Purchasing a Dental Practice
Purchasing a dental practice is one of the biggest decisions a dentist can make, and there are a number of steps you must take prior to finalizing a six- or seven-figure deal. It doesn’t matter whether you have 5 years of experience or a 30-year career in dentistry and practice management; you must do your due diligence, rely on the help of outside experts, and carefully review key pieces of information to ensure that you make the right choice for your financial stability and professional future.
Existing vs. Startup Practice
The first question that must be considered is whether to purchase an existing practice or start one completely from scratch. Although there is a higher initial investment, Thomas Snyder from DentalCompare.com is unequivocal in his opinion that an existing practice is far more appealing. This is primarily because of the income stream that is already in place with a business that has been operating for years and has a built-in patient base.
Snyder explains, “For example, you purchase a practice grossing $600,000 and pay $360,000. Let’s assume the overhead was 60 percent and the growth rate for your new practice is 6 percent, then your pre-tax cash flow over 10 years would be in excess of $3,000,000, even though you are assuming $360,000 in debt. Conversely, if you were to cold-start a practice, chances are this level of earning capacity would not be achieved in the same 10 year period since it would likely take three to four years to hit the $600,000 mark.”
Once the decision has been made to purchase an existing practice, the next question is when to take the leap and become your own boss. Darryl Bodnar of The Original Dental CPAs does not recommend purchasing a practice right after graduating from dental school: “Instead, working as an associate for 2 to 3 years allows you to gain experience in the dental field and familiarize yourself with the business side of a dental office before opening one of your own.” Another benefit of working as an associate is the potential to strike an agreement with your employer to purchase their practice. This is a very attractive possibility because not only will you have a better understanding of that particular operation, you will also have existing relationships and rapport with your patients, making the transition as seamless as possible.
If taking over the practice you currently work for as an associate is not a viable option, there are brokers that can assist you with finding practices for sale. Another route to consider, according to Bodnar, is “asking local dental supply/equipment reps … to learn what practices might be available as sales reps typically visit practices more consistently than any other person and gain valuable information.” Finally, reaching out to dental schools or professional associations is yet another way to locate potential practices for sale.
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Demographic Information to Consider
Now that you’ve identified a practice (ideally, multiple practices) that you are interested in purchasing, there is a laundry list of data to assess and analyze. We’ll cover the financial considerations in a moment, but first let’s look at the demographic information that must be evaluated. The size of the patient base is an obvious place to start.
It goes without saying that a practice with 2,000 active patients offers more potential than one with 200 active patients, but we need to take it a step further and delve a little bit deeper into these figures. A zip code analysis will help predict how many of these patients may leave during a transition in ownership (essentially, patients who are traveling further may be more apt to simply find a new dentist closer to home once the practice changes hands). The age analysis report is also crucial. Depending upon the type of services being provided (clearly a pediatric practice must skew younger), this report may give you a heads up about potential problems down the road.
The last piece of demographic information to review is the amount of new patients the practice is producing. You need to know whether the practice is growing at a steady pace because if it isn’t, you will need to negotiate a purchase price that allows you to have capital left over to implement a marketing strategy.
Financial Information to Analyze
Acquiring a business is a major investment that requires caution and careful due diligence, so reach out to a third party (a broker, CPA, or dental attorney) for assistance evaluating a practice’s key financial data. In her article, “Appraising a Dental Practice Before Buying,” Karen Norris from DentalEconomics.com identifies nine important areas to review when appraising a dental practice:
- 3–4 Years of Tax Returns – If the seller cannot provide this information, then they are probably not serious (or they’re hiding something).
- Practice Valuation – This should be completed by a qualified certified valuation analyst (be sure to confirm the credentials of the preparer and have the report reviewed to ensure it’s a comprehensive examination of the practice).
- Cash Flow Model – One of the most critical resources at your disposal, this report should project 5–10 years into the future and take into account growth rates, variable and fixed operating expenses, the debt service necessary to finance the purchase, and compensation needed to satisfy the buyer’s personal financial requirements.
- Aged Accounts Receivables – A close examination of this report will identify any issues with collections policies.
- Lease Agreement/Real Estate Documentation – Does the current owner also control the property where the office is located? Will you need to negotiate a separate lease agreement? What sorts of terms does the landlord offer? These are important questions to answer prior to beginning serious negotiations.
- Production/Collection Reports by Staff Member – When the buyer has taken over the practice, they will be in charge of the entire operation, which includes any associate dentists on staff as well as the hygienists and assistants. It’s essential to know the strength of your team so that you can begin making decisions about which providers will remain onboard once the transition period has been completed.
- Associate Agreements – If the existing staff includes associate dentists, you must find out if they have contracts and what is included in the terms of their employment agreements. Associates without contracts present a risk because they would be free to leave the practice and take patients with them.
- Employee Salaries/Benefits – Just as it’s important to know the productivity of the existing staff, it’s equally vital to have a complete understanding of their total compensation to be able to make informed decisions regarding overhead and potential expenses.
- Financing Ability – The final element to consider has nothing to do with the current owner of the practice and everything to do with the prospective buyer. Although this item is last on the list, it really should be one of the first things to be examined. If you are unable to finance the acquisition of the practice, all other concerns become moot, so meet with a lender/bank representative to discuss the amount of borrowing power you have.
Taking Ownership & Moving Forward
After you’ve carefully considered all aspects of your purchase and negotiated an acceptable price with the current owner, there are some common sense steps to take to ease the transfer period and ensure a smooth handoff. First, have all agreements reviewed by a knowledgeable attorney and decide how the seller’s accounts receivable will be handled, how vendor invoices will be paid, what will be done with unpaid staff vacation time, how much access the seller will have to the office, and when announcements will be mailed to inform patients of the change in ownership. These transitional elements will make the purchase process easier so that you can begin thinking ahead and developing a strategy to run your new business.
Patient management and bookkeeping software, payroll services, HR policies, internal controls, employee development, banking/accounting systems, and vendor agreements will all need to be ready to go on day one. You should be able to get comfortable with your new surroundings, see your new patients, and begin building rapport with your new staff members as soon as possible. This will be impossible to do if you aren’t working at the chair because you’re busy dealing with administrative details.
Now that you’ve completed the acquisition of your practice and set up all of the systems needed to provide your patients with top-notch care, all that remains is to lead your team with an eye toward the future. Implement strategies to grow your business through various marketing initiatives or by joining local groups, clubs, and/or professional societies. Stay up to date on the latest techniques and technologies, but also keep learning about management practices and continuously assess your staff to ensure your investment pays off.
March 09, 2015
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