Buying A Practice – You Don’t Know What You Don’t Know
Evaluating a practice involves understanding what you’re looking for. You need to make sure you can do the procedures the current owner is performing. You also need to look for opportunities to add procedures in order to grow the practice. Understanding the reports is also important. If a practice has 50% of its production from the hygienist, is that normal? Is it because the hygienist is great? Is it a good thing or a bad thing? Why are there very few fillings being done and a lot of crowns? The same for implants. Why are there no SRP’s being done? How about the lease? What do you look for when you are reviewing the lease?
Then there are the financial statements – tax returns, balance sheets, and profit and loss statements. What do all the numbers mean? Staff salaries are 25% of revenues, is this too high? The rent is 20% of revenues and the owner owns the building. What does this mean? What’s the depreciation schedule used for? Do I care? Why are there travel charges, automobile expense, and clothing charged to the practice? What are add-backs? How was the practice price determined? Who did the valuation, how was it done and is it right?
If there was an associate dentist who worked in the practice and left two months ago, should I ask to see an associate agreement to make sure there is a non-compete provision? What do I do if there was not an associate agreement? What do I do if the lease has a teardown clause? What is a teardown clause? The seller claims there are 3,000 patients in the practice collecting $525,000 per year. Does that seem right? How do you perform due diligence and what do you look for? What’s a chart audit?
How do you evaluate the staff? How do you credential for insurance? Can you continue the seller’s retirement or health plans? How do I set up a corporation? What type of corporation should I set up? What types of business licenses do I need? How do I get the x-ray heads certified?
The list of questions goes on and on. The point is if you have never purchased a practice before, or even if you have, there is so much that you don’t know what you don’t know. Throughout the last 20+ years that we have been assisting in practice transitions, we have developed an expertise in knowing what a good practice looks like and what skeletons in the closet look like. We also have developed our own 72 point checklist of items to ensure your transition as a buyer into the practice is successful and it goes smooth. We are experts in transitions and have answers to the above questions and more. Don’t go it alone and hope you get it right. We can assist -you as a buyer in evaluating the practice and getting it closed. Whether you are buying a practice from us, from another broker, or directly from the owner dentist, we can help you. Call us to learn more about our Practice Buyer’s Program – (877) 866-6053
Practice Transitions Seminar
Friday, February 1, 2018 – Seattle Midwinter Practice Transitions Seminar, Bellevue Club in Bellevue, Washington – Register here
Friday, February 8, 2018 – Portland Midwinter Practice Transitions Seminar, MAC Club in Portland, Oregon – Register here
Are There Skeletons in the Practice’s Closet?
The first one to look out for is staff embezzlement. You can tell if there is embezzlement by comparing the tax return numbers to the production/collection reports — and if you want to go further, you can look at bank statements. If the collections reports say there’s $700,000 in annual collections and there’s only $650,000 showing on the tax return, where did the other $50,000 go? Staff’s pocket?
The second skeleton could be that the Doctor is under investigation and you don’t know it. I’ve had a couple of practices where the doctors said they wanted to sell their practice to retire. As I was listing the practice and doing some research, I found out that the doctors were under investigation for insurance fraud. I have also had other listings where I discovered the dentist’s performance was being reviewed by the Dental Board. You can typically find this information on the State Dental Board’s website.
There can be terrifying things with leases as well. Is there a “tear-down” clause in the lease? These clauses allow the landlord to give you notice and a certain period of time to move your practice. That can be frightening, especially if you are thinking about selling and the landlord does decide to tear the building down and not renew your lease. The value of your practice would go down to nearly nothing.
You will also want to know if any associates have left the practice in the last year. If they have, was there a non-compete clause? If there was not, are they opening a practice down the street and going to try and take patients or staff? Ask the seller if they have associate contracts to review.
Is the selling dentist a bit aggressive with their treatment plan? Is all the dentistry that has been treatment planned completed already by the seller? This leaves you with nothing to work on except hygiene exams, which is not going to pay the bills. Do chart reviews, social media reviews, and other research to figure out how aggressive the seller was in the practice.
These are just a few of the scary things you can look out for when getting ready to purchase a practice. Its buyer beware, so be sure and do your due diligence when buying a practice. Contact us for buyer’s representation so we can ensure you have someone helping you on your side.
You haven’t missed the boat… yet!
If you were contemplating a practice sale in 2018, but didn’t get started, you haven’t missed the boat… yet! In 2018, consider the following:
- Interest rates on practice loans were between 4.75% and 5.25%
- 50% of dentists are now over the age of 55
- The economy has been strong
- Consumer spending on dentistry has increased
- Practice values were up 5% to 10%
All of these factors have contributed to a growth in the number of dentists deciding to sell their practices. Dentists have seen their retirement accounts increase thanks to the strong economy. Dentists love the clinical aspects of dentistry but have grown unhappy with the business of dentistry. Insurance company reimbursements have been cut. Managing staff has become more and more of a burden with other industries competing for workers. Finding qualified staff is a major undertaking. Rent in metropolitan areas has skyrocketed. The combination of the good and bad has given dentists the motivation to sell their practices opting for retirement, or harvesting their equity and going to work as an employee for another dentist. The timing couldn’t have been any better for sellers with many of these factors creating a perfect storm to sell a practice and receive an optimum value.
But, it’s not too late and you haven’t missed the boat – – yet. There is still a strong demand for practices, interest rates are still comparatively low and practice values are currently still going strong. If you are considering a practice transition within the next year, now is the time to act. At no cost to you, we can help you formulate a plan to determine the time, the price and even potentially the person to whom you will be selling your practice. We will spend as much time with you and your significant other to ensure you are comfortable with an exit plan that fits your timing and your desires.
We are not like other transition consultants. We know that you care about who you will be selling your practice to. We are experts in matching sellers and buyers. We have a combined 30 years of experience selling hundreds of practices. Our personalized service enables you to relax while we do the work needed to get your practice sold. Our marketing team provides expertise in getting the word out with a goal of every dentist knowing your practice is for sale while keeping your name confidential throughout the entire process.
Contact us today to schedule your no-cost transition planning meeting. You have a lot to gain and nothing to lose. We guarantee you will walk away from the planning meeting much more educated and confident about your practice transition.
info@omni-pg.com
877-866-6053
Questions Frequently Asked by Dental Practice Buyers
Here are 10 of the most frequently asked questions we get when buyers come to us looking for a practice to purchase:
Q-1: When should I buy a Dental Practice?
A-1: Most buyers are out of school at least two years. This allows the dentist to increase his hand speed and allows them to be an associate in a practice or two where they can see how a practice is run. Many banks also require that the dentist is out of school a couple of years before they will give them a practice loan.
Q-2: Where do I look for practices for sale?
A-2: Get on the email distribution of all the brokers in the area you are looking to acquire a practice. Be sure you are a member of your state Dental Association so you can see their classified ads. Some dentists sell their practices without a broker, so they will advertise in the association’s classified ads.
Q-3: When do I form my “team” and who should be on my team?
A-3: You can form your team early on in the process. You don’t have to formally engage them with an engagement letter, but at least speak with them on the phone and be comfortable with knowing who they are. Get references for who does a good job. Your team should consist of a dental accountant, dental attorney, dental banker, dental consultant and/or dental broker. Note that I specified “Dental” before each team member. Having someone who specializes in dental is critical. I’ve seen more money wasted because someone used their neighbor who is a divorce attorney as their practice acquisition attorney. They soon regret this after they’ve spent $30,000 in legal bills.
Q-4: What do I look for in a practice?
A-4: Look for a practice within a 20-to-30 minute commute of your home. Everyone is different as far as what the practice looks like, or what procedures are done in the practice. But, in general, look for a practice that you can purchase and be comfortable doing the procedures the current doctor performs. If there are some procedures you do not do that the seller performs in the practice, know that you can learn to do those procedures, often very quickly. Keep in mind that there is no such thing as a perfect practice and things can be fixed. Overpaid staff or too many staff can be fixed. Old chairs can be replaced or recovered. Green shag carpet can be easily replaced. High rent can be renegotiated on occasion.
Q-5: I like the practice I’m looking at, now what?
A-5: Have your broker or consultant write up a Letter of Intent. This is a non-binding offer to purchase the practice. There are contingencies in place that allow you to get out of the transaction should you decide at some point to not move forward.
Q-6: How much should I pay for a practice?
A-6: Cash flow is king in analyzing a practice. Would you pay 110% of collections for a practice that would earn you $500,000 per year in income? (Hint: Yes) In the current market, practices are selling for between 70% and 85% of last year’s collections. They can go higher and they can go lower. Again, the big factor is cash flow. If the practice has good margins and good cash flow, it will sell for a higher percentage of cash flow. Lower margins mean the practice sells for a lower percentage of collections.
Q-7: What are the costs involved with purchasing a practice?
A-7: Brokers typically do not charge a fee to the buyer. Attorney fees can range from $5,000 to $10,000 for a simple, straightforward transaction. There may be an escrow agent involved and their fee is usually $1,000 to $2,000. You will pay sales tax on the equipment portion of the purchase price. You will split the cost of sending letters to the seller’s existing patients with the seller. Then, any upgrades to equipment, décor, etc.
Q-8: What is Goodwill?
A-8: No, it’s not just a place where you donate used household items. Goodwill in a practice is all of the intangibles of the practice. It’s the practice and doctor’s reputation, the location of the practice, the culture, the environment of the practice, all those things that bring patients to the office to have their dentistry done there.
Q-9: What is a typical Covenant Not to Compete?
A-9: A typical Covenant Not to Compete is for 5 years and 10 miles. This means the selling doctor cannot treat patients for 5 years within a 10-mile radius of the practice they are selling. The 10 miles is measured as a crow flies. The Covenant can be more and can be less. It is sometimes negotiated and more densely populated areas could be less and less densely populated areas could be more.
Q-10: I currently work 6 blocks as an associate dentist with a 10-mile covenant not to compete from the practice I want to purchase. Are the non-competes binding?
A-10: Yes, Covenant Not To Competes are binding, especially if it’s 6 blocks away. If it’s 9.8 miles from your current practice, you might be able to talk to your employer and get them to release you from the non-compete. But, other than that, they are binding.
These are just a few questions we often get from buyers. Hope this helps educate you a little bit more in your quest in purchasing a practice.