Author: omniadmin

In 2015 Dental Services Organizations, or DSOs, owned approximately 12% of all dental practices.  Experts predict that by the year 2025, DSOs will own 25% to 30% of all dental practices and almost 50% by 2030*.  As a practice broker keeping a pulse on the practice selling market, we have not seen a lot of large DSOs, let alone smaller groups buying practices.  However, as of recently, that appears to be changing.  We’ve been getting more and more calls from DSOs and Private Equity groups looking for practices to purchase.  So, who are these DSOs, what are they looking for and what are they requiring of sellers?

These DSOs are groups who are looking to consolidate the dental industry similar to what has been going on with pharmacies, surgery centers, and hospital systems for many years.  In fact, as a side note, two-thirds of pharmacy revenues come from corporate-owned pharmacies.  The DSOs, especially the large ones, are backed by private equity money looking for good returns on their money.  Smaller group practices are typically backed by local or national banks.  The private equity groups like the dental market as there are good margins in owning a dental practice.  I’ve heard they can typically get a return of 15% to 20% after paying an associate salary and all other overhead.  They don’t require financing, so they don’t have the debt service payments that individuals may have.  They often consolidate the “back-office” functions – Human Resources, accounting, and billing to save money.  They also can negotiate better insurance reimbursements and dental supply prices than the solo practitioner.  For staff, they can offer decent benefits packages as a result of economies of scale.   However, they may not pay staff wages as well as solo offices.  The larger groups range from 30 practices under ownership up to several hundred locations with groups like Heartland Dental.

What are they looking for when they acquire a dental practice?  Many of them claim they will pay a premium for a practice.   I’ve been working as a practice broker for almost 15 years, and I’ve never seen a group, DSO, or Private Equity investor purchase a practice for an above market price.  Most have purchased practices at market, or even slightly below.  They like larger practices doing at least $800,000 and up.  That doesn’t mean they won’t buy smaller practices, but the larger ones are more appealing.  They like to acquire smaller practices in the area where they already have a larger practice so they can consolidate the smaller practice into the larger practice.  Most of them want the selling doctor to stay on and work in the practice.  Many of them want the seller to stay for up to 3 years.  Most will negotiate down to 2 years.  They usually do not give you your entire purchase price upfront.  They’ll give you 80% of the purchase price at closing, you will have to wait for the other 20% to be paid out upon certain conditions being met.  Those conditions include serving your agreed-upon employment term, the practice production staying at where it was before or even growing, and other conditions may be possible such as hiring an associate, managing the practice, etc.  If you don’t meet your conditions, the DSO may pay none or only a part of the last 20% of the purchase price.  And, if after a few months you decide that working as an employee for the group isn’t what you thought it would be, or you decide to move out of the area for health reasons, or for some other reason you decide to leave the practice and not meet your term, then too bad for you.  You forfeit the 20% that the DSO owes you.

The small groups, DSOs, etc., will also tell you that they prefer you not get someone to represent you.  That includes an attorney, a consultant or a practice broker.  They want to use their experience, their sales tactics and their gaggle of attorneys to negotiate a great deal, FOR THEM!  Yes, they’re not looking out for your best interest.  They could care less if most of your retirement nest egg is in your practice.  They care about building their market share so that they can make as much money for their investors as possible.
​
My advice if you have received a letter in the mail from a DSO or small group is to don’t go it alone!  You’ve been a dentist for quite a few years for crying out loud and haven’t negotiated a multi-million-dollar deal, dealt with aggressive attorneys or a large corporation.  Whether you use a broker, attorney or consultant, get someone on your team to represent you.  Our group at Omni has negotiated many deals ranging from $500,000 to $7 million and up.  This is what we do and have expertise.  Feel free to call us anytime to discuss your transition, an offer you received, or anything else where we can provide knowledge.   We’re always glad to help.

*Footnote: “Dental Service Organizations – The What and Why of DSOs – Part 1 of 6”  Posted on May 13, 2019 by Sara K. Stock. www.stocklegal.com/blog/dental-service-organizations-the-what-and-why-of-dsos

​There has been a great deal of discussion over the years about dental practice price, but very little has been said about practice value. It is especially important that practice buyers understand these terms and be able to differentiate between them since practice value has significantly more impact upon the future of buyers than does practice price.

Price is the consideration (cash, note, barter, etc.) paid to a seller to acquire an asset.  Sellers receive price. Value is the benefit received by the buyer from the use and ownership of the acquired asset.  Buyers receive value.

I illustrate this point by asking buyers to consider four similar practices:

Practice A grosses $400,000 and is priced at $275,000.  All too frequently, buyers zero in on price as the primary practice purchase issue while ignoring the issue of value.  However, buyers stand to benefit much more by receiving high value than by paying a low price, since the primary practice value is the net income the buyer takes home from the purchased practice.  I ask buyers if this is a good deal. Most buyers admit they do not know.

Then, we look at Practice B, which grosses $400,000, of which the hygienist produces $100,000 and the seller produces $300,000. After paying all the overhead expenses and all of the purchase payments, the buyer will have a net income of $140,000. Without even knowing the price, most buyers believe that Practice B is a good opportunity.  Knowing the price and gross alone does not make for a well-informed decision.  Knowing the cash-flow derived value, or net income, received in return for work performed by the buyer, does allow for a well-informed decision.

Consider Practice C, which grosses $400,000 and is priced at $300,000. After paying all of the practice-overhead expenses and all of the purchase payments, the buyer will receive value, or net income, of $150,000.  Now examine Practice D, which is very similar to Practice C.  It also grosses $400,000 but is priced at $250,000.  After paying all the practice-overhead expenses and purchase payments, the buyer will receive value, or net income, of only $125,000.

This comparison shows that it is possible to pay a higher price for a practice and still receive more value, or net income.  Differences in fixed expenses, such as rental cost, can cause such differences. Which practice would you choose?

While we do not suggest overpaying for any practice, we do point out the old saying, “You get what you pay for.”  Since “what you pay for” is net income in the case of dental practices, higher-priced practices generally will yield higher net incomes, even after making the payments. In the case of purchasing a practice, it often is safer to pay slightly too much than too little.

We strongly suggest that if you are considering buying a practice and are seeking professional advice on price, be sure that you also receive a practice cash-flow analysis to learn all of the important facts — especially the answers about practice value, the net income you will earn.

I’m sure many of you have sold a car, boat, or a house by yourself.  For the most part, cars and boats are pretty simple to sell. Even selling a house only involves a couple of pieces of paper, an escrow agent, and a few other steps.  But selling your practice is another ballgame.  Emotions get involved as you are attached to your patients, staff, and heck, you built this baby!  There is a valuation to do – how do you do that?  Additionally, there is due diligence, lease assignment, document preparation, letter of intent, renegotiating after due diligence, closing process, CPAs… and on and on.  It’s hundreds of hours of doing a lot of different things.
 
ARE YOU READY?
You might be saying, “This practice has been my baby and my life for many years,” Or, “I still want to treat patients a couple of days a week after I sell my practice.” Before you make any decisions, ask yourself some questions:

1. Am I emotionally and financially ready to step away from the practice where I’ve invested so much of my time and resources?
2. What do I want to do after I sell? Will I retire from dentistry, work part-time, or volunteer my services?
3. How do I want to sell my practice? For example, should I sell to an associate and immediately retire, or should I transition to another dentist and gradually step aside?  Should I sell to a corporate?

It’s understandable you want to preserve your practice legacy while ensuring the ongoing care of your patients and staff meets your high standards. That’s why it’s important you find the right buyer to entrust your “baby.” It’s one thing to be financially prepared for retirement. It’s a whole other ballgame to emotionally handle walking away from your practice.
 
READY, SET… GO!
After taking stock of your personal finances, retirement, and practice transition goals, it’s time to call in the experts to help you prepare for the sale. Your team of professionals should include a CPA, wealth management advisor, practice transition specialist, and an attorney.
 
Certified Public Accountant (CPA): A CPA will compile and review all your financials. Be upfront about anything that might be considered outside the normal scope of dental practice business, i.e., expenses above industry averages, any non-cash benefits, or family members on the payroll who don’t work in the office. This allows your CPA to do a thorough analysis and advise any necessary adjustments.
 
Wealth management advisor: The sale of your practice could be the single biggest contribution to your retirement fund. Consult an expert wealth management advisor to help you plan for any related tax consequences and long-term investment strategies.
 
Practice transition specialist: A good practice transition specialist will review market prices in your area, establish a practice sale timeline, conduct a comprehensive practice analysis, and have a pool of financially viable buyers. Get recommendations from colleagues and interview each one to find the best match for your needs.
 
Attorney: Attorneys provide much-needed protection and attention to practice sale transaction details. Due diligence and sound legal advice benefits you, your practice transition specialist, and the buyer. Find an attorney who is well-versed in dental practice transitions. This will save you time and money, and potentially add tens of thousands of dollars to the purchase price of your practice.
 
FINANCIAL PREPAREDNESS
Be sure to have all of your financial statements in order to accurately show the fiscal health of your practice. Make sure you prepare and review monthly and quarterly profit and loss statements with your accountant. If you have not done that, start doing so immediately. Review each line item to manage revenue fluctuations, expenses, and ancillary accounting issues.

The ADA, a member of the Academy of Dental CPAs, or a transition specialist can give you current industry averages for revenues, expenses, new patient flow, fee schedules, and much more.

Buyers will look at your profit and loss statements to compare each line item to industry averages. Make sure your CPA explains any noted differences upfront, otherwise you could lose significant value to your practice. It also puts to question the integrity of your practice financial information.

• Due diligence: Potential buyers will want to review your production against industry averages. Carefully analyze the following key reports generated by your practice management system:
• Provider summary report: This report actualizes productivity by provider and type of procedure. When reviewing this report, make sure your hygiene production numbers are within industry averages. Also, if you offer specialties such as orthodontics or sleep apnea, you need to make sure any potential buyer can replicate those procedures. If they can’t, it could negatively impact the purchase price of your practice because that revenue would be deducted from the valuation.
• Accounts receivable report: Buyers pay close attention to the percentage of receivables based on the delinquency bucket. Be forewarned: most buyers will not pay for balances over 90 days. Large account receivable balances are a red flag for any potential buyer. It usually signifies a lack of controls for effective practice collections and cash flow management. Carefully analyze each account and make the necessary adjustments to non-collectibles.
• Fee schedules: Review your current fee schedule and adjust fees to the minimum 80th percentile for your area.

FINAL INSIGHTS

• Carefully vet all potential buyers. If they don’t have a clear understanding of the market and how it relates to the value of your practice, move on.
• Establish relationships with industry professionals. Their expertise and support will be an invaluable resource.
• Determine a specific date of sale with a realistic timeline. Communicate clearly when you want to stop practicing dentistry.
• Plan early and anticipate delays. Your location, mix of procedures, and practice revenue trends can impact the pace of your practice sale.

Practice valuations and those that value practices can come in all shapes and sizes.  Did you know that there are probably 20 different methods you can use to value a practice?  Did you know there are 5 to 10 different certifications or accreditations for those who value practices?

Rule of thumb valuations are ones that are typically quoted and overly abused.  The typical rule of thumb in a dental practice is a value based on a percentage of the practice’s gross collections.  For metropolitan areas, the rule of thumb can be from 85% of collections up to 100% of collections.  For a rural area, the value is typically 65% up to 85% of collections.  Sounds simple and straightforward, but is it accurate?  There are several reasons it is not. 

The first reason is the practice may have a good gross production number, say $800,000, but it also may be mismanaged with a high overhead of $750,000, leaving $50,000 leftover for debt service and salary for the doctor.  Do you want to work for nearly nothing?  Using a rule of thumb approach, this practice would be valued at between $700,000 and $800,000 if in downtown Seattle or Portland.  The problem is that it doesn’t cash flow enough for bank financing.  Secondly, you don’t know what is being run through the gross revenue production number.  Is the practice on capitation plans, DSHS, or another low reimbursement program?  Low reimbursement means low money to the practice, narrowing the margins.  If you get a high volume of the low reimbursement programs, you can bump up your gross and leave little to pay off debt and doctor’s salary. 

Another valuation method that can be dangerous is called the cash flow method.  This method calculates an adjusted cash flow to the practice.  The valuator will then normalize a doctors’ salary and calculate a value based on how much debt the practice can afford to pay.  In some practices, the valuator will use a forecasted number to get the value even higher.  This helps the seller when selling a practice, but is bad for the buyer, as he or she is stuck paying a high debt payment each month.

Omni follows standards set by the Institute of Business Appraisers and the Society of Certified Public Accountants Certified Valuation Analyst program.  We have an Accredited Business Appraiser on staff as well as two Certified Valuation Analysts.  We use three different valuation methods to determine the value of a practice – the Production Acquisition Method, the Capitalization Rate Method and the Book Value method.  Each of these methods focuses on a different aspect of the practice.  After we calculate all three methods, we blend them to determine the total value of the practice.  Blending these methods gives us a value that looks at the assets, cash flow and overall collections of the practice – a full picture of the entire practice and not just a glimpse of one aspect of the practice.

If you are interested in hearing more about Omni’s Practice Valuations, send us an email or give us a call today – 877-866-6053.

Who can help me? 
This is a very important decision and time for you and your family, so it’s critical to build your team of trusted advisors, such as veterinary specific broker (with a commercial real estate license), lender, CPA, attorney. These professionals have done many unique transitions, and often with each other, so they work well together and know how to provide you with a successful transition. You can use your relative or friend in these professions, but they can’t know the things veterinary specific advisors know. Experience and knowledge in a select niche are worth its weight in gold.

Can I afford a practice and associated real estate?
Veterinarian-specific lenders understand the veterinary industry and understand that you may have student loan debt in excess of $150,000. If the practice cash flows and provides you with the money to pay your practice and student debt, plus living expenses, you may be good to go. If you are thinking about a start-up, you will most likely need to work part-time somewhere else as you grow your new practice. Your trusted advisors can provide you with ideas to assist with your startup as well as potentially referring to a veterinary-specific marketing company. So, the answer is, typically, yes, you can afford a practice and associated real estate.
Sometimes, depending on the seller and your finances, you may rent a few years. The things to consider here are that if you rent, you may still have the seller “visiting” when they want and still act as though it’s their building and try to deter you from making your own decisions. It’s hard to make changes and you will someday understand this! If you rent, you will want your attorney to ensure there are solid details surrounding future purchases.
Some veterinarians prefer to own their own real estate and that can be beneficial for those with property ownership goals. Leasing in a commercial space or strip mall can be worth the potentially high rent if you have the opportunity to gain increased collections.

What do I need to know when looking at potential practices?
Where do you want to live and work? Once you determine the general location, look for a practice with a good and visible location and parking.
Work with your broker or buyer-representative to assist you to review the formal valuation or the following statistics.
Last 3 years financials to see collections and expenses. Some expenses may be backed out that would not pertain to the new veterinarian, such as “large” continuing education, cars, 401K, and family members on the payroll that may not have an active/necessary function in the practice.

I want multiple offices.
Having multiple offices can be profitable if done correctly. Ensure you have solid processes in place that can be replicated. Consider doing a demographic study to determine where you want your locations. If clients may be going to more than 1 location, ensure your veterinary software is capable of being accessed by all locations.

What do I need to know/do before starting my first day in my new practice?
Work with your CPA to set up your entity, accounting system, payroll, and tax payments. Plan to have a confident first conversation with your new team. They will be anxious about the transition so you will want to put your arms around them and help them understand you want to continue the quality care and any small changes will only be for the better for clients and team. Be prepared for difficult questions such as asking for a wage increase, change in schedule, or complaints about other team members. Guide the team on how you want them to discuss you to the clients and how your goal is to retain clients.
Become familiar with your veterinary software. Most veterinarians and teams do not maximize the reports and statistics available to you. Remember, your veterinary software and accounting system are the 2 biggest tools you have to run your practice.

Purchasing a practice, with your team of trusted advisors, should be a pleasant process that leads to a profitable and enjoyable career!