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When Joseph McGregor was a young attorney in Cleveland, his friends in the Case Western Dental program started asking for advice about practice buy-in agreements. The questions kept coming, and before he knew it, Joseph had a side job through which he met several players in the dental industry. His experience led him to open a dental-focused law firm in 2009. (His desire to make it big led him to Texas). In this Dentist Money™ interview, Joseph highlights two of the most costly mistakes made by dentists during transition. He also offers a word of caution about the employee handbook that’s been gathering dust at the bottom of your file drawer.
This is Dentist money, now here is your host, Reese Harper.
Reese: Welcome to the dentist money show. I am your host, Reese harper, here with a friend of mine, Dr. Joseph McGregor. I call him Doctor.
Joseph: Here we go. Juris Doctor McGregor, I’ll take it.
Reese: He is a doctor and this is the first podcast with an attorney we have done in like the last quarter, so I am very excited about this.
Joseph: There ya go. This feels very academic.
Reese: Today we are going to be talking about some very interesting subjects that apply to dentists. Joe has been in the dental industry for a long time he owns a company called McGregor law firm. You guys are headquartered in Texas?
Joseph: That’s right, Dallas Texas.
Reese: And everything is bigger there, so better firms, better people? Ok?
Reese: I love Texas. My sister just moved there, actually. I want to go visit. I am going to be coming down soon.
Joseph: We’ll look forward to it.
Reese: We wanted to take a few minutes and let you tell us how you got in the industry. Also, how you got into law and how that shifted into this niche.
Joseph: My drop into the dental market was pretty organic. I was an MNA attorney at a large law firm in Cleveland, Ohio, and a lot of my friends at the moment happened to be dental students there at Case Western. As they were graduating, they would ask for help.
Reese: Just for people that don’t know, tell them what MNA means.
Joseph: It is the buying and selling of businesses, kind of what we do now. But the businesses were of different varieties and most of the ones that I helped participate in were of international flavor somewhat. Basically, what we do now, but with a lot more zero’s involved. It was a large law firm and we were dealing with people all across the globe, so it was really fun and really grinding.
Reese: A lot of hours.
Joseph: Lots of hours. We had 80-100 hour work weeks. You know that is not going to be a long term thing. So as I was living there, I always kept my eye open for the next thing. I had expected to go into another firm but that was also at the time where you know the economy wasn’t doing so great, especially in Cleveland. I kind of had it in my mind, “well maybe I’ll go do my own thing.” That was about the time where I started getting exposure to a lot of these dental deals. Especially dental employment agreements where there were buy in opportunities.
Reese: Just because of all your friends that happened to be there.
Joseph: Ya, they started graduating and they would say, “hey Joe, I need some help.” My firm had a really high initial retainer amount. People couldn’t afford it, so I started helping them on the side a little bit.
Reese: That’s cool.
Joseph: As I started getting in touch with the other players in the dental market like the dental brokers, lenders, people like that, they just kind of put it in my head that I could do this full time. At first I thought that’s not a real thing, who does that? I didn’t go to law school to be a dental lawyer. But as it grew and as I started to get a little bit more exposure to the market place, I realized it was something I could do and I really enjoyed it. With my work at work I didn’t even know who my client was. Some major company and you have no idea what is happening you are a very tiny cog in a huge machine and I really liked the personal interaction with the dentists. They were making decisions that affected them greatly. It was kind of nice to be able to say, “hey, this is what you are dealing with. This is what you need to think about.” You know what you are telling them is going to affect their family..
Reese: It was a consequential interaction versus an impersonal interaction.
Joseph: Ya, there is a lot of trust involved. They are asking you questions that are going to bring meaning to their life and it was very satisfying. I made the decision to start out on my own and I moved back to Texas in 2009.
Reese: Did you grow up there?
Joseph: I grew up in central Texas but my wife and I made a promise that we would never live where we were from, so Dallas was where we landed. It was about two and a half hours from where we were from.
Reese: That’s about a state away for most people right?
Joseph: Ya, so it was nice and we have just slowly, organically grown from there and now we have four or five attorneys depending on how you cut it. They work full time and we represent attorneys in a lot of states. Particularly in Texas, Arizona, Colorado, Utah, and it is growing more and more.
Reese: That’s awesome.
Joseph: And we enjoy it!
Reese: The listeners of this podcast tune in to know how they can make smarter financial and better management decisions. What do you think are a few of the main legal faux pas that happen? Or mistakes that guys make when going through a transition or getting started? Perhaps acquiring a practice?
Joseph: Of course there are a multitude of problems. I think that the two things that I see most often are number one, purchasing a satellite office. It is becoming a higher percentage of the deals we do. Bear in mind that we are helping acquire over 100 practices a year. We see quite a lot. Every year the percentage of buying someone’s satellite office goes up and up and up. What happens is someone becomes very successful at their office. A dentist opens an office or buys an office and he does really well. Then they assume that whatever they are doing there must work in a second office. Maybe it will, maybe it won’t. That is not my scope of expertise. What happens is there are significant number of dentists who open up a satellite office or on occasion, they open up like five satellite offices.
Joseph: The skills that made them successful at one office somehow didn’t transfer and they have got to let it go. They just invested a tremendous amount of money in making those offices work. Money that could have worked other places or maybe just in that one single office. Instead they give it up because they can’t make it work and they are losing money. We represent the new guy who is going to come in and get a great deal. For our clients, this is a great deal. What we see a lot is an opportunity to buy a practice that is already built out, already has some patients, maybe not enough to make it full time.
Reese: Fairly well equipped.
Joseph: Ya, beautiful equipment. Bear in mind, this dentist who started the second office already knows what works and what he likes. So he built it exactly like he wanted. And he typically picks a great location! Now sometimes what they will do is sell their old office and move to the new one, but if you can pick up a practice like that at a price that is at or less than starting up your practice and it comes with some bonus patients? Man, that is a great deal for our clients. Not a great deal for the guy who just lost some money.
Reese: We see that a lot in different entrepreneurial ventures and dentistry is definitely one of them. Its a situation where a founder (we call it in our office jokingly a territorial conquest, Genghis Kahn stuff. Ok? If I can pile up more land thats how I”ll be more successful.) That’s not always the case and some people have the personality profile to really execute that and for some it is just a big stretch so they open that second location and they find that they aren’t able to spread themselves between the two locations as much as they thought. That is actually a really good insight. Ya, you are the guy that does the transaction so you see that there is a little bit of a market in efficiency here where that buyer can get a deal and it is sometimes at the expense of the seller.
Joseph: It is! And you are hoping, because you are a good guy, you are hoping that the seller doesn’t lose money but it wasn’t worth it to stretch himself so thin to try and operate two practices.
Reese: Ya, it can still be a win-win. Then he can take his time and refocus back onto his primary location and increase his profitability there.
Joseph: Ya, it doesn’t always have to be a sad story but I do know that those are.. People ask me, how do you know whether or not its good. A lot of our clients are the ones doing second locations! They ask me, “how do you know?” Honestly, I don’t know. Somewhere out there there is an expert who knows the answer to that. But I am honestly surprised. I have clients who are very energetic and seem to be pretty business savvy or overly entrepreneurial and sometimes they are the ones who struggle. Then some quiet, unassuming guy.
Reese: He just works.
Joseph: Sometimes we are surprised they made the first practice work and then now they have got a second practice and they are both killing it.
Reese: It is not always one factor.
Joseph: We talk about it in our office quite frequently you know what are the common components of this stuff? What makes these guys successful especially in the conversation of satellite offices and we have some ideas, but I don’t think there is anything scientific about it. We can’t predict it.
Reese: Lets wrap that up in this idea, what mistake or general tip is this that we are framing here?
Joseph: I think that what I would suggest to our clients when we tackle this is make sure that you are done digesting your first office and that you have bandwidth. Whether that is your time or money because a lot of people will leverage out to get that second office and there is just… I know the appeal, I can see the appeal. On a spreadsheet it will often make sense, but if you are not confident and comfortable that if you lose you will be okay, then you may not be ready for that next office.
Reese: That is good, good insight. What is another kind of situation that you come across that you think might be a good tip or a mistake that we can kind of help people avoid?
Joseph: This is really tough. You don’t necessarily want a lawyer always in your life. However, the most common problem I see because it relates to whether they are going to start an office or buy an office or do some type of asset protection mechanism or whatever, but when they get lawyers involved, they get them involved pretty late in the game. There is nothing more frustrating. The reason, that reason, that people don’t want lawyers involved besides the expense, and I get that. The other reason is that lawyers are viewed as people who kind of choke up deals. They slow it down.
Reese: They get in the way.
Joseph: Ya, they do get in the way and listen I have to deal with lawyers on all these deals and I know that lawyers are maybe the worst human beings ever.
Reese: Just bad humans.
Joseph: Just not good people. I am not sure if law does this to us? Maybe we are just naturally bad and we are attracted to it? Either way, the problem is that it gets pretty frustrating when a deal is brought to you and it is structured in a way that is not good. Sometimes it is just not good for your client.
Reese: There is a bad deal structure for the guy that comes to you?
Joseph: Yes, you are disrupting what they have agreed to because its so bad.
Reese: People don’t like to hear that though.
Joseph: Ya, because they put all this effort into a really creative solution and if they had involved the accountant and lawyer they could have created a solution that was beneficial to more people, or everyone. We just had a deal that nearly fell a part and we hate to be those guys. But it had severely negative tax consequences to both our client and the seller. It was really hard for the seller to let go of the concept because he thought that he came up with this really creative plan, and yes, it was certainly creative. It just wasn’t good for him or his client and everyone involved had to basically re-do the deal. I think that becomes frustrating. What becomes frustrating is when the deal starts to unravel because of things like that. Or people get us involved too late. As an example, this morning I had a call from someone who is trying to buy a practice and they are somewhat close to the closing date and they are just now getting us involved and the only reason they wanted to get us involved is because the seller is essentially backing out of the deal. Unfortunately, because of the way their letter of intent was structured there is absolutely nothing we can do for them. There is just nothing. But if we had been involved in structuring that LOI, we would not have had the language that they had in there. In general, the advice is, consider bringing your consultant’s on early. Whether it is your CPA, your advisors, practice consultants, marketing consultants, lawyers, whoever, use them!
Reese: I think that’s tough. At the end of the day, it is a big problem for service providers to get engagement from their customer and to interact early on. From a client’s perspective it is a hassle. It’s another thing I have to deal with and people pounding on my door bothering me. They just want stuff to happen without having to deal with it. As a manager, if you are going to own a company or a business, then you have to set aside a certain amount of time to proactively interact with a service provider whoever that may be. They have got to have your time in order for them to add value and you just need to budget that time during the week. Take two hours a week or five hours a month. Make sure that is sacred time that you block off.
Joseph: Ya, especially if you know you are about to do something that is out of the ordinary. Out of the ordinary course of business, something to think about.
Reese: I think one thing that you hit on that I want to dive a little bit deeper into is why do you think people are hesitant to engage with service providers? Let’s talk about attorney’s because that is your space. Why do you think people are hesitant to pick up the phone and call their attorney?
Joseph: The number one reason is probably expense.
Reese: They are worried about buying the cost of whatever time?
Joseph: Ya, and that’s why we never charge by the hour. This is the exact reason we threw away the hourly rate because we want the client to talk to us. We never charge for a client to call and talk.
Reese: Then you just price the service once you know what it is that needs to be done.
Joseph: Ya, and we have standard fees and stuff. We try not to penalize anyone for taking to us. We think that bears itself out. Once someone becomes our client through their career they do use us. They call us. We are not the only lawyers who charge flat fees. This is not necessarily trying to be a plug here, but that is the number one reason.
Reese: It is still rare too, a lot of times, a lot of people, have an element of hesitance that people have if they feel like they are going to be on the clock before they even know if they need help. Most people are happy to pay for help if they know they need it. But it is hard to pay for help if you don’t even know you need it.
Joseph: Exactly, exactly.
Reese: So you can take that twenty minutes and say, “hey we have service rates, transaction rates, and different things that might cost you different rates but let’s talk about it before we decide if that’s what you need.” That is a huge service you guys are providing. That’s valuable. I think it’s helpful for service providers to have that mentality. Evaluate before you build, right?
Joseph: And I think going off of that the other problem is utilizing true experts. A lot of people are utilizing service providers that appear as someone who can just get a particular job down. Let’s take CPA’s. They are only using a CPA because they need to file their taxes and this guy knows those numbers. But if you see a CPA who understands dentistry and maybe works well with the financial planners that works well with attorneys and understands the big picture then they can add value to you. They can say, “ hey, this is how you need to prepare for this upcoming concept that you have.”
Reese: Ya, they can see things that haven’t happened yet.
Joseph: Yes. If I am calling an attorney and he doesn’t understand dentistry, he’s probably my brother or something. Then why call him up? He is not going to give me very much. I may be paying just to educate him on the issue. I would recommend always using people that are true experts where you value their opinion and they are giving you good advice and of course they work well with other people who are having that same expert opinion.
Reese: That is really good advice. Frequently I think one of the reasons dentists don’t outsource to providers is for that reason. Their is not an expertise that they feel like really adds value so why would they reach out?
Joseph: Why would I pay $400 an hour to an attorney so I can explain to him…
Reese: How a transition is going to work?
Joseph: Ya, you shouldn’t have to educate your service providers.
Reese: If you find yourself in a position where you are explaining a concept that you think should be intuitive that is probably a red flag.
Joseph: We have to work with other attorneys and other CPA’s and consultants and stuff that ask us questions that evidence a lack of experience in this place. My first thought is, man, you are charging a lot of money and I am educating you on things that you should already know. How can you justify a fee if you don’t know, what we would consider, pretty basic things?
Reese: Let’s talk a little bit about, maybe if you had a checklist of things you would want a dentist to go through in a calendar year? Maybe just a few things that they can think about. To sort of proactively evaluate whether they are on top of all their legal stuff ya know? What are some things that come to mind if I were to sit down and look at a list in front of me that I should kind of be thinking about at least periodically.
Joseph: Right, I think that for most of our clients who have entities, once a year you need to go and do what we call a corporate formality. You need to take stock of what has happened this last year. Did you do any major financing? Did you do anything that..
Reese: Did you buy an asset at all? In business or otherwise?
Joseph: Right. Especially major assets. Did you do anything that really affects a fundamental business transaction? Those should be documented. So basically corporate record books need to be maintained.
Reese: A lot of people won’t know what that means. If I have an LLC that holds my bidding what do I need to do with that entity like once a year?
Joseph: By the way, most states will have it to where missing a year is not necessarily destructive to your entity. But basically what happens is the law will honor… we set these LLC’s up for the sole purpose of protecting your stuff. It is a somewhat fictional concept. We are just putting up a wall that otherwise doesn’t belong there. The courts will honor it and certainly some states are better at honoring it than others, but they will honor it only as long as we honor it. So we have to continue the fiction by having records. There is no stipulation that you have to have a fancy leather binder to keep your records in. Or that you have to have meeting where someone pounds a gavel or anything like that. But you do need to keep track of major things and so if your going to buy major assets, typically the ting that comes up most often, you need to document it and put it in your records.
Reese: So what your saying is, let me break this down. I am a dentist and I bought a building inside of my LLC. One of my patients gets hurt outside of my building because I didn’t de-ice my sidewalks. They get upset because they break their hip. They sue me, and theoretically, let say I have a building that is all paid off…
Joseph: Because you’re such a good guy and you hated debt and you paid it all off. Good for you.
Reese: So I have got this person who is hurt and they are suing me and I didn’t keep any records and if I spent the money in my LLC checking account on a vacation for my family and I bought some toys with it and went on a couple other vacations and then bought my lunch for my friends out of it and the court doesn’t necessarily look at that entity the same way as if I kept my records and I took care of the corporate formalities that I am supposed to be managing right?
Joseph: Yes, you just catalogued how to destroy any of your protection. Those are the things that you need to make sure that you are honoring those corporate formalities. You are treating it as its own little entity. One thing that is difficult is that if you own your building it is held in an LLC that is different than the LLC that holds your practice. So we are talking about two different entities and you want to make sure that even at that level, it is not that you feel confident to pay expenses out of any account but the appropriate account for what needs to happen. If your building entity just bought a new dental chair that may not be appropriate unless that is indoor lease that you need to have. I would say that continuing to check on all the things that need to happen every year you need to review and make sure that you have done everything you need for your entity and make sure you aren’t missing any documents. Frequently when someone is taking over a practice there is so much to do, life is moving a hundred miles an hour, and maybe there are documents that are talked about but never put in place on day one. That’s not a problem, but it has got to be done eventually. There isn’t a lot pushing those people to go and get things done until someone breaks their hip on your front step. If you have kept up with this stuff for the past seven years then you are going to be in a good spot. That is from a legal perspective. The primary thing they can do other than especially meet with their financial advisor and take measure how their assets are growing, and you know sometimes they are growing at a significant rate and you might consider other asset protection ideas.
Reese: Ya, the wealthier you get as a dentist and the more liquid you become and the more equity you build in real estate anymore equity you build in your practice that equity is just at risk if you are not thinking about crossing your T’s and dotting your I’s recently.
Joseph: And you a re a big target now.
Reese: You are the person I want to hit my car you know what I mean?
Joseph: I don’t care if the poor guy hits my car, that is just annoying. But if the rich guy hits my car then that is payday! The other thing that we see hurt our clients is that they don’t keep track of their employee manuals.
Reese: They don’t have policies and procedures in place?
Joseph: Right, and most states don’t have rules that you have to have LLC’s procedures manuals. How could that be bad for me?
Reese: I am going to play it hard for you here.
Joseph: Worst case scenario here is that someone goes to google and they find an employee handbook out there they change the name, put their name on it because they think somewhere in their mind they know that they are supposed to have this and it might protect me. But they actually have no idea how it might protect them and maybe they are in Utah but the handbook that they got was from Florida and it was written in 1999 and you know it is not 99’ anymore.
Reese: And they didn’t redact any of the names of the company that they downloaded so the front page says the dental practice…
Joseph: Yes, they signed under someone else name. The problem there is that in a move that they thought was protecting them they actually invited liability. One of the fastest places dentists will get sued, their greatest exposure to liability, is their own employees. It is a tremendous exposure to risk because you have to have these employees. But if you mess up sometimes, and it is very difficult to manage this, because different laws will implicate an employee handbook in different ways. So for instance, in Texas, an employee who just got terminated is only entitled to vacation days that they haven’t used if it is in the employee handbook. So if you didn’t even know that that was in there, well, you may just owe this person that has worked there for twenty years and never took a vacation day; you may owe her like nine months of vacation and you may absolutely be liable to pay her for it. We have had clients who did not know what was in their book and they end up with this exposure to liability that they didn’t even know that they had only because they thought, and we tell clients and this is a general podcast and this is a state to state type of answer, but for the most part it is better to not have an employee handbook then to have one that you don’t know about. That is another source of liability and what’s hard about it is that you have no idea what’s going to come up. It is not just race discrimination. That is not the only claim an employee can have. There is just random stuff. People getting pricked with needles. We see Facebook as a common theme. The way people violate Hippa. Your employees are a lawsuit waiting to happen in a lot of regards.
Reese: Probably one of the higher probability law suits.
Joseph: Ya, it has been awhile since I saw this but at one point in time I remember reading an article where the probability of getting sued by an employee was about four times higher than the probability of getting sued by your patients.
Reese: Well, Joe, this has been a great show. We have covered a lot. We have talked about protecting your money, forecasting, planning, being proactive. Looking at things that might happen in your future and inviting your service providers to get involved. You have covered a wide range of topics, it has been super helpful. It’s been a great interview, we look forward to having you back.
Joseph: Thanks for having me!Practice Transitions