Crafting Your Chiropractic Legacy: The Importance of Succession Planning with Dr. Douglas Sea

What if you could start planning your exit strategy from your chiropractic practice today, ensuring a seamless transition when you're ready to step down? Let's join the conversation with Dr. Douglas Sea, who started planning his succession 41 years ago, and learn from his experience. We talk about his journey, inspired by the book "Good to Great," and stress on the significance of envisioning the end goal and mapping out your exit strategy.

We then turn our attention to the importance of finding the right successor, mentoring them, and understanding the intricacies of the transition process. Hear from Dr. Sea as he shares his own experience of selling his practice and the crucial financial and legal implications it encapsulates. We break down the three possible exit strategies: selling outright, retiring in-practice, or creating a succession plan. 

Lastly, we delve into the complexities of valuing and selling a practice. We discuss what you're really selling and how to correctly evaluate it, considering different scenarios for both the buyer and the seller. This episode is a treasure trove of insights for new graduates on the lookout for an affordable practice, or for those designing their own exit strategy. So, whether you're a young chiropractor planning to acquire a practice or a seasoned professional preparing to exit, this conversation with Dr. Sea will equip you with essential knowledge and strategies.

Dr. Douglas Sea Bio: https://sidecaredge.com/about/douglas-sea/

Transcript

Speaker 1: 0:04

Welcome to the activate your practice podcast. I'm Dr Four. Data always wins. Hi, I'm Dr Arlen Four. The podcast coming to you is called activate your practice.

Speaker 1: 0:20

We have people at all different levels in practice today and we want to do some things to help everybody at every level. And this morning I'm honored to have Dr Douglas C, who 41 years ago became an activator student and he was at Northwestern, came over to a seminar in Minneapolis, looked at activator and said this is what I want to do. And so Dr C has now gone on to have a program. That's where you bring people in to take over your office. And when I say take over, I mean when you want a succession plan, because today people will come up to me and say what do you think my practice is worthwhile? This morning we're going to ask Dr C because he's had a lot of experience and you know we don't bring somebody on this program if we haven't seen what their end result is.

Speaker 1: 1:14

So good morning Doug. Good morning Dr Arlen. How are you? I'm just fine, thank you. You know, give him a little history, because he's not only a consultant today, but for some 35 years he had a practice in Sioux Falls, south Dakota, the largest practice in the state of South Dakota, and I asked him this morning and I said, doug, what was the highest number of people you saw in a week? And Doug, what did you say? Busiest week was 744 patient visits, and he keeps statistics, by the way. How about the biggest day you ever had?

Speaker 2: 1:50

Biggest day was 244 patient visits in one day.

Speaker 1: 1:54

See, I told you he had statistics in his mind, but we started observing his practice from our headquarters here and saw you know that he was really doing things correctly, and we wanted to get some of this information out to you. And how many years ago now was it that you decided to put a succession plan in? How do you go back?

Speaker 2: 2:17

a little further than that.

Speaker 2: 2:18

I think I had an associate one time and when I brought the associate in, unfortunately my practice didn't go in the direction I thought it was going to go and go up. We actually dropped by about 25% during that time. That wasn't any fault of the associates, it was really my faulty planning, thinking that you just come in and be able to pick up a higher volume practice and do what needs to be done to sustain that and grow it without having a plan in place. And I kind of actually vowed, made the vow to never have another associate, another doctor, in my practice because there's actually too much work. And then I had the serendipitous fortune to read the book Good to Great by Collins and in chapter four I think it was about every great company has a succession plan. And at that point in time I was 41 years old and I started thinking about my succession plan clear back then and it was like I'm not going to do an associate, I got to do something different. And that's where I coined the term successorship versus associative.

Speaker 1: 3:24

So then did you start bringing people in. How did it? How did it evolve?

Speaker 2: 3:29

It happened very organically and again, when you're when, when you're committed, providence steps in and kind of guides the process. As I said a second ago, I vowed never to have an associate again and then the business partner of my very first patient I saw in Sioux Falls came to me or their whole family was patients, except for their son that was enrolled in Palmer. And mom came to me and said, hey, would you mind talking to Trent about options and possibilities in the profession? And I said absolutely for sure. Well, it turns out this kid was mowing my yard when he was a kid.

Speaker 2: 4:08

He was an entrepreneur, hardworking kid doing great in school, and I'm like he wants to come back to South Dakota and I didn't want an associate. So I got to get really creative on how to make it. Either it's gonna work really well or it's not gonna work. And he wanted to come back and actually preceptor with me. And my counsel with him is I don't think I married the first girl I kissed. I know what I have to offer you as a clinician and an opportunity in my practice. You need to go out and do your preceptorship somewhere else. And he actually did a preceptorship in Arizona at the time with an activator doctor and it was in January, february, march and I wasn't sure I was gonna get him back after the winter. But he came back and the rest is kind of history and we assimilated it and went in and pursued the process.

Speaker 1: 4:58

Well, what's the best time to begin to plan? I mean, you were starting thinking back in 40. And, if I remember correctly, you were 50 something when you actually got the succession plan, you know, completed.

Speaker 2: 5:11

Finally executed it and sold my practice in December of 2011 or 12, so it was 52, just turned.

Speaker 2: 5:20

Just turned 52 when I decided to move away and move on to another passion. The best time to plan is kind of like I wrote my book years ago. I was assigned in the landscape store, signed, read the best time to plan a tree for shade was 20 years ago. Second best plan is today to plant that tree, and I think the same thing applies to our strategy of exiting our business.

Speaker 2: 5:47

We sometimes wanna at least when I've talked to people I always want them to begin with the end in mind and the realization that everyone is going to leave their practice at some time. No one gets out of this world alive, and so what happens is we either make that decision on our terms, with our options, or it happens to us. And so everything that we wanna teach us all about having options so that you can do what you wanna do, when you wanna do it, how you wanna do it, and that's really about the lifestyle and the life that you wanna break. And so the planning process and understanding a timeline, a game plan those types of things are very important to work backwards from the process that at some point in time, I will be leaving this practice.

Speaker 2: 6:31

How do I wanna leave my legacy? Do I wanna leave a legacy? Do I have family members that wanna join the practice? What are my options? How do I really sort out my timeframe? What is my economic situation like? What can I afford to do? When can I afford to do it? Do I need an income from the practice? There's always more questions than answers, arlon, until you get kind of the footing on where the doctor is really at in that process and how soon they wanna make it happen.

Speaker 1: 6:59

Now you designed, though, a step by step approach. That's what I've learned from the people that I've recommended to you.

Speaker 2: 7:10

Yeah, the process is really the successorship protocols I think that you're learning to hear is really about how do we go through a recruitment phase, finding the right doctor, how do we hire them in that process? Wonder what's the interview process for them? This is one of those things where I always use the analogy. This relationship is much more like a marriage versus a date dating. We are committing, we want to come in with alignment of vision, alignment of values, alignment with timetables. One of the things that we get accused of in our profession a lot is abusing and eating our young professionals and not giving them a chance and the goal posts keep getting moved and things don't get executed. We don't honor our commitments. So we really need to be aligned in our vision going forward. This is what we're going to look at that happens and we look at that, having the clarity of the vision of what we want to happen and, again, in filling in the gap. So the recruitment process you got to have the right candidate, you got to go through the steps of vetting that person, the assessments, the gap, all the discs. I mean we've got reports done to see how good of a fit that successor doctor is with the owner doctor, on their behavioral style and their motivations, what gets them excited. So, alignment of vision, having a clear cut plan and then the implementation, one of the things that I knew in my process.

Speaker 2: 8:42

When I had it figured out right, I took a sabbatical for two months and during that two months I don't know if I ever told you I never went into my office. For two months, I never talked to my doctor, I didn't talk to my staff, I didn't write a bill, I didn't go to the bank, I didn't write a report. I didn't do anything for 60 days. And I came back and you know what Nobody missed me. Patient volume was the same, new patient attraction was the same, revenue was the same.

Speaker 2: 9:09

My income didn't change, because the way the successorship model is set up is not based on who's cracking the back. It's based on the success of the business. So as long as the business is growing, there's profit is distributed according to the formula and the contract. So I was gone for 60 days and never missed a beat. Never missed a beat. Patients would go hey, you've been gone for a while, missed it the last time I was in. Yeah, it's gone for a few days, and they didn't know I was going for six weeks. Nobody are 60 days. Nobody missed me. It was beautiful. I had created my vision of creating a business that's replaceable and I'm replaceable.

Speaker 1: 9:49

When you started looking for a candidate, were there some criteria.

Speaker 2: 9:54

Yeah, I think one of the biggest criteria other than moral character and somebody that you would like to work with and spend a great portion of your life with is technique alignment. One of the things that we see, especially in activator practices the technique is really the brand, it's the brand of that practice. This is what all the patients over the years have come to appreciate about that office is the technique, the deliverable, the treatment plan, the care, the staff all those things are the brand and we start mixing up different, diverse techniques, we create brand pollution and a polluted brand is not a sustainable or scalable or excitable brand. So, being really tight on your business model, being really clean on your technique, deliverable, activator, diverse I don't care what it is, but it needs to be the alignment between the owner doctor and the successor doctor Need to be very compatible in their chiropractic philosophy and their technique compatibility and their behavioral and motivation styles.

Speaker 1: 11:04

How long does it take you to tell if a candidate is going to be productive and if he's gonna be worth taking through the whole process?

Speaker 2: 11:13

Well, it's kind of it's a great question. It's kind of like taking a dog home from the kennel right the braider, is it the dog or is it the owner if there's a behavioral problem? So it's a great question. I think you would never hire anybody that had definitive red flags. You would never welcome them into your home, which is metaphorically what you're doing. You're often welcoming them into your business. You're turning over the keys of your business baby, your legacy, to someone. You are going to vet them very clearly and completely before you give them the keys to the kingdom, keys to the practice. And so it can take.

Speaker 2: 11:58

You know when you hire the right staff, you meet the right person. You kind of know whether this is worth putting that effort in. And then you give them a little more rope, a little more time, a little more responsibility and you can know pretty definitively within 90 days, six months, whether they're going to make the grade or not. But to me, most of it is on what your leadership is and how you're leading them to success. We, as a seasoned doctor, we've had our time in the spotlight. Now it's how do we mentor the next generation who can sustain our legacy, can take over and make it even better than what it was when we left.

Speaker 1: 12:37

Is the doctor that took over your practice still doing well today?

Speaker 2: 12:43

What's interesting about that? Yes, he is. He's actually now at the stage where he is now going to be the first of our company that is now looking for his own successor. So he's repeating the process all over again. What was interesting?

Speaker 2: 12:58

When we made the decision, I made the decision to actually sell out completely. At that point, we met with our banker in April and December was going to be my exit time and we shared with her what was going on and she started crying at lunch. She took us out to lunch and she started crying and she goes. I don't know what I'm crying. I'm really happy for you, doctor. She didn't move on to the next thing you wanna do. But I'm really happy for Dr Trent too. You've both taken care of me, and I simply said to her what do you need from me to make this happen? And she said I just need three years of your less three years of your personal company tax record records. That was all I did. He got secured in house financing because he had the relationship with the bank. The bankers were patients. They kept the loan in house. He paid off the loan in less than four years and now he's doing very, very well.

Speaker 1: 13:57

How much money did you ask for down when you sold it? All of it? So, in other words, you didn't get payments. You the bank took over and paid you the full amount.

Speaker 2: 14:10

I'm not a banker. I don't wanna be responsible and tied into that. My financial philosophy is a little bit different. I raised my kids that way, is that if I'm giving them money to do something then I'm gonna be judging what they do. It was still, I can't let go of it, right?

Speaker 2: 14:28

My son when he was an example, when he was a freshman in college, he wanted to go to the Phoenix for spring break with one of his buddies that was going to school at ASU. He said, well, how do we do this? That'd be 32 now, so it was 14 years ago. Online booking was really easy, right? So we are just starting. Wasn't very familiar. So I was helping him pick up a flight and he goes now, what? Well, now get your debit card up and I go my debit card. Well, I'm not going to Phoenix, you are right. So all of a sudden he's looking at a flight that was $150 cheaper but he had a two hour layover in Minneapolis, so I'll book that flight.

Speaker 2: 15:07

I'm not making his decisions. He's making his decisions. Now. He's accountable. If I had money in that practice, still, I'm always gonna be looking over his shoulder. When I sold that practice, walked out, I didn't step foot in there for six months because I didn't want to create confusion. It's his shell. He bought the house. I don't care what color he put paints to master bedroom, it's his house.

Speaker 1: 15:28

So the one thing I'm picking up here is you don't go get payments from somebody. You go to the bank and if they're worthy of the financing and so forth, they'll get that from the bank and you are out of it and then they make the payments to the bank.

Speaker 2: 15:42

That's the best case scenario, I think. Now the problem is that they may not have the relationship with the bank. There may be urgency, that we have a health concern, someone's got a divorce, a death, a broken hip, whatever it is then it changes the denominator. So when you really look at exiting from practice, backing up the step or two, there's really, I think, three options. One you sell it outright. You just be done, I gotta leave. How do I, how fast do I sell that?

Speaker 2: 16:15

The best way to do that is with a broker Broker's gonna say here we come in, we'll do the valuation, all those types of things. That's the traditional way of doing it. Other option on the other side is to go. You know what? I'm gonna retire in practice, I'm just gonna keep doing what I'm doing. I love doing it, I love going in part time. When it comes that time where I'm physically no longer capable of doing it, then I will just close the doors and walk away.

Speaker 2: 16:41

And then the third option, which is kind of in the middle, is truly where the successorship mile comes into play. How do I mentor someone else to continue in my legacy, continue to build that legacy, to continue to take care of all those patients in my community that have come to depend on me and the kind of chiropractic care that we deliver. And that's where the successorship comes in. It's not the brick and easy lip. It's more of a mentoring someone else to learn all of the skills that you have learned to create the business model. You know as well as I do.

Speaker 2: 17:18

We're not really doctors, we're small business people. First, we're small business people doing business as a doctor and when you gotta start thinking about how does the business run, that's really, in my opinion, the big distinguishing factor between successful practitioners and non-successful practitioners. To this day, in my experience in being on campuses around people, the campuses have tried to get more of our new students more business acumen. They're still woefully inadequate and prepared to come out and be an entrepreneur in the business world. They don't know how to read a P&L, they don't know how to make business decisions, they don't know how to plan, they don't know how to hire, they don't know how to fire. They don't know how to do the things that are essential to running a business. The technician is only a third of it. You gotta be a manager and you gotta be an entrepreneur.

Speaker 1: 18:13

Well, and this, as you say is a big problem from the schools and you know we at Activator we deal with 32 universities in one shape or another and one of the biggest things that we see is the lack of business acumen. They just about a school, being a great doctor, but they don't have a clue?

Speaker 1: 18:34

They're no training, and it's really a shame, because I'm kind of a Dave Ramsey fan, you know, and he is, you know, the no debt type thing. Well, they come out of school with $250,000 worth of debt and that's a big chunk of money when you start to pay that back. And so they have no idea what they're being faced with. And so what today, is a practice worth of us? Young doctor comes out and he looks at a practice and say they're doing $500,000 a year. What would, how would you value that practice for that youngster?

Speaker 2: 19:08

I think the understanding, at least the way I have evolved in my thinking and been validated by a number of different brokers and different formulas. There's a lot of different formulas but again you always have to start with what are you selling? Most kind of practice are not selling a true business. They're selling blue sky and a job Goodwill, right. The business by definition a business doesn't need the owner to be there, right? The owner of the McDonald's franchise should probably very rarely, if ever, be in there making fries. So the technician work isn't always the most important. It's where we, as carpenters, I think, look at that piece of it and we put so much import to the technician side, we lose track of that business side even more so, in my opinion.

Speaker 2: 20:04

If I looked at a practice not that long ago, 1.2 million in gross revenue Right, pretty successful gross revenue in our profession. But when you look at the P&L, the net income that practiced was $113,000 and 17 employees. That's what you're talking about. You couldn't give me that practice for free because there's so much liability financially. If you're going to sell that practice on net gross, $113,000 of discretionary income to put back into the business, won't even pay the mortgage on that Exactly, the doctor's going to work for free. Do you know what I mean? Yes, so you have to look at what's the profitability. So we really want to value fair and accurate value for both buyer and seller, because everything we need to do in this world needs to be a win-win. It shouldn't happen if it isn't good for both parties. So when we're selling the practice, what you're really selling is your discretionary and net discretionary income. How much money did I make last year? Take back any of your retirement savings because a new doctor coming in isn't going to be finding your retirement, so that's profit, right. So you're releasing a car. Your car practice doesn't need a lease car of $800, $1,000 a month for a lease car because a new doctor is probably going to buy or drive his car, is still driving in college, so that's a clawback profit. You're doing something for tax purposes.

Speaker 2: 21:36

So as you start looking at how do you formalize the net income, there's a few things that happen in there that make sense. And then the multiplier again, as businesses sell, they tend to sell in multiples of EBITDA and what's the net income? So that practice was that you just alluded to was collecting $500,000 a year and they were operating in the somewhat standard 50% overhead. That will leave a $250,000 for doctor's salary, wages, compensation, plus something to the bottom line, approximately 30% to salary, 20% to bottom line profit to the business. Then gives that doctor a profit total of $250,000. We take that times a 1.5 multiple, we create the valuation of $375,000 for that $500,000 a year practice. If that practice was only throwing off $100,000 of profit, practice is only worth $150,000 and 1.5 times the net income.

Speaker 1: 22:42

I think that's the formula I was looking for right there.

Speaker 2: 22:47

Yeah, it just makes so much sense. In fact, we did some work with practice brokers with NCMIC a while back and my partner did a webinar with them. They used this, basically the same formula, when they're selling practice and evidently there's a cap on what a bank will be willing to loan on discretionary income, as approximately two times net income. It depends. Everything has to be perfect to get that. When we look at 1.5, everybody can agree to it. It's a fair valuation, everybody wins. When we look at that, it's not punitive to the buyer, it's fair to the seller, everybody wins. If you got accounts receivable, that's also money that is formulated and everything else, such as cost them Discretionary income. Simplest, easiest way to evaluate a practice.

Speaker 1: 23:40

When a new student coming out of school is looking for a practice. Are there practices out there that they could buy without a lot of money?

Speaker 2: 23:49

Yeah, we just had a client that moved from the Pacific Northwest to a different state and these sellers had to relocate to the South. It was a relatively new practice. It didn't have a lot of revenue, it had a starter practice and a nice office. I think the bottom number he ended up buying this for was about $60,000. He exited his practice and when a buyer wanted to move into his area, used our formulas cashed out deal, moved out, reinvested in that 60,000 practice where his wife and kids wanted to be in go school.

Speaker 2: 24:34

So there's, so there's so many variables. This is why it's so hard to have this conversation, because people will hear one thing and they'll look at. We had a client and up in Oregon, with all the stuff that was going on with COVID, was trying to get out of Practice, couldn't use, had a very successful practice, ended up simply closing it down. So if there's a lot of turmoil going on, a lot of geopolitical confrontation, a lot of other things, those Values depreciate the sale value because if nobody wants to move there, practice isn't worth much. Exactly, it always takes a willing buyer and a willing seller to make a deal.

Speaker 1: 25:14

Well you know it's helped me a lot because, being around students all the time, I just send them to you. But I I don't want to get into that part of a business, but Tell everybody how can they contact you.

Speaker 2: 25:28

Well, if you had any questions or anything we're talking about today. I'm an open book. My dad was a teacher, coach, principal, personnel director, superintendent of the school system, and they tell you there was one thing I knew when I was a kid growing up that I didn't want to do was ever be a teacher. I saw how hard he worked. My sister were. All my siblings are teachers. I knew it's the one thing I don't want to do. There's too much work, not enough reward. Don't want to do that. And now, at this season in my life when I actually practice my favorite thing and I find more fun and fulfillment in my life right now, as much as I did taking care of people is teaching business concepts to our profession in a different manner.

Speaker 1: 26:07

That's makes sense, it's Ethical and it's all about taking care of the patient for some formless Well, and, as I say, I've watched you now, for you know several years, and so that's why you're on the podcast today, because I trust you and I know that you've had success, because friends of mine have sold their practices through your program and I watched the outcome and they're just happy as can be. Now, tell us what. What's your? I'd like to have your email and you're the name of your company and that's everybody knows.

Speaker 2: 26:40

Yeah, the company work part of founder in is called sidecar SID e car and the name of the company actually means a lot to us because if you ever look in a sidecar in a motorcycle it's not because we like motorcycles, but we look in that sidecar. There's no controls. The owner of the business, the doctor or client, has the brakes, the throttle, the gear shift, the steering wheel. We're just the guy that rides in the. In the sidecar we got an old crap bar that we can hang on, just rides a little fast. We're in there whispering in your ear on about hey, you better go faster on this curve, it's really pretty slow down this pothole. Up here we can be your guy because there's not much we haven't seen in this profession In our collective of all the founding partners of over a hundred plus years in practice, not much we haven't seen. So we're active, your guide, but you still make all the decisions. You still do all the same.

Speaker 2: 27:33

So psychers, the company website, psych our edge, edie G E. Psych our edge calm, go on their shop around. My email, dr Se a. My last name, dr se a at sidecar edge calm, and then my cell phone number. You got any questions. Shoot me a text is area code 605 929 6 616, again 605 929 6 616. You shoot me a text, just put in there, activate activator or something.

Speaker 1: 28:06

So I know what the message is about just say, I listen to the activator podcast and I want to activate my practice and I may want to sell it and talk to dr Doug. See and Doug, thank you so much because the insight that you've given this morning, there are Thousands literally out there of people that have no idea how to make this kind of a transaction, so your services is really been beneficial.

Speaker 2: 28:32

Thank you. I'm appreciate appreciate time. Thank you.

Speaker 1: 28:35

Well, we want to thank dr Douglas C for taking his time today to help young doctors, older doctors, retiring doctors, with a plan, not just some kind of a half-cocked idea of what they want to do. And he he's, as he said, a member and owner of sidecar, so you can contact him at sidecar and you can. He put his will, put his phone number and everything out, so all of you will have a chance to Learn from dr C and if you're trying to sell a practice, that's a place to go tune in next time to Activate your practice, because we're having a lot of different subjects and I'm sure you will want to hear.