Author: omniadmin

I get the question a lot, “do you think I am ready to buy or start a new practice?”  I’m probably the wrong person to ask as I’m somewhat of a serial entrepreneur.  I tend to live by the quote “Fortune favors the Bold”.  Maybe I can answer better by giving you a few real-life case studies.

Case Study #1 – I helped this young dentist locate a practice right out of school.  He was a typical new graduate.  He was clinically sound, somewhat slow with procedures as expected, and not confident at all in managing a practice.  However, he found a decent practice that I helped him evaluate.  It was not great, but it was producing $45,000 per month.  He struggled for the first six months to make ends meet.  He had to dip into his working capital to keep things going for a couple of months.  We continued to work with him and help him ramp things up.  He said he felt more and more confident as time was going on.  His hand speed improved and he worked through a few management issues that helped him get respect from the staff.  Fast forward 3 years later and he’s now producing $125,000 per month, has low overhead, and is well on his way to a potential early retirement.

Case Study #2 – A dentist had been out of school for about 4 years.  He kept looking for that perfect practice in King County.  I showed him a number of practices, but nothing fit his model.  He finally decided that if a practice wasn’t going to come up on the market that fit his needs, he would need to create one from scratch.  We found him a nice location in the heart of the area he was looking.  He went from $0 to $40,000 per month within 9 months.  Five years later, he’s comfortably doing $80,000 per month.

Case Study #3 – A dentist searched for several years for the perfect practice.  There were over 20 practices in a five-year period I have shown this person.  We even looked at starting up a practice.  We put letters of intent on a number of practices and new start-up locations, but nothing stuck.  This dentist is still looking and still has yet to find the perfect practice.  By the time they find the perfect practice, their friends will have owned a practice for 7 years and be well ahead of them in terms of building a practice and being in a better financial position.

The moral of the story is that you are never 100% ready to buy or start a practice.  Dental schools do not spend enough time teaching you to manage or own a practice.  If you have been out of school for a few years, have a good number of associate jobs under your belt, and have a desire to own or start your own practice, it’s time.  Find a good practice or location, do your due diligence, get good advice from your advisory team and go for it.

-Rod Johnston, MBA. CMA

Caveat Emptor is not a garnish at your local Italian restaurant.  As you go through the steps in buying a practice, you should be cautious while going through due diligence.  Due diligence is the thorough, in-depth analysis of the practice charts, equipment, systems, computers, and everything else in the practice.  If you missed our buyers’ seminar last month, you would have received our very lengthy due diligence checklist.  There is a lot to cover and a lot that can be uncovered in the process of due diligence, and there is a lengthy checklist involved, embezzlement, fraud, misstatements of numbers including active patient counts, faulty equipment over and under-treatment are just a few things that can be uncovered during the due diligence process.  Do not take the word of the seller or broker, dig in and find the information yourself.  Caveat Emptor is prudent advice when shopping for a practice.

-Rod Johnston, MBA. CMA

There are a number of things to look out for when buying a dental practice.  If you’re not careful, you could end up with a bag of tricks.  Here are some of the top pitfalls to avoid when buying a practice:

1.  Not understanding the numbers.  Be sure and know what normal dental expenses are and what may be extraneous.

2.  Assume the staff are all on board and will be staying with the practice.   Know who the staff is and what their relationship is with the seller.  Find out if they are planning on staying.  Know how loyal the patients are to the hygienist and the rest of the staff.

3.  Embezzlement – hire an accountant to look for any irregularities.  The ADA estimates 35% of all practices have caught their employees stealing from them.  (the other 65% just haven’t caught their staff yet).   Are courtesy credits high?   How about patient refunds?

4.  Does the procedures the selling doctor perform match the procedures that you do?   Make sure a large amount of the procedures you don’t do are not currently being performed by the seller.  You don’t want to have an immediate drop in production right from the start.

5.  What was the definition of “active” patients?  Some selling dentists use the life of the practice, others use 24 months.  I typically like to quote how many patients have been in the practice in the last 18 months.   There are several ways to estimate, but just make sure you spend some time on this area.

6.  Has all the treatment been done on patients?  Was the doctor too aggressive?  You can only find this out by spending several hours delving into patient charts.

7.  Are there capitation or other discount plans in place?  This can be a big drain on the practice.

These are only a few of the pitfalls to make sure you don’t get tricked.   Spend as much time in due diligence as you need and bring on experts to help you along the journey.

-Rod Johnston, MBA. CMA

So, you found a practice you like and it has a price tag of $500,000. How do you know the dental practice is valued correctly? A short answer is that the price, or value, is what a willing, knowledgeable and unpressured buyer along with a willing, knowledgeable and unpressured seller would be willing to exchange for a property or asset.

I can probably write a short, very boring book, on valuing a dental practice. But, no one would buy it and no one would read it. So, I’ll keep this short and if you want more information, you can call or e-mail me.

A rule of thumb:  value that is often quoted for the northwest is between 65% and 75% of the last 12 months collected production. If you’re in a metropolitan area like downtown Seattle, Bellevue, Redmond, etc., it will be on the high end, possibly more. If you’re in a rural area, you’ll be on the low end and possibly less.

When I do a formal appraisal on a practice, I use standards approved by the Institute of Business Appraisers, of which, I am a member. These methods take into account not just the collections of the practice, but more importantly, the income of the practice. Why is this? Well, would you buy a $1 million practice with a net income of $100,000, or a $500,000 practice with a net income of $200,000? Don’t answer out loud unless you’re certain of the answer.

We, at Omni, use three methods – capitalization of earnings, asset value, and production acquisition that blend three areas of the practice – earnings, assets and production, to get a true value of the practice. In summary, when you look at the price of a practice, you can start with a rule of thumb to get an idea of whether the practice is priced right. But, in the end, a full valuation is needed to determine the true value.

-Rod Johnston, MBA. CMA

 There are a few things you should be wary of when buying a dental practice. These are not necessarily deal breakers, but things to bring up and analyze with your team when you are buying a practice.

1. ALL THE TREATMENT IS DONE
You can run an unscheduled or untreated treatment plan report that should give you an idea of treatment on the books.  You can also look at the number of true active patients and compare that to the annual collections to see if there is potential treatment.   If annual collections are $500,000 and there are 1,500 active patients, there’s a good chance there’s work to be done.  If annual collections are $500,000 and there are 400 active patients, start asking questions

2. OVERPAID STAFF
Annual staff salaries typically run around 20 to 25% of the annual collections.  When you get up to the 35 to 40% area, you are in for some bad news for the staff.  An older practice with long tenured staff may have dental assistants who get annual salary increases and now their making $30/hr.The same with hygienists.  Or, they are receiving an incredible benefit package of health insurance, retirement plan, gym memberships etc.,This can be cured, but if you plan on keeping the staff, be prepared for a discussion on reducing benefits and/or pay.

3. OUT OF CONTROL COLLECTIONS 
You can typically tell how good of a job the front desk is doing by looking at the accounts receivable balances.  The total amount should not be above 125% of your monthly collections (adjusted for insurance discounts).  The insurance aging report should be pretty clean with only small dollar amounts in any of the aging buckets.  If the aging balance is too high, or the insurance aging is high, you will either need to retrain the front desk, or hire a replacement in the future.

4. SECRETIVE SELLER 
If you are asking for reports or questions from the seller and they are giving you run around answers, you may want to think about moving on.  If the tax returns do not match to the annual collections reports, something funny is going on.  You should expect straight and quick answers, unless the seller is away on vacation or overly busy.

5. EQUIPMENT NOT WORKING
I am surprised how buyers don’t have someone go through and make sure all of the equipment isn’t working.  You would hate to go in on your first day and have equipment not functioning.  The equipment supply companies will typically come out at no charge and go through your equipment to make sure it’s working.  If it looks old and in disrepair, it will give you a good peace of mind to have it checked out.

All of these red flags can be fixed, so they are not deal breakers.  But, if you do run across any of these red flags, be sure to have your team of experts, CPA, consultant, equipment rep, etc., dig a little deeper and make sure you are getting what you think you are getting.

-Rod Johnston, MBA. CMA