Story Time! – War Stories and Spectacular Deals

In this episode of the Dental Boardroom Podcast, host Wes Read, CPA and financial advisor at Practice CFO, welcomes attorney Justin Morgan, JD, MBA, founder of Morgan Advisory Group, to share real-life “war stories” from dental practice transitions. Together, they unpack legal and financial pitfalls dentists should avoid—and opportunities that can change the trajectory of a career.

From hidden Botox expenses in med spas to phantom patient credits wiped off the books, and even a “Bitcoin blowout” practice fire sale, Wes and Justin reveal how careful due diligence, smart deal structures, and the right advisory team can protect buyers while uncovering hidden value.

Key discussions include:

• Why every practice transition carries risk—and how buyers should assess it.
  
• How undisclosed irregularities in expenses can lead to litigation.
  
• The importance of understanding accounts receivable (AR) vs. patient credits, and how mismanagement can derail a deal.
  
• The critical role of financial reports like aging AR in evaluating practice health.
  
• A shocking story of a dentist who used EIDL COVID relief loans for Bitcoin investments, lost it all, and was forced to sell at a massive discount.
  
• Why partnering with skilled advisors—legal, financial, and operational—is the best way to safeguard your investment.
  

Justin also explains the legal frameworks behind dental transitions, including asset sales, goodwill valuation, and common structures for financing deals. Wes brings a financial lens, connecting these stories to practical lessons every dentist-owner should apply before buying, selling, or expanding a practice.

This episode is packed with cautionary tales, legal insights, and practical takeaways to help dentists think like business owners and avoid costly mistakes.

Key Points

• Every practice transition carries risk—smart buyers weigh risks against upside potential.
  
• Hidden expenses, irregularities, or non-disclosures can result in litigation.
  
• Accounts receivable (AR) and patient credits must be carefully reviewed before closing a deal.
  
• Proper due diligence includes analyzing aging AR reports and patient credit balances.
  
• Practices sold below market value may offer high upside but come with added risk.
  
• Misuse of EIDL loans highlights how financial mismanagement can create rare buying opportunities.
  
• Buyers need a strong team: legal, financial, and operational advisors.
  
• Asset sales focus on goodwill, not stock or tax IDs—key for understanding practice valuation.

Transcript:

Wes Read:  Welcome back everybody to another episode of the Dental Boardroom podcast. Today we're gonna launch into some war stories that practice sonic dentists have experienced. These are real life stories that I think will be deeply valuable for you practice owners as you experience different challenges.

Let's hear how other dentists have handled some challenges. And for this podcast, I've got a guest. This is a dental attorney named Justin Morgan. Justin, welcome to the Dental Boardroom podcast. Wes, thank you so much. I really appreciate this opportunity to join you on this podcast and um, I've got some pretty good war stories for your clients.

I think some of our best podcast episodes are dentists telling actual real life stories that they've had. Now, you're not a dentist, but you are in the yoke with these dentists fighting certain battles that we're gonna talk about today. Um, I started my practice of law almost 13 years ago. I've been working almost exclusively with dentists for the past six years.

I've spent some time at Bank of America helping finance these deals. So we see a lot from the transaction side and on the litigation side as well. So some of these stories will deal with practice sales moments, transitions, and some of them wa are just sort of standard practice o owning items. And, um, I say we, we jump in.

But before we do, I'd love for you to give a little introduction about your, your book. Tell us a little bit about a book that you wrote that gives you some authority on these matters. Yeah. I, I wrote a book, uh, named Shit Dentist Chanel, and it's for buyers and sellers in the dental space. And it talks about everything that a doctor should know, right?

So if you are a younger dentist or if you're midstream in your career and you wanna learn about the fundamentals that you need to understand. From both the financial piece and the legal piece, and also the players that you need to get involved with. It's a great primer, and likewise, if you're on the sell side or if you're looking to sell or expand or, or make other moves in your career, there's other sections of the book that's gonna do a, a really good deep dive that's gonna provide you with great information.

All in one comprehensive book and it doesn't waste a whole bunch of time. It's like a hundred pages. I'm gonna, in the show notes, include a link to the Amazon, um, uh, page where your book is sold after the show. And I just want all my listeners to know that, uh, like Justin is here on his own time, I'm not paying him and I want to give him some good exposure and a shout out because he has a great reputation.

So really quickly, how can people get in touch with you as a dental attorney? Yeah, so it's justin@themorganadvisors.com. Yeah, great. Easy enough. And many of my, uh, listeners are clients of mine and hey clients, you can always reach out to me. Directly or your CFO advisor and we will get you in touch with, uh, Justin for any legal needs that you need as a dental practice owner.

Alright, let's jump into these war stories. So the first one relates to tax liens and refinancing practice debt. Give me the backdrop on this one, Justin. Yeah, I call it the taxing extraction. Right? And, um, I, I, a couple clients that owned a, uh, a, a big building, um. In California and they, they had built this building together.

There was numerous dentists in one building and they went to refinance this building. Um, and one of the partners had a lien on his interest and did not disclose that to these other partners. And so this lien caused their refinance efforts to be stymied. And they later learned about the lien at the very end.

And so they lost, you know, a hundred thousand dollars, let's say. So when that, when the group went back to try and recoup some of those losses and settle out with their partner, the partner got kind of irascible and refused to do so, and then that ultimately ended in litigation. And you know, this took four years to resolve.

And so at the end of that four years, the partner that had refused to provide his notice of the tax lien had ultimately sued his partners and then lost that dispute. Ended up having to sell his interest back to his partners at a 40% discount after paying his attorney's fees or after paying everybody's attorney's fees.

So it was a really important lesson to, to know a few things, right? One is, um, I think the, the offending partners counsel, um, got a little bit over aggressive and really didn't advise their client that, Hey, this could go really, really negatively for you. Um, and the other piece is that you should really speak to your partners.

Like if you're going through, you know, death, divorce, disability, talk with the other partners so that everybody can be on the same page. In this circumstance, this tax lien arose out of, you know, one of those three kind of challenging circumstances. So it wasn't like an intentional thing, but it really led to a terrible result, right?

This person started out with maybe $30,000 of debt or something, and it ended up compounding over time, and that became a really large loss for this person. Can we talk about a couple of things here? Number one is partnerships. Now we, we work with partnerships here at Practice CFO. Uh, a partnership of two doctors is three to four times the work on our end for these doctors, because they're typically set up as you know, a partnership of corporations.

Where you have the partnership and then you have each doctor owns their own wholly owned corporation, which then owns their interest in the partnership. And I, I did about a, a six part series on partnerships about eight months ago for those interested in partnerships. But in it, I emphasize partnerships, uh, can be extremely profitable because you have multiple producers with shared overhead and they can be extremely complicated and emotional because you're sharing a bank account with somebody else.

How you distribute profits is a function of the partnership agreement, which isn't just equal dollar for dollar, split it. It can be any way you want to, and doctors tend to view their own input to the success of that practice differently than others view their input because it's so subjective and it creates for a lot of controversy and partnerships.

I've always said, if they get along so good chemistry, if they have shared clinical philosophy, and number three, if they can have a good model of sharing the bank account, meaning how do they distribute profits in a way that feels commensurate for both of them. They can get those three things right. They can have a, just a wonderful experience with the partner.

There's so many benefits to having a partner in business. I love it. They're just sensitive and a lot of doctors go into it without. They usually get the first two, right? They get along, they have a shared clinical philosophy. They think they have trust in their friends, so they shake hands, not really understanding how they're gonna break out the money.

They have some generic sort of concept in their head. Then reality hits and unique issues come up like a tax lien, and it affects the other partners. And oftentimes that leads to a dispute which has the PO, the potential of essentially dissolving that corporation and time. In certain cases through a, a legal dispute, which can be nasty, ugly, costly, and long.

So now let's go on to this concept of a lien. Would you just kind of explain or define the term lien for our doctors? LIEN? Yeah. A, A lien is going to be formal notice of a debt on certain assets. So when the federal or state taxation authorities impose a lien. They will record that lien. It will provide notice to all creditors that the federal or state government has a right to certain assets.

Okay? And a tax lien is especially pernicious because it doesn't just attach to everything in the past. It'll attach to stuff in the future too. So this particular person had a tax lien on their membership interest, which flowed through to the the business they had with their partners. That showed up on the bank's, um, lien search when they were about to close the loan.

So are all liens extended from a government entity? No liens can be imposed by an individual, a person, a corporation, or a governmental entity. It's established by the filing of a document with the, you know, recording office, locally or county, at the county level. And that provides notice to all creditors that there's somewhere else with a claim.

Right? And so banks will impose liens when they lend, and they'll usually wanna be in first position. And then you may have second and third liens, um, just like a first money mortgage on a house, and then like a heloc. Great. And explain for our doctors, when you say membership interest, explain what that is.

That's, that's how we de define the ownership interest in an LLC. Right? When you own a corporation, it's gonna be stock. When you have a, an interest in a partnership, it's gonna be a partnership interest. So when you hear attorneys talking, we use really precise language because it means something very discreet within our world.

Um, and, and that's how we we explain that. Great. And thanks for taking the time on some of these basic variable. Doctors are extremely intelligent. My clients are extremely intelligent, but they're also so busy and they've spent most of their life learning a very specific area professionally. And so I like to, uh, go through basic definitions on a lot of these things.

So thanks for taking the time on that. So in this case, um, the, one of the partners who had a ownership in the business, or as we call it the membership interest in the business, had a personal life event that cost him or her, um. A certain amount of assets or money in order to, uh, make good on that obligation.

And maybe it was a divorce and maybe in the divorce agreement, the courts ruled that x amount of the, uh, of the dentist's assets were given to a spouse. I'm just going through a hypothetical here. I don't know the exact details, but the, it was, um, a lien was placed on that partner's interest in the practice.

Therefore when that practice went to go get a loan to a traditional loan from, say, bank of America to refinance their existing loan, they couldn't because of this lien that the other partner or partners did not know about suddenly surfaces because the bank sought when they did a lien search and said, we can't actually refinance your practice.

And I don't know what the motive of the refinance, was it just to save an interest or was it needed to sort of expand and grow? Do you remember? Yeah, the, the refinance was for several reasons. They could lower the interest rate, which would save them money on their monthly payments. The owners could also draw money out of the bills business because there was an increased amount of equity.

So the bank was willing to lend them more money, which they could have taken as a distribution, and then redeployed or reinvested for themselves. Okay. And so when I'm talking about this, it's when you refinance the business. A lender may say, oh, well this business is worth a million dollars. We can give you up to $800,000 on the business and you can take that money and do what you will with it.

Um, and so there was a couple of different benefits to this refinance. Um, and it was also time for them to refinance as well. So it was at the end of that loan's term. So they were forced to refinance by the end of the term, and they were unable to, or they were delayed in completing that refinance because of the tax lien.

So they ended up getting hit with penalties and interest from that, the original lender. So I wanna go through a few concepts here. One of the main reasons for these podcasts, Justin, is I'm really keen on my clients and dentists becoming savvy business owners, and to be a savvy business owner, unfortunately, they have to learn a lot of stuff on their own because they're not gonna learn it through college classes or formal continuing education.

They have to be intentional about learning the concepts of business ownership beyond doing, uh, dentistry. So I like to really call some things out as just sort of modules of education. So the three things I want to call out where we are right now in this war story is, um, is number one. A lot of times we'll refinance with a doctor.

Um, let's say they're halfway through a 10 year loan and they're out of the prepayment penalty, which is usually four or five years. They can refinance. Maybe rates have dropped, but the, the monthly payment could come down for two reasons. One, the interest rate drops as you mentioned, but also when you refinance, you're usually essentially getting a new loan and extending the term back out to 10 years.

So not only did you lower the rate, but now you lowered the payment because instead of a million dollar loan, let's say you're at 600,000 left on the balance and the 600,000 over a new 10 year period. Especially if it's at a lower rate, you may see your, your monthly payment get cut by 60%. And a lot of times when rates are low, I don't mind using debt that's at a four 5% tax deductible rate in order to free up more cash flow to do things like expand or to fund their retirement plan, which will get tax deductible deferred growth.

And so it's a very strategic thing. The next point I want to emphasize here is. So point number one is that debt restructuring can be a great strategy when it comes to cash flow management. Number two, um, is the equity cash out loan, which is, this is like a HELOC on a house. You've got equity in your house.

Let's say you've got 500,000 equity. You can go to the bank and say, Hey, can I get 200,000 as a line on the equity of my house because I want to go buy a vacation home or a boat, or whatever that is, do a remodel, et cetera. In the business world, we call that an equity cash out loan. So we don't call it a heloc, we call it an equity cash out loan.

So that's what, that's what was happening here is if the dental practice owners were saying, I would like some money to actually take off the table, some of my sort of equity in a way to take off the table. Then you go to the bank, the bank says, yeah, your practice is doing 2 million a year. You've only got 400,000 in debt.

We'll absolutely lend you another million dollars. You can use 500,000 for build out of three more ops, that kind of thing, and take $500,000 home to go live on. This leads me to my third concept. So the first one was extending the refi or the refi extends the loan payments and significantly lowers them, which is a great, uh, cash management strategy.

Number two, um, equity cash out is a specific type of loan that dental practice owners can get equity cash out loans. And number three is a concept called excess distributions. Now, when a bank gives a practice owner a loan, and it's a equity cash out loan, so let's say it's a $500,000 loan, and they literally drop 500,000 in the practice checking account, $500,000 lands.

Can the doctor then transfer that out to their personal account for living or savings, new car, whatever they wanna do? The answer is maybe, and I have a episode I did about three months ago on this concept called excess distributions tax. It's in the tax code, and what that means is if you're piggy bank, think of your practice as a piggy bank.

You have money. Let's say you have $50,000 to start that you put in. You got $50,000 sitting in that big piggy bank. Then during the year, you net 500,000 in income on your tax return. 500,000 goes inside that piggy bank. Let's say you took out all $500,000 and you moved it to your personal account. You still got 50,000 in there, so your piggy bank is still positive.

In that example, if you took out 600,000, you only had 550,000, 50 original contribution, 500,000 of net profit. After all expenses, you took out $650,000 or $600,000. You took out $50,000 more than was in your piggy bank. That's not good. And the IRS will charge you. A 20% tax on that and California or whatever state will charge their state tax rate.

And so it's about a 25 to 30% penalty on that extra money. So if you took an excess distribution of a hundred thousand, you're gonna pay $30,000 in a penalty. And sometimes what we see PAs do is we reclassify that as a loan and it's called a loan to shareholder. Up to about a hundred thousand. It's fine.

It's on the radar. You go above a hundred thousand, you're setting yourself up for audit risk. 'cause on the 1120 s tax return of the corporation, it specifically says, are there loan to shareholders? And that you gotta be careful about. So my main point there is if a bank, if you want to go get a loan from a bank to take out money and spend personally, you've gotta know what's in your piggy bank, which is a tax number called your basis.

Ask your CPA, what's my basis in my corporation or my partnership and can I pull out $200,000 without triggering this excess distribution penalty on my dollars? Okay. Those are a few sort of business and tax concepts I wanted to bring up. Uh, as it relates to this scenario here. Let's carry on. So who sued who in that example?

In this example, the, the individual with the tax lien ended up suing his partners that did not have the tax liens. So just to re restate this, the person that caused the problem ends up suing his partner. That's why I was confused. Explain that. It's confusing and it was because the partners had, they thought they had come to an agreement.

They said, okay, we'll take this distribution from you as as compensation for the amount that you owe us and we'll all move forward. So what happened was you have the business, they had to give distributions to their shareholders or their members, and the person with the tax lien. Was supposed to get, let's say, $50,000 as a distribution.

He owed about $50,000. So his partner said, give us this $50,000 and the the debt is clean and we can move forward in the future. The next day, this person said, no, I want you to give me my $50,000 in cash so I can write you a check for the same amount, and we can move on. Then this doesn't make sense because it does not make sense.

Okay. And that was an attempt by this particular offending partner to take the money and run. So his, you know, his partner said, you know what? We're holding onto the money. And so the offending partner sued his partners. So that he could get the money so he could then pay. So it sounds like one of the partners sort of controlled the purse rings mechanically, even though they all, as a shared owners should have access to it.

One of 'em was the sort of the, the gatekeeper of the cashflow distributions. Is that about Right? And the offending partner couldn't get it and sued them for it. Yeah. So, so it was the, the other partners said, no, no, no, let's just do it this way. And the offending partner said, no, no, no. I want you to give me the cash.

So then I can pay you back. And the other partners didn't have the trust. They're like, oh, we'll give you the cash, but we don't trust you that you're gonna actually pay us. There was, there was no trust and there was no reason for trust at that point. Yeah, that makes sense. Okay. And how did that, uh, wrap up?

What was the outcome? So let's just say that, you know, these partners had 2 million bucks. Speech and and value that they had. Okay? And so the offending partner got bought out for basically a million bucks, but he also had to pay $600,000 of attorney's fees. So he had a $2 million bucket of money in equity with re re recurring revenue because they owned a business that was profitable and the value of that fell to 400,000 bucks.

As a result of the, as a result of a dispute over, like how this little bit of money should be handled, whatever financial obligations originating in that offending partner's private life, whether that was a divorce or whatever, just got dramatically compounded by the loss of the value of their share of the estate in the practice from 2 million to 400,000.

So. Um, the, what's the takeaway lessons here as the, I'll make a first stab at this as a dental partner. If you're in a partnership, first of all, don't get into a partnership unless you have strong trust and an agreed on method of allocating profits. That's number one. Number two is, um, you are married together.

When you share a tax ID and a bank account, make sure you have very strong trust and a good code of conduct. That you all live up to, which includes transparency about things going on in your personal life that are gonna affect the other partners. That's an in inevitable fact of life. When you're dealing with a pass through entity, like a partnership and you have other partners, what's your takeaway from that for dentists?

Um, you know, I think the takeaway is if you're having some difficulty in your family life or in your personal life, make sure you have. Good advisors that can help help you make good decisions in your business life. Right? Because this person was so convinced that they were right, they were doing the right things.

I'm not sure his counsel and his people were really fighting back against him, um, that he brought this upon himself. Right. Great takeaways. Alright, let's go on to war story number two. This one relates to a practice sale, three clinics. Just to be clear, this is. I'll just share pretty openly. This was a dermatology, uh, practice, but you dentist, I want you to know that dermatology and dental practice practices, there's a lot of similarities here and this could absolutely apply to dental practice ownership.

So kick us off on this war story. Yeah, so I wanna call this one bad Botox.

So my clients we're looking to acquire Med Spa Derm Clinic, right? Three different locations, had great marketing, had great apparent profitability. You know, we were looking at the, the profit and loss statements. The tax returns probably did about $4 million in total revenue, and they were willing to pay about $4 million in cash or financed money.

Right. And. As I got a hold of the deal, I said, you know, guys, like, why are we paying this much? You know, the banks aren't gonna come in with this somehow, you know, you know, is there, is there other competition on it? And so as, as we go through the, the process of looking at it from a high level in terms of value, profitability, investment value to the client, you know, they're like, oh, there's, there's this as much profit, this is unusually profitable, and that kind of sins.

A little bit of a red flag up the pole, right? Or it puts me on alert. And so as we go through it, I'm, I'm, I'm looking at it and it's like, well, how is it this profitable? How, what are the other practices or the other small businesses that do this, what do they look like? Right? And it's like, well, they're not as profitable at this as this one.

Okay. And so we just say, Hey, look, you guys should be on high alert here. This could be problematic. And then as we proceed through the transaction, we've got a pretty irritable. Irritating attorney on the other side, right? Really aggressive, won't change certain, certain language. That's pretty standard.

Like we asked for, Hey, are you guys complying with all of the applicable laws, rules and regulations that apply to this type of business? And you know, they really wanted very simple, like two, three sentences in terms of the reps and warranties, which are promises about the quality or condition. Of a certain aspect of a practice, right?

That's a rep and warranty. And so that again, sent a red flag up, which is like, Hey, you know, we usually want to have better documents, especially when we have a lot of money at risk. We want to be really clear on this. And so my clients, they acknowledged that, said, Hey, look, we think we can move this forward.

We think we can take care of this and handle it. We're gonna assume the risk. Okay, so we finally closed this transaction months later. It finally gets across the finish line after a whole bunch of hemming and hawing and, and, you know, negotiating and going around in circles. And three months later or two months later, I get a call from my client saying, well, we finally figured out why this practice is so profitable.

And I say, what happened? Right? And like, oh, well, the Botox that this practice relies on is not FDA approved. And was purchased overseas at a deep discount. So there's the extra margin, right? And everybody in the practice knew that they were ordering illegal Botox. And so I think my, I, I think it'll probably will work out for them in the end, um, whether that gets resolved through litigation or not.

But, um, when we see something that's too good to be true in terms of profitability. Or a hockey puck like growth and, and a dental practice especially, we should start asking questions, right? And they need to hire people like you and other consultants and people to jump in to provide like detailed forensic analysis and investigation.

Let me do what I've been doing. The other story, just share a few educational concepts out of this. The main one is around this concept of due diligence. Whenever you buy a dental practice, you wanna do due diligence on that practice. And usually before the offer letter goes in, it's marginal due diligence.

It's maybe looking at a p and l and tax return and just seeing if the car looks healthy. We will use the car analogy, kicking the tires, maybe even a little test drive that that's pre, uh, post NDA, pre LOI offer letter, letter of intent. LOI. And once the LOI goes in, now the due diligence starts, and this is my way that I've always cataloged due diligence, is I say, there's financial due diligence, there's legal due diligence, and there's operational due diligence.

And the financial due diligence is going and getting source documents that validate the numbers on the p and l accurately represent the economic reality of that practice. So if it says it does 2 million in collections, let's go get bank statements for two years and let's add up all of the deposits.

Look for even deposits that might be owner contributions and not collections. Sift those out and add 'em up and say, does this match close pretty closely? What's on the p and l that we used to determine a price? For labor, which is the biggest expense on a dental p and l, let's go look at the, at the payroll reports and validate that their labor cost, which they say is 30%, is actually 30%.

So in this case, it, the, the financial due diligence is going from top to bottom on the p and l and validating that that is all real lease, under lease documents, bank statements, tax returns, payroll reports, production reports, all of that validates those numbers. That's the financial due diligence, the, uh, legal due diligence.

That's where you're, uh, drafting up these legal documents that have the, the warranties, how you're gonna agree on different, uh, items like, uh, ca like, um, redos and these sort of, I call 'em deal points. You know, there's like 20, 25 of these deal points. What are you gonna do about ar, for example, that kind of thing.

That's where the attorneys are redlining back and forth and making sure that document, along with a lease assignment is being structured correctly. I just call that the legal due diligence. And then the operational due diligence is what's the state of the equipment? What, um, what existing treatment plans are there that have, are unaccepted, has the doctor taken all the meat off the bone, so to speak, right before the sale and that kind of thing.

So, um, on the due diligence, what I would've looked for in this specific situation is, let's say this were a dentist and the dental supplies were, I, I would, I would say normally dental supplies are around six to 9% of revenue, depending on what kind of supplies they're buying. Uh, but let's say it's 7%. If I'm looking at a dental practice p and l, and if it says supplies are at 2%, I'm gonna be like.

How is that possible that you're at 2% of dental supplies? All right, so you're buy, who's your vendor? Okay, it's all from Patterson. All right, let's go look at some of these invoices. And then we would uncover that they were buying from China at 10th, a 10th of the cost. And then we'd say, okay, buy Or can you, are you legally allowed to keep doing this?

Because if so, great seller found you a nice little nugget. If not, then we have to do an add an adjustment to the profit to show what the buyer will pay in supplies. And we would need to add, you know, $150,000 to supply costs because they're gonna be compliant with the FDVA on that. So that's where good due diligence on the financial side.

This attorney, you're not gonna really get into that, but the uh, whoever the buyer's accountant was, I think should have known that these Med Spa derm clinics. Have an average of X amount of revenue going for their Botox costs, and it doesn't look right as a percent. So let's dig into that. But sounds like that never happens.

So bottom line there, do some good due diligence and have a good team to help you out if you're buying a dental practice. Awesome. Okay. Any other takeaways from that story, Justin? Um, understand that each transaction has risk, right? And. I think that the buyers in that situation assessed the risk and they kind of knew that something was gonna be off, and they also saw the, the investment potential or the upside potential of the deal.

And so I think they'll be fine. Right. I would think that that should have been disclosed and because it wasn't disclosed, I would think that is a, what's the, what's the word? A, um, it has legal. Recourse for them to go back to the seller. Yeah, they, they certainly are. They've certainly initiated a civil action.

Okay. I, I hope and suspect they will get something out of that for sure. Alright. I love these stories. Let's go on to story number three, and this one deals with patient credits. It's also about a practice transition as well. Give us the backdrop on this war story. Yeah. Um, this is the case in the Phantom credits, right?

Uh, this is also a, this is a dual office dentistry practice. My clients were the buyers, and just like the proceeding story, we saw some irregularities on the profit and loss statements and the tax returns. Rather than being incredibly profitable, this practice was not very profitable at all. Okay. So when that happens, my clients, they understood practices pretty well.

They saw the clinical opportunity with respect to the practices. They saw the opportunity to tighten up expenses. They anticipated that maybe some other people were on the payroll. That shouldn't have been. Maybe there was some accounting irregularities. Or some aggressive tax saving strategies that were being employed by the selling party and decided to move forward with that transaction.

Now, um, to put, if this all in context, you know, we, we may have had like $3 million in revenue on these two offices and maybe like $50,000 of net profit, right? Um, and so when we look at the expenses, it's just kind of. Over the top. Um, and so again, the recomme and, and this particular practice was on the market for over a year.

The big banks couldn't finance it, so we had to come up with an alternative structure, a promissory note, cash down payment, which dramatically reduces the amount of buyers that are available for a particular practice, especially in Southern California. And you know, it also puts me on high alert, and it's the directions of the client.

It's like, Hey, we, you really need to be careful here, right? Because we can't get traditional finance. Everybody's kind of concerned about this. The practice has been on the market, but again, it's, let's assume the risk. We know what we can do with this practice. We're already getting a great deal because this sold at, let's say 55 or 60% of revenues.

In terms of the purchase price, which is a little bit depressed compared to maybe 80 or 81 or 2% if it had been managed appropriately. And so we take that transaction to closing, and two months later we find out that there's $200,000 of patient credits that were deleted from the books or months before the closing date.

This is discovered because patients come in and they say, Hey, I've got a, a credit on your books. And or I had a credit with a former owner, like, I would like to have this work done now. And they go, look at the books. No patient credit was transferred at closing and it's not even on the financial records.

And then we later on find out that one of the staff members said I was directed to delete these patient credits in April. So this too leads to litigation, right? And it's a big headache for everybody involved, especially the seller, because on the sales side, and I don't have a window into what this person did or did not do, you know, it becomes a question, um, where the patient stolen by the staff, or were they stolen by the owner?

Right? If you're an owner and you're trying to unload your practice and and head into retirement, the last thing you want is to be sued two months after your closing date. And so this one will hopefully work out and resolve, and the parties will come to an agreement so they can go their separate ways.

But again, this also presented a really big opportunity for my clients too. So they had a riskier deal. They may have had some headaches on the litigation side. They also got potentially a really good set of practices at a discount that they can take off and grow over time. So let's go over some of the financial education components of this war.

Story number one is dental practices buy and sell just like houses. Buy and sell as dentists know, but they're what's called assets sales. Asset sales means that the buyer isn't buying your, your tax id, they're not taking over the seller's tax id, which let's say it's a single doctor S corporation.

They're not buying the stock of that corporation and carrying it on. Instead, it's like a garage sale and the seller's lifting up their garage door and saying, here's all my dental chairs and my x-ray machines and my CAD cam. You know, my leasehold improvements, and let's say that's all valued at 300,000, but I'm gonna sell it to you for 1.2 million.

That extra 900,000 is just the reputation, the goodwill. That's goodwill is an accounting term for an intangible asset. You can't touch it. And that's what most of dental practice values are, is they are really goodwill because you can't really sell your stuff for, for the, for that much. And so when, because it's not a stock sale, the buyer is not.

By default entitled to money that comes in for work before the sale closed. So the seller's doing this work and then they're collecting, you know, but ideally they're collecting within 30 days, but there's a certain amount of uncollected, but already completed treatment, and that's called accounts receivable.

And, uh, if you're a dentist practice owner, you should, you should know what accounts receivable means. You did the work, you haven't collected the money. Because you're selling your assets. Account receivable is an asset. It's something that you are entitled to get. That's an asset for the seller. You're going to get the that ar when the money comes in the door.

Usually when we value a dental practice, we don't include the value of the accounts receivable. So if it's a million dollar practice, we might say this is valued at $750,000. There may be an extra a hundred thousand dollars of AR that's gonna come in the door in the month or two after closing. And typically the seller keeps that AR in addition to the sale price and the seller keeps whatever cash is in the account on the day of closing as well, because they're keeping all assets other than the assets they sell.

And they're usually selling the dental equipment, leasehold improvements. They're selling the, the goodwill to the buyer. Now, sometimes the buyer will say, well, let me go ahead and buy the goodwill. I'm sorry. Buy the accounts receivable. And let's say the accounts receivable was valued at a hundred thousand.

So instead of paying 750,000, they pay 800,000. Then every dollar that comes in after the sale date goes to the buyer. But there's, there's pros and cons when the buyer buys the ar. You know, there's pros and cons to both of those, uh, scenarios. Now, the opposite of AR is a. AR credits basically, or, or, or, uh, patient credits ar is when the patient owes you money or the insurance company credits is when you owe the patient money.

And so in this case, the seller decided to just wipe out everything that seller owed patients legally on the books in order to not have to pay that and let the buyer deal with it. And they didn't disclose that they were doing that, which is completely. Illegal. So let's learn a little bit about here, about ar.

How do you handle the AR credits on file? Number one is you should quantify those and there's reports in the practice management software that will tell you here's how much you owe your patients. Where it gets tricky is that some of those AR credits, those patient credits are like eight, nine years old.

Patients long gone. Probably will never have to fork out that $150 patient credit. Is the seller supposed to lower their purchase price? Dollar for dollar? Uh, for a credit that is likely never gonna be paid back to a patient that is long gone, maybe even moved outta the state, maybe even died. That's why it gets a little tricky here.

Same thing with AR that is over 120 days. Is that ar actually ever gonna come in or is that patient that owes you money Long gone at this point? So usually what we do is. You can net the two and say what are patient credits and what is our ar? And you can sort of net them and then pay for a price. And when you do that, you always pay more for younger ar, so AR for treatment that you did in the past 30 days, the buyer should pay probably 90% of whatever that AR is because it's a very high probability on collecting.

If it's older than 120 days, either the buyer just doesn't buy it. Or they pay like five or 10% of that balance because it's unlikely to get collected. And so it's this tiered percent based on the 30 day, 60 day, 90 day, and 120 day plus of how much the buyer would actually pay for that. For that ar I have done hundreds of deals.

I've never seen a deal where a seller essentially. Hid the credits. I've never seen that before. So I think the buyer absolutely has the right to legally go after the, the seller on that one. Any other takeaways you wanna give to our listeners on this subject of ar and ar credits in a practice sale? Oh, uh, no.

I think you're spot on, right? With, with aging ar I think, um, when you're going through a transition or an acquisition. Preparing for a transition mind, your accounts receivable and your revenue cycle management. Try and tighten that up, optimize that so that one, you don't have a whole bunch of AR at closing.

And two, you reduce your stress level about getting that money delivered to you after close. Um, and then also on the buy side, look at those AR statements. Look at the patient credits. The, the tighter those are. The less amount outstanding old AR there is, the better the practice management of that business is gonna be.

Right. So I think those are really two big bellwethers, um, that give me a lot of confidence in deals. I always like to ask for that aging AR report up front. Agreed with you on that one. I think we have time for one more war story. You up for it? Yeah. I will keep it punchy. Okay. Do we wanna do the staffing shortages, war story?

Actually, I have a different one. All right. Tell me about it. Uh, I wanna call it the Bitcoin blowout

at this point in time. In a day and age, I think anything on bitcoin's gonna be interesting. Yeah. Um, simply, but I got introduced to a client, her brother was an attorney, found me online, said, Hey, talk to this guy about this. Really unique opportunity and the opportunity was, um, practice generated $600,000 of income and it was being sold for 150 grand.

And I said, what's wrong with it? There's nothing wrong with the practice, but the owner had been indicted by a governmental agency over. The use or misuse of certain governmental funds. Okay, so what happened was this individual took those funds that they had borrowed from the government for one very specific purpose and invested them in Bitcoin.

Okay? And Bitcoin crashed, insolvent immediately and couldn't pay the debts back, and then also got something triggered. And so they found. This person had taken those governmental funds and wired them into something pretty unique. Um, you know, I don't know if, if it was a random audit or not, but you know, this person got indicted, pled guilty, serves a little bit of time, but also has to unload his two, or her, his or her two practices.

And that resulted in both of these practices needed to be sold in 90 days, and it went to the person that was. Able to see through and understand that there was little risk associated with what his conduct was and the ongoing operation of the practice. And so it was an interesting place to be because here I am working with another attorney who's taking care of trying to take care of his family member, and I'm saying look like she can buy the assets in this practice.

It's unrelated to this criminal case. As long as the patients are still coming in, they don't really care about it. This is the deal of a entry, right? Because you couldn't even build out this practice with old equipment for $150,000. So they got that practice on a, on a steal, and immediately your cash flowing and making great money, and they'll, they end up making it the, the deal of the century.

All right. Couple things on this. The, the loan that you're talking about from the government. I, I'm, I'm 99% sure it's the EIDL loan. And the EIDL is the economic injury, uh, economic disaster injury loan. And that came out from COVID to help dentists get through the storm of COVID. But a lot of office offices being closed down and supply costs going up, yada, yada.

Along with the E-R-C-H-H-S grants, PPP, all that stuff. EIDL was a loan. The other ones were more like gifts, pretty much. This one was, was a loan though. Um, and for most people it was 150,000 loan. That was kind of the max outta the 3.75% interest. And many of my listeners right now have that sitting on their balance sheet, the ideal loan.

Certain clients were able to get more. I have a client who literally got a $1.5 million loan. Uh, has been able to use that to get a return on investment in a business investment. He literally put in a certain business savings account getting more interest than he's paying, and he is arbitraging three or four grand plus a month just off that.

So it wasn't necessarily used for, uh, an economic injury disaster. But I'll tell you what these things have been used for, everything under the sun from taking it out, buying a boat, putting it in a 401k. Relatively few of them used it for getting through the disaster. I found that the P-P-P-H-H-S grants and the ERC were more than sufficient for people to get through COVID, but a lot of people did get that it is at a great tax deductible, 3.5% rate.

I mean, that's hard to beat, close to free money and um. So now what triggered the government, the SBA finding out about this? Was it that he, the, the, the owner defaulted and could not make the payment and that triggered a, an audit? I was not on the sell criminal law side, so I don't know what triggered the audit or the review.

Okay. I bring that up because I suspect half of dentists who got an E-E-I-D-L if they were audited. Probably could be traced back to that EDL not being used for economic injury. That said, it gets a little diluted when the EIDL money goes in the same checking account as collections and then labor cost comes out of it.

So it just gets sort of mixed into this bag and then they take distributions out. So they took the EID and it landed at it's 150,000 and immediately pulled it out as 150,000. That's easy to trace. But generally that's not what happened. And so it gets sort of laundered inside of the p and l overhead and they're taking distributions all the while of 10,000 here, 20,000 here.

That the reason why they're able to take those distributions is 'cause they have extra cash thanks to the EIDL. But I think that laundering can hide it for a lot of people, but not everybody. And I certainly wouldn't want the IRS coming and sniffing around the balance sheets of my client's accounts on, on this, not that we're.

Eva evading taxes, but we here at practice CFO are fairly aggressive in helping our clients, um, beat the tax friction. Anyways, that's a fascinating story on the EIDL. Let's go ahead and wrap up with that one. Justin. These have been great stories. I love to extract learning lessons out of actual dental stories.

These are highly valuable as I attempt to educate my clients on all things business. As they are business owners. Any final comments or words of advice for our dental practice owners out there? Don't be afraid of the business piece, right? You have people like Wes, you have people like myself that can walk you through a lot of things and serve as guides and training wheels as you grow and develop into a business person, and I found the path to be really enriching and a really enjoyable thing to do.

Amen to that. Now, tell everybody what areas of law you can help dentists with. My firm focuses on m and a. We do a lot of transitions, so purchasing, selling. We do a lot of real estate, whether that's going to be leasing, new leases, startups, acquisitions. We do partnerships, DSLs, private equity transactions, so really a corporate development corporate department, and we have.

Two junior kind of legal attorneys. We have another, um, of counsel that's a 13 year veteran as well. Um, and then an office manager that helps keep everything on track and people can find you at Morgan. Your company's called Morgan Advisory Group. They can find you at the Morgan, M-O-R-G-A-N, the morgan advisors.com, A-D-V-I-S-O-R s.com.

And again, this is Justin Morgan jd, MBA. You've got an MBA. Yeah. Hey, busy. I love that. It means you can, uh, get my language with numbers. Yeah, absolutely. That's a great combo. Well, you're highly, uh, credentialed in the area. I love your communication style. You've got great experience. I will, um, be sure to add you to our list of great attorneys and really, you're here in Southern California with me, so you and I are gonna be doing some work together.

I am sure. Yeah, man. Absolutely. Thank you. We'll, we'll have you again back on the show. Thanks for joining. Dental Boardroom podcast and, uh, excited to get this out to our listeners.