters of intent, every deal is different. Some special considerations, if there are any should always be spelled out. And really, I think as much as anything for everybody involved, the more you kind of have the difficult questions or tackle the difficult issues, right this time, you know, make sure you're on the same page before you spend time, money and let months go by going back and forth. To make sure you're on the same page with as much stuff that matters as possible. There's always gonna be things that come up in the actual agreements. But if you can tackle as much as possible at the LOI stage, it really helps that agreement, preparation, review and negotiation process go a lot smoother. Totally agree with you. All right. Well, Paul is always fun chatting. Thanks, everyone for listening. If you'd like today's podcast, please go on your favorite podcast app and give us a good review and till the next time thank you. Awesome.
Thanks for listening to another great podcast with The Dental Amigos. And don't forget to tune in next time to have the dental business demystified. If you're looking for more information about today's podcast, you can find it on thedentalamigos.com If you're looking for Paul, you can find Paul at DrPaulgoodman.com. And if you're looking for Rob You can find him at yourdentallawyer.com This podcast has been sponsored by Orange Line Media Group. Helping dentists and other professionals create content people love find out how we can help you take your business to the next level at www.OrangeLinemg.com. 'Til next time