Be Aware of These Dentist-Specific Contract Concerns – Episode 263

Before you make a contractual mistake, learn how to dot your “i”s and cross your “t”s.

On this episode of the Dentist Money™ Show, Ryan welcomes Rob Montgomery, whose firm has specialized in legal counsel for dentists for over 20 years. Throughout your dental career you will probably sign associate agreements, leases, acquisition documents, and even sell your practice.

Rob takes Ryan through many of the legal nuances you need to be aware of before you ever sign on the dotted line. “Caveat emptor” takes on even greater significance when you have so much at stake.

 

Show Notes
https://www.yourdentallawyer.com/

 

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Podcast Transcript

Ryan Isaac:
Hey, Dentist Money Show listeners, thanks for joining us on another episode of the Dentist Money Show. Today I have Rob Montgomery, dental lawyer to dentists all across the country. Today we talk about contracts. Contracts as an associate, as a new partner, in acquisitions, as a tenant, leasing, buying real estate, being a landlord, selling to DSOs exiting out at the end of career. Lots of important stuff here, you won’t want to miss it. My thanks to Rob for joining us on the show today. Do you have any questions for us, go to dentistadvisors.com, click on the book free consultation link and schedule a chat with one of our very friendly, very knowledgeable dental specific financial advisors today. Or go to the Facebook group, the dentist advisors discussion group on Facebook, post a question, we’ll answer it. Thanks for joining us today. Enjoy the show.

Announcer:
Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by dentist advisors or registered investment advisor. This is Dentist Money. Now, here’s your host, Ryan Isaac.

Ryan Isaac:
Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Ryan Isaac. And I am joined today by Rob Montgomery, dental attorney for dentists all over the country. Rob, thanks for joining me today. How are you doing?

Rob Montgomery:
I’m good, Ryan. Thanks for having me. Nice to be chatting with you again.

Ryan Isaac:
Yeah. It’s been a while actually. Hopefully 2020 has treated you fairly or semi fairly, semi okay.

Rob Montgomery:
2020 is almost over, thankfully. It has treated me fairly enough, but I’m not sure how many years it took off my life, and I’m not looking forward to a repeat, that’s for sure. But still standing, Ryan.

Ryan Isaac:
Still here. And we’re glad you’re here. How about Rob, give us a quick intro to who you are, what your background is, what you do for dentists, what your firm does, and tell us a little bit about yourself.

Rob Montgomery:
Sure. So I’ve been practicing law for 25 years. I’ve had my firm for about 23. We have seven lawyers who work from different locations around the country. Most of us most of the time are in Philadelphia. We used to all be in the same physical office, that’s not the case anymore. Like most businesses and consultants and professionals, we’re doing a lot remotely now. But the focus of our practice is helping dentists with their dental legal needs. So helping people purchase practices, negotiate leases for startups, partnership buy-ins. We help people prepare associate agreements, we help young associates to review and negotiate their associate agreements.

Rob Montgomery:
So really all of the business legal things that come up in the realm of a dental practice, we help with. We’re not litigators. I started my career as a litigator and I’ve managed over time to transition completely away from that. [crosstalk 00:03:10]. Yep. No mas. We do help clients with pre-litigation, dispute resolution, though I would try to stave off having to actually get involved with the court proceeding, but I have hung up my tie, so to speak in that regard.

Ryan Isaac:
That’s fair.

Rob Montgomery:
And as you said, we do it at most places around the country, with the exception of California. We’re in most major markets and states.

Ryan Isaac:
Well, thanks for the intro. At the end of the podcast, we’ll talk about where people can find you, we’ll put links and descriptions to how people can get in touch and reach out to you guys. But let’s set the stage here for what we’re going to discuss today. As everybody knows, the evolution of a dentist career, it’s pretty robust and complex, and there’s a lot of different phases. And a handful of very, very large consequential decisions that have to be made from the very beginning when you get out of school, all the way until the end and you’re trying to exit. So today we’re going to break down phases of career to early, mid career, and late career, kind of exit time. And we’re going to talk about some of the common things that you work on with dentists, some of the legal things they have to go through when setting up a business or starting as an associate, buying real estate, bringing partners, analyzing cashflow, that kind of stuff. So let’s start from the beginning. I think that’s a movie quote from somewhere.

Rob Montgomery:
That sounded good. Very good place to start, right? [crosstalk 00:04:35].

Ryan Isaac:
Yeah, exactly. So we’ll begin at the beginning, and let’s just start with someone’s out of school, they’re an associate, they’re going to get a job as an associate. Before they buy a practice, let’s just start there. What are some of the things that associates should be thinking about in terms of their contract and searching out for their first job?

Rob Montgomery:
Yeah, I think it’s important for associates at that level to really comprehend that, for the first time probably in their adult life, they’re likely going to be signing a contract that really matters and has an impact. So what I like to tell young dentists and people that are in residency and dental school, that up until that point of your life, you’ve signed car leases, apartment rental agreements, contracts that they have protections built into them or federal agencies have vetted them, and the FTC says what you can and can’t put in a car lease, right?

Ryan Isaac:
Standard stuff. Yeah.

Rob Montgomery:
Exactly.

Ryan Isaac:
[crosstalk 00:05:45] wonder if it varies, like your Honda Civic loan. You’re like, “This is pretty standard.”

Rob Montgomery:
Exactly. And not even a crazed lawyer is going to read a lease agreement for their Honda Civic, right? However many pages in a four point font with five columns. Five hours later like, “Who’s that guy at the dealership that’s sitting in that chair, reading that contract?” [crosstalk 00:06:10]. Right. Because it just doesn’t really matter that much. And there are a lot of contracts that are like that as you roll through life. Now, bingo. You have to flip the switch, because you’re now being confronted with a real agreement, an associate agreement that is likely going to have restrictive covenants and other provisions in there that can impact your ability to practice, and really dictate what you’re going to be able to do and not do for the foreseeable future. So it’s important to understand what is in an agreement, and making sure that what your short-term, mid-term or long-term goals are, don’t conflict with what you’re agreeing to in the contract.

Rob Montgomery:
So what I mean, like an example of that is, if you’re looking at an associate agreement that has a restrictive covenant of say 10 miles around Austin, Texas, and you’re thinking, “Well, after my associateship, I think I’d like to own a practice in Austin, Texas.” Well then, chances are you have just stymied your ability to do that by agreeing to a 10 mile non-compete. Or let’s just say that you are an orthodontist and you say, “Well, at some point I want to work, get referrals from my uncle who’s a pedodontist in Miami. So I’m going to take an associateship in that neighborhood where my uncle works.” Well, you probably, you’re going to block your ability to practice in that neighborhood and do a startup or acquire a practice after the fact. So it’s important to really understand what you’re agreeing to, and not agreeing to. Associateship agreements can be very difficult to negotiate on some points, especially when it comes to non-competes.

Rob Montgomery:
If we’re on the employer side, an associate says, “Well, yeah. Right. Okay.” Yeah, right, “Well, you’ll do eight miles on the non-compete, but not 10? What are you planning on doing at 8.5 miles away from my office?” Right?

Ryan Isaac:
Yeah.

Rob Montgomery:
So even though you can’t necessarily negotiate those things, you still have to make sure that you understand them, right? And let me say this too Ryan, this is really important for young associates to understand. Contrary to what you see on blogs and social media posts and social media groups, non-competes are enforceable in most places. And even if they’re not enforceable, that just means that a court won’t tell you what you can and can’t do.

Rob Montgomery:
When you go to get financing to buy a practice or do a startup, the lender’s going to ask to see your associateship agreement. And no matter how unreasonable or how unlikely it could ever be enforced, it doesn’t matter. They’re not going to give you the dough, if you’re looking to do something in a restricted area. So contrary to all-

Ryan Isaac:
[crosstalk 00:09:08].

Rob Montgomery:
Yeah. And it drives me crazy Ryan, when I see dentists on these groups, chiming in saying, “Don’t worry about that. Yeah. It doesn’t matter.” Right?

Ryan Isaac:
As if the lawyers don’t know.

Rob Montgomery:
Right. My blood boils Ryan, because I’m thinking, “Yeah, but you’re not going to be able to buy a practice, or you’re not going to be able to open up.”

Ryan Isaac:
You’ve obviously seen that happen. I’ve never seen someone get turned down for financing, but clearly that’s something you’ve seen happen before. That’s scary, it’s pretty frightening.

Rob Montgomery:
I mean, turned down for financing, but would you want to borrow a million dollars to find out whether or not the Sheriff’s going to show up on the first day that you open your practice, to see whether or not the non-compete is going to be enforceable?

Ryan Isaac:
To roll the dice? Yeah. No, I’m not a gambling man. So no. No thank you.

Rob Montgomery:
Yeah, too risky.

Ryan Isaac:
Okay. So restrictive covenants, non-competes, anything else in an associate contract? And to be honest, I don’t hear… Maybe I don’t talk to enough associates these days, but I don’t hear a lot of associates reaching out to attorneys as they start their new jobs, but it seems like that’s something you should take… I think we take our phone contracts more seriously than maybe [crosstalk 00:10:13]. Like, “Wait, when can I upgrade? And when do I get the new iPhone?” [inaudible 00:10:19] my contract. I mean, pretty serious stuff. Any other things that are pretty common in these associate contracts to look out for?

Rob Montgomery:
Yeah. You have to be careful about provisions, dealing with insurance and your responsibility to indemnify the employer sometimes for your malpractice. That just means that you’re essentially agreeing to be the insurer of any problem or any claims. So you have to make sure that your malpractice insurance actually provides coverage for that, otherwise you just became the insurer for your employer, which is not a place that you want to be. But any provision where you see indemnification, whether it’s for any acts in the practice. The other thing that you have to be careful about sometimes are independent contractor arrangements. Similarly making sure that you’re not responsible for being misclassified as an independent contractor as opposed to an employee. Doing the right tax planning with that, Ryan. I’ve seen young dentists we’ve tried to help with acquisitions, where they have credit problems and try to understand how they could have credit problems when they were making decent money.

Rob Montgomery:
And then you find out that it’s because they had an independent contractor arrangement, where at the end of the year, they owed $75,000 in taxes that they didn’t plan for, right? So that can be a bit of a whammy. I’d say one other thing that falls in between the early to the mid levels, and maybe this is a good transition for where you’re going next, is we’re seeing more and more large corporate groups or DSOs, non-dentist owned practices, that are promoting partnership arrangements with young dentists. Where young dentists are buying into a minority interest of some unspecified practice, or maybe they own 10% of the practice and some piece of the overall management company. It’s very hard to value that. Be careful about those arrangements. All partnerships are not created equally.

Rob Montgomery:
Just because you are a partner in that practice doesn’t mean the same thing as being a partner in a 50/50 partner in an owner operator situation. A lot of times these corporate groups will seek to retain associates, because obviously the whole money doesn’t work for them unless they have dentists, right? And if you have a turnover of dentists, that’s not necessarily a good thing. So a lot of times, if you find yourself buying into a practice, even though you’re a partner, legally, you may have just bought yourself a job, and may find that you’re chained to that practice, and that’s difficult to leave. And that in reality, this isn’t really a partnership, this is they just basically made you beholden to this practice. So be careful about those arrangements. And you’re definitely swimming with the sharks as a young associate when you’re negotiating with a large private equity group about an ownership interest in a practice.

Rob Montgomery:
And you’ve got to get a lot of legal and accounting and financial planning help, when it comes to those deals.

Ryan Isaac:
Matt, the other day I ran into someone who said they had never listened to a webinar. I was like, “I don’t even know what to tell this guy.”

Matt Mulcock:
I mean, you should have told him we are the connection generation, techs, social media, lots of screens, interactive webinars, baby.

Ryan Isaac:
Baby, that’s right. It’s easy to join our webinars. We discuss an element in depth each month. Go to dentistadvisors.com, click on the webinars under education library, and join us for the next one.

Ryan Isaac:
The next phase after associateship would be practice ownership. And there’s two paths, I guess. You have the startup route, and then you have either acquisition or partnership route. Let’s begin with startups, those that are out there beginning their careers in the startup phase. What are you seeing on that side of things?

Rob Montgomery:
I mean, I think startups are great. We help a lot of clients with startup practices, just like we help with transitions. I think overall it’s good to keep an open mind as to which one’s the better one for you based on your opportunities. But I feel like a startup that’s done right can be successful. And when I say, “Done right.” It means you’re working with the right people, you’re working with a good consultant, you’ve done the right demographic studies, the right planning, the right marketing, all that stuff. You can really hit the ground running with a practice that is truly yours, it’s unique, it has your vision. And it’s nimble and you’re not burdened by somebody else’s problems that you’ve inherited.

Rob Montgomery:
So if you do all those things, I feel like you can provide an awesome, modern, state of the art office that patients want to come to, but you have to do all those things. You have to do them right. You can’t cut corners, especially, Ryan, with startups. Because trying to do startups on the cheap is a big, big mistake.

Ryan Isaac:
Yeah, I think that’s great advice. As I hear that, is it fair to say that from a legal standpoint, as far as the arrangements go, a startup is a little more simplified than entering an arrangement maybe from an acquisition or with a partner?

Rob Montgomery:
Possibly, yeah.

Ryan Isaac:
Just because it’s less people. It’s just you, right?

Rob Montgomery:
Correct. But-

Ryan Isaac:
[crosstalk 00:15:42].

Rob Montgomery:
Right. That part of it. But you’ve got a very important quasi-partner, which is a landlord, oftentimes in those deals. [crosstalk 00:15:51]. So yeah. Yeah. And you got to be careful. And if you’re signing a lease with a big real estate investment trust or big retail space where most dentists understandably go into retail spaces now. Retail leases can be a real dose. And there’s a lot of provisions that you could see in them that aren’t intuitive, that you wouldn’t expect to see. Things like rights where a landlord can relocate the tenant to another part of the shopping center. You think, “Well, I signed a space for this end cap that I love, right?” Now, all of a sudden I end up in the back of the shopping center because an Urgent Care wanted 20,000 square feet that took over my space. There are things and little time bombs that could be in a lease that you have to be really careful about.

Rob Montgomery:
But those things, just like anything else, you get the right advice, you do things right at the outset, then things won’t come back to haunt you and you won’t have surprises. So yeah, a startup can be more predictable in that respect. If you don’t have partners, you’re not inheriting somebody else’s practice, right? So that’s a whole other thing. The good news is, Ryan, that dentists have great credit, they’re great tenants, they don’t default on leases. Among the lowest default rates of loans and leases in the country. And when a dentist leases a space, they’re there for a long time. A cell phone store, they might be gone in two years and take their racks, and away they go. A dentist, once you sink all that money into the plumbing and the build out-

Ryan Isaac:
Half a million dollars into the build-out, you’re like, “I’m not leaving anywhere.”

Rob Montgomery:
Yeah, right. Until I get my money back out of this. And then you sell it to somebody else and they stay there for another 20 years. So, because of that, dentists have… You got leverage with the landlord. Because that’s pretty much an evergreen lease. As long as the landlord wants to have them, they’re in there.

Ryan Isaac:
Is there a list of common things that are the maybe flexible, possible negotiation items that you see in contracts, the things that you might have some control over or some leeway?

Rob Montgomery:
Yeah. Definitely. Exclusivity is a big thing. So being the only dentist or particular specialist in a building or a center, that’s something that’s important. We feel really strongly about trying to get good assignment language that allows you to assign the lease to somebody that’s purchasing your practice, with as little or no landlord intervention. Because once you give the landlord a seat at the table when [crosstalk 00:18:28]. Well, yeah. You want to be able to do it without the landlord having to approve or consent it. Because if you’re sitting there saying, “Hey I’m ready to sell my practice.” And the lease says, “You can’t assign the lease unless the landlord approves it.” Then you say, “Well, I’m ready to sell my practice, landlord. Will you please allow me to assign the lease to this person?” And then sometimes depending on the landlord and the buyer, you might be looking at a young dentist who has $400,000 of student loans, and $100,000 of cash and equity in their house.

Rob Montgomery:
That a negative $300,000 net worth potential tenant. Ryan, outside the dental world, most people don’t respond real well to people with negative net worth, right? We all love them because we know it. It’s the nature of the beast, right? But-

Ryan Isaac:
You’ll be okay. Yeah,

Rob Montgomery:
Yeah. Right. You just go get a loan, you’ll make lots of money, right? But landlords may not necessarily be hip to that, “You want to sell your practice and you want me to accept this tenant who’s got over a quarter million dollars of negative net worth, I’m not going to approve that.” And if you can’t get that assignment of the lease, then the value of your practice has just decreased dramatically. Assignment, that’s a big one that we like to get in there. Tenant improvement allowance, that’s something that starts to get into something more that a realtor would negotiate, but how much money the landlord is going to put into the deal.

Rob Montgomery:
And then there’s just this whole host of other things that could be in the lease, because leases are really in terms of what’s in there and what’s not in there, are all over the map. And while associateship agreements are certainly not standard, when it comes to leases, you can run the whole gamut. And there’s really no telling, I could probably list by brainstorm here today, Ryan, a hundred different things to think about and look out for. It’s limitless. So it’s really key to know what you’re signing yourself up for, and try to limit whatever potential interruptions or risks there are when you’re negotiating those.

Ryan Isaac:
While we’re on the subject of real estate, what about the dentist who’s purchasing real estate? And maybe on that same topic, someone who’s purchasing real estate where they will now become a landlord themselves. A lot of dentists will buy buildings that have multiple spaces in there for multiple tenants. Any similarities, differences, things to look out for when you’re the purchaser, or when you actually become the landlord yourself?

Rob Montgomery:
Yeah. That’s a great question. Well, first off let me just say, I think too many dentists over obsess about owning the real estate. You guys see, I’m sure too, that dentists make money practicing dentistry.

Ryan Isaac:
Pretty good money.

Rob Montgomery:
Yeah, right? That’s the focus. Where can I be? Whether it’s a leased space or a space you own, it doesn’t matter. You’re making your money off of being a dentist, not off the dirt. And there’s a reason why DSOs, and most DSOs don’t buy the real estate. Because you give those guys the cash and you say, “Go out, take this money and use it to make as much money as you can.”

Ryan Isaac:
Highest return. Yeah.

Rob Montgomery:
Exactly. [crosstalk 00:21:46]. No way, right? So if you can find that unicorn, which is a building in the absolute right place, that helps you to maximize your revenue and your profit and works for you in every other way, then that could be a cool thing, maybe. But I’ll tell you why in a minute why it may not be too. But that could be a cool thing.

Rob Montgomery:
Any sacrifice that you make along the way on any of those things just costs you. So if you have an office that you own, but it can only have five chairs instead of six, and that you lose $150,000 a year over 20 years because of that, I don’t care that you own that building, right? You have lost money by being a real estate owner. So that’s key.

Ryan Isaac:
I love that.

Rob Montgomery:
I think the other thing though, before I answer the landlord multi unit, multi tenant question, is I’ll say what I don’t like about dentists owning the real estate, is when you go to transition to practice. Essentially, if it’s a standalone building, you have an audience and a potential buyer pool of one. There’s one potential buyer for this giant important asset. I don’t know too many markets where a potential buyer, a market of one is a good thing, Ryan.

Rob Montgomery:
So dentist says, “Well, well, I’ve got a captive audience. Whoever buys my practice will buy the real estate.” Yeah. Unless of course they don’t. And then, [crosstalk 00:23:23], right. Who are you going to sell a single tenant standalone dental office to, the real estate to? Somebody who can’t own or occupy it. There aren’t many investors out there. There are some, but most are not interested in that. So now you have this very illiquid investment in the office real estate, that obviously can’t fill it too while you’re operating a practice, otherwise you’re going to have no place to practice. And then when it comes time to transition it, you may or may not be able to sell it. So to me, I don’t like it oftentimes. And the other thing too is we talked about a lot of dentists now want to go into retail space where they’ve got that great exposure, and they’ve got better demographics.

Rob Montgomery:
Most people can’t buy a shopping center anchored by a Walmart for their dental office, right?

Ryan Isaac:
Yep. Yep.

Rob Montgomery:
So I don’t like that. Now, if you’ve got a situation where you’ve got a multi tenant building, that’s got cashflow and you have an orthodontist in there, a general dentist, you’ve got a physical therapist, you have a CPA, a lawyer, okay, that’s starting to look like an investment to me. And that’s a building that has a market. There are people that want to buy a multi tenant building that’s got cashflow off the leases. That could be a good investment. But I feel like if you like investing in real estate, go invest in real estate that’s got a good market that you don’t have to worry about whether or not how you’re going to transition in the future, and go out and rent your office and make more money and buy more real estate. I mean, that’s my take away from most of the time with that.

Ryan Isaac:
That’s great. Thanks for giving the input on that. So you would advise that just like being the tenant, negotiating a contract is very important. If you’re the landlord and you have multiple tenants, getting those contracts right in the beginning is probably incredibly important.

Rob Montgomery:
Huge. It goes to the value of the building. If you have strong leases with good terms that are locked up properly and demonstrate a positive cashflow, that’s how the value of the building is determined. So doing that where you’ve got some sloppy arrangement with a bunch of month to month leases, and you don’t know whether somebody is going to be there next month or six months from now, when it comes time to sell that building, you’ve devalued that asset. So you have strong well-written long-term leases are going to add value to that asset, without a doubt.

Ryan Isaac:
Have you seen real estate owners like dentists that have multiple tenants in their building that they own, just because they’re not experienced real estate investors, make those bad contract moves and really come back to bite them. Has that been common?

Rob Montgomery:
Yes. I’ve seen that. And where it falls into is you fall into the temptation of, “I’ve got this form of lease that a friend of mine used, and I’m just going to take that same lease and use it for mine.” Yeah. And it doesn’t-

Ryan Isaac:
And that’s because you’re a dentist, man. Real estate isn’t your world. It’s very complicated. Yeah. That’s what I would think.

Rob Montgomery:
Yeah, yeah. And look, it’s just once you get to that point, you’re a grownup and a professional. Do things right. Hire the right people, jumped through the right hoops. Otherwise, why do you even want to deal with the aftermath of that just mess when you don’t have to?

Ryan Isaac:
I love that. I wish we could end right there, but I have more questions. I like the, “You’re a grownup, act like a professional. Hire a professional.” Make some shirts out of that. Let’s talk about mid career. Let’s say you’ve been solo practicing for a while and now it’s time to bring in your first partnership, maybe split some duties, buy back some of your time, grow the practice. Any common pitfalls or things to look out for when you’re bringing on your first partner ever?

Rob Montgomery:
Well, I’d say two things. There’s the practical reality and the operational reality, and then the economic reality. From an operational standpoint, I think that a lot of times people think, “Well, if we get bigger and I bring on a partner, it means I’m going to have less work and I’ll have somebody else share that.” It doesn’t work that way. No matter what, the bigger you get, no matter how many partners you have, the more you got to do, right? So the fact that you have somebody that’s willing to share calls with you when you’re on vacation, in the end of the day this is not necessarily going to impact you. So be realistic with what it means. And I think it’s important to, just with all this stuff we’re talking about, document the relationship, document the deal, all deals are different, all situations are different.

Rob Montgomery:
Don’t just think that a template partnership agreement is going to be good for one size fits all. It’s important to work with somebody as to what your objectives are with this partnership, to transition out of it when you’re going to be ready to sell. Every deal and every situation is different. So I think don’t expect there to be some universal right way to do it. Understand that there are a lot of different ways that you can go about that. And I think something to keep in mind that I think a lot of people don’t realize until they get into it, if you’re bringing on a partner and you’re selling them a 50% interest in your practice, for example, and they’re going to go to a bank to get a loan to purchase that, that lender is going to require a lien on the practice assets.

Ryan Isaac:
On your side of the practice. [crosstalk 00:00:29:05].

Rob Montgomery:
Exactly. Yeah. So you got to get comfortable with that. It doesn’t mean you shouldn’t do it, but don’t take the money that you got at the closing and go to Vegas and think that you’re going to try to squander that, because you’re renting that money until they’ve paid back that loan. Because if they don’t pay it back, the bank’s going to look to you and you’re going to have to be able to step up. That doesn’t mean that you shouldn’t do it, but just understand-

Ryan Isaac:
Yeah, be aware.

Rob Montgomery:
Yeah, exactly. So the credit risk of your partner becomes your risk as well. And again, it doesn’t they shouldn’t do it, just have to plan accordingly and be aware of that. The other thing is right in your guys’ wheelhouse, Ryan, is from a partnership standpoint is, tell me what the cashflow looks like. If the pie on the day before you do this deal is a certain size, your share of that pie the next day is 50%. And the pie did not get bigger the day that you did that deal. So I think a lot of times we see people with unrealistic expectations that haven’t done the right financial planning to map out what this is going to look like. And then come to us after the fact and say, “But gee, I did this deal.” Whether they’re buying into the practice or they’re selling an interest, and say, “Well, I thought I was going to make a lot more money, or I didn’t think I was going to make this much less money.”

Rob Montgomery:
And we’ll question them a little bit and talk about the planning and, “Did you work with your financial planner? Did you work with your CPA to look at these numbers and do some projections?” And, “No. No.” “Well, what are you basing this off?” “Well, a friend of mine in Miami did a deal like this last year and they-”

Ryan Isaac:
[inaudible 00:30:45].

Rob Montgomery:
Right. Exactly. So you can limit the risk and the surprise by doing the right homework with the cashflow analysis. Otherwise, it’s like saying, “I’m just going to take what’s behind door number two.” And you find out six months later what the economic impact of that decision is. And really, it’s not just partnerships, it’s bringing on an associate, how much money are you going to have to pay that associate, how much less [crosstalk 00:31:13] production are you going to have? What’s that going to cost you? What happens if you drop this insurance plan or bring on this insurance plan?

Rob Montgomery:
All these are business decisions that have variables, but they’re fairly quantifiable. You can go into that and make that decision, and enter into that transaction with a fair level of predictability as to what the financial outcome is going to be for you. There is a range, but you shouldn’t be totally surprised by the economic impact of this six months later, right? That’s just reckless. And that leads to problems too with both sides of partnerships. If you have two people going into a business arrangement, and one of them is really unhappy about it, then that’s probably not going to be a long, sustainable, long-term partnership or relationship. And partnership breakups are nasty, and they should be avoided at all costs.

Ryan Isaac:
End of career, you’re planning to transition out of the practice, sell to the partner you’ve had, the associates you’ve had or someone new, sell the building, lease out the building now that you’re going to be a landlord. What kind of steps at the end of career do you recommend people take? What are some common things that you see go right and wrong there?

Rob Montgomery:
I think it’s about planning and being realistic. Bringing on an associate if you’re going to start scaling back your hours and your production, because you want to keep the production as high as possible if you’re going to transition the practice. If you go over the finish line and you’re running out of gas, then your practice is not going to be worth as much. I think back to the real estate and that situation, if you are doing a lease renewal later in your career when you’re already starting to strategize about transitioning the practice, that’s the time you want a longer term lease. That’s not the time to let the lease expire or have very little lease term, because your ability to maximize the practice is probably going to be contingent on your ability to deliver a long-term lease.

Rob Montgomery:
So keep that in mind from a planning standpoint, just because you’re out, doesn’t mean that your successor who’s buying the practice is going to be out. So think about that. And then as part of that last lease renewal, shall we say, where you’re negotiating with your landlord, try to get good language in there. That’s going to allow you to assign the lease to somebody who’s a potential buyer of your practice. Even if you don’t have good assignment language now from when you first signed the lease, every time you come to the table with these lease renewals, you’ve got leverage. So try to fix the things and start to think about the transition plan then. I feel like for owners that own the real estate, I encourage those people.

Rob Montgomery:
I think it’s usually best to try to sell that real estate with the practice for the reasons we talked about earlier. If you love owning commercial real estate, great. Do a 1031 exchange, sell that property and go buy something else that’s more liquid, that has a market, whether it’s multi-family or small strip center or whatever other investment grade, real estate. But if you’re transitioning out of the practice, try to get out of the real estate too. I think as far as people that are selling to big DSOs, that’s a whole other thing. You and I could talk for the entire episode about-

Ryan Isaac:
Yeah, I’ve seen you on that webinar on selling to a DSO sometime. I’m seeing that multiple times a month now just as a financial advisor, can’t imagine how often you’re seeing it as an attorney.

Rob Montgomery:
Yeah. It’s lots. And it’s not going away. It’s changing a little bit. But I think the biggest pitfall I should say, or things that people overlook with DSO deals oftentimes is that, a lot of times these deals, the buyer is using your money to buy your practice. So if you’re doing a deal with a DSO, where you’re going to be making, say $200,000 less a year as being an associate after you sell the practice than you are now, and you have a five-year obligation, well that’s a million dollar. So if a DSO is paying you a million dollars for your practice, and then you’re going to make a million dollars less over the next five years, I’m not so sure you made any money off of that deal, right? So a lot of times people are surprised when they look at it, are like, “Oh wow, they’re using my money essentially to buy…” Yeah.

Ryan Isaac:
Yeah. Rob, thanks for joining us. Can you tell everybody where they can find you, how they can engage with you if they’re in any of these phases, which is basically everybody. Where can they find you?

Rob Montgomery:
Yeah. The best way is just to go to our website. We have an easy URL to remember it’s yourdentallawyer.com. And all the contact info is there. We’ve got some content, some webinars that we do. And we also have links to podcasts I do with Dr. Paul Goodman, the Dental Amigos. We’re friends with your gang I know. So yeah, we’ve got lots of good resources there too, but you can submit questions there or get contact information and email for myself and my lawyers there as well.

Ryan Isaac:
Thank you so much. Best of luck on the next two weeks of 2020. I hope they pass well for you and to your crew and everyone over there. But thanks for spending some time and teaching us about this. Huge subject and I’m sure we’ll do it again, looking forward to it. But thanks for being here, Rob. Appreciate it.

Rob Montgomery:
Thanks so much for having me, Ryan.

Ryan Isaac:
All right. Take care.

 

Practice Transitions