Build or Buy? Your Pathway to Practice Ownership
Every potential practice owner comes to a crossroad where they ask themselves, “Should I buy an existing practice, or should I just go start up a new practice at a new location?” We typically suggest you find a good existing practice to purchase, but if you cannot find one that fits your needs and desires, then the alternative is to start one from scratch. There are pros and cons to both and a lot depends on your vision. Here are some things to consider before making a decision:
- Cash Flow – Buying an established practice typically gives you instant cash flow. That’s if it’s a decent practice and if it already cash flows. Cash flow is the money left over after paying all of the practice bills and your debt service on the loan for the practice. If you can find a practice in your desired area that has good cash flow, or you believe you can get it to cash flow, then by all means, you should buy it.
With a startup practice, it can take 18 to 24 months before you break even. Cash flow would happen shortly thereafter. If you spend some time and do some good research, you can cash flow much sooner. We’ve assisted with demographics for doctors and helped them find locations which cash flowed in 6 to 9 months. - Practice Philosophy – Do you have a certain practice philosophy on managing your practice? Do you want to do certain procedures, treat patients a certain way and manage the staff in a certain manner? Then, buying an existing practice where patients and staff are set in their ways may be a challenge. Patients may be used to making payments. Staff may be used to leaving early, using their cell phone during work hours, or having their kids hang out in the staff room during work. Changing patient protocol or staff habits may result in losing some patients and staff. At a minimum, you will have disgruntled staff.
If you start up your own practice, you can mold your patients and staff in your philosophy and style. Patients can be treated and trained to pay up front, accept your treatment plans and trust you. Staff can learn from the beginning how you want them to work and what you expect. - Cost – A good practice in a good location is going to be valued at 70% up to 100% of the last 12 months collections in the current market. Great practices that are high producing with low margins in metropolitan areas are going to sell for between 90% and 100% of collections. There is a high demand for these practices and they sell quick. In rural areas, these practices may reach 80% and possibly 85%. Low performing practices in these areas will be priced between 70% and up to 80%.
Construction costs in the Northwest are currently on the high side reach up to $200/sq. ft. They are traditionally $135/sq. ft. That is before any equipment is purchased. This puts a typical startup practice at around $500,000 to $600,000. This is a negative for currently doing a startup. The cost to build it out due to the current market is high. - Systems – With an existing practice, the systems are already in place. Patient flow, collections, insurances, staff salaries, and benefits etc., are for the most part all set up. You just need to buy the practice and copy what the current owner is doing. As long as they are good systems, then you’re in the money. If the systems are bad and going to potentially cost you more money, then you’re in for a headache. Changing systems can create problems with staff and patients.
With a startup practice, you need to create your own systems. You hire your staff and establish benefits and pay. If you have experience in doing this, or at least know what type of systems, benefits, etc., you want to put in place, then your okay. If not, you may be learning on the job which will end up in mistakes and cost you money. - Finances – In certain situations, lenders may ask you to keep your associate position on a part-time basis. This is just in case the practice doesn’t cash flow enough to support you or the debt. Or, you may need to have some cash in the bank in order to have something to fall back on if there is a cash shortage during any one month.
For a startup, they most likely will suggest you keep your associate job one or two days a week until your practice gets going. If your practice picks up quick, you can quit your associate job and focus on your practice.
Over 65% of doctors want to eventually own their own practice. Whether it be via purchasing an existing practice or doing a startup is up to you. Following a few guidelines, getting good demographics and seeking wise and experienced advice will help you make a good decision.
Happy New and Improved Year
Happy New Year! Is this the year you finally take the plunge and buy your own practice? Or are you content with being an associate working for someone else? Here are a few reasons why 2019 should be the year you become a practice owner:
- Interest rates are starting to move up. The past few years have rewarded buyers with interest rates in the 4% to 5% range and some with as low as 3.75%. Interest rates moving up means you may have higher payments on your practice loan.
- Bank financing is readily available. If you think you cannot get financed because of high student loan debt, personal debt, bad credit, etc., then think again. Banks view your diploma and the accompanying school debt as a positive thing. It’s an asset that can be used to generate a good income. Call us and we can hook you up with a bank to discuss your situation.
- Jump in, the water is warm. Studies have shown that those who are successful in both business and in their personal lives take calculated risks. Owning a practice is a well-calculated risk with the failure rate on practice ownership less than .25%. Yet, many doctors continue to be an associate as they deem practice ownership to be a risk.
- Pay off debt and retire sooner. By purchasing a practice this year versus several years down the road, you can pay off your debt sooner, put more money in your pocket and retire sooner. I know of several examples of doctors who bought a practice two years out of school and five years later had their practice completely paid off and are putting that money towards retirement. Plus, practice owners make an average of 25% more per year than typical dentists who are associate employees in someone else’s practice.
- Become independent. Owning your own practice allows you to do the procedures you want to do and refer out those you do not want to do. It also allows you to choose your staff, even choose your patients. You get to work when you want to work and go on vacation when you want to go on vacation. It is all up to you as you are the boss!
Whether you decide to purchase a practice in 2019 or continue to work as an associate, Omni Practice Group would like to wish you a Happy and Prosperous New Year!
Top Ten Things To Know When Buying A Dental Practice
When you buy a house, there are certain key things you check to make sure it’s a good, solid house. Those include the condition of the roof, foundation, electrical, plumbing, etc. Well just like buying a house, there are key things to look for when buying a practice. Here are a few I suggest you look at to make sure you are getting a good practice:
- Cash Flow – This is how much cash the practice is producing before paying the doctors salary to pay the debt service. You can look at the tax return and do some simple calculations by adding back the non-operational expenses (think travel, food, etc.,) and doctor’s salary to the net income. This is a critical piece of the decision.
- Trended Gross Production – Are the numbers going down year over year, or are they going up? If they’re going up, that’s great – the practice is growing. If they’re going down, that means either the doctor is getting near retirement and not doing as much work, or there’s a problem.
- Active Patients – This can be defined as patients that have been in the office the past 12 months, 18 months, or 24 months. No matter what, you should calculate out how many patients have come in the last 12 months. If it’s a paper practice, you can count the charts to get the number. If it’s a paperless practice, look at the production by procedure and look at the hygiene appointments to get the number.
- Staff Salaries – Staff salaries should not be higher than 25%, including the payroll taxes and benefits. If it’s not, don’t panic. If you see that production can be quickly lifted, that will help get the salaries into a better perspective. Or, if it’s already producing at a high number, you may have to look at adjusting salaries. Do some more research here. I’ve seen a staff member that can do the job of two people and is worth her/his weight in gold.
- Production by Procedure Report – Make sure you can do all of the procedures the current doctor is doing. If there are some that you cannot do, can you take a course and quickly learn that procedure, or will it require a longer length of time? Or, if you don’t want to do that procedure, what will be the impact on the numbers? You can also bring someone in to perform that procedure, for example, if it’s an orthodontist, you can have an orthodontist come in a couple of days per month to perform ortho treatment.
- The Lease – How much time is left on the lease? What is the annual lease? Did they sign the lease at the height of the market and leases in the area are now 20% lower? Is there a tear down clause in the lease where the landlord can tear down the building with a 12-month notice? Note, these are not that uncommon in areas that are growing or regentrifying. Just know that they are in the lease and know what the likelihood of the building being torn down is. Look at comparable leases in the area and see where they are in terms of price.
- Treatment Planned – When doing a chart audit, look at treatment planned. Is it all done, or is there a decent supply of work to keep the production going? Some doctors will try to do all of the work on their patients before selling so they can get all of the money. Others will leave treatment for the buyer to help them out. Just be sure to know how aggressive the selling doctor was with their patients.
- Insurances Accepted – Understand for which insurances the seller is a preferred provider. Also, are there plans that they are a provider, but the insurance company is not offering them to new providers? This is the case with the Delta Premier Plan. All Delta Premier patients are put on the normal Delta PPO when you come on as a new provider. The result is a 10% to 20% reduction in fee reimbursement.
- Is the doctor going to stay and work, or are they going to give you the key and run? If you have enough experience, in running a practice, you may be okay with the seller getting out of there quick. If it’s a larger practice with some unique procedures, you may want the doctor to stick around and show you the ropes before they going on a six-month safari to Africa, or elsewhere.
- Is the staff sticking around, or are they retiring as well? If the doctor is in his 70’s and he/she has an assistant and a front desk person in their 70’s, there’s a high likelihood that they may be retiring as well. It’s not the end of the world, just know what you’re getting yourself into.
These are just a few things to know and understand before you buy a practice. Just as in a house where a roof, foundation, plumbing, and electrical can all be fixed, so can production, staff salaries, rent, procedures, etc., in a practice. You just need to know what you’re getting yourself into.
Best of luck looking for a practice! Our Buyer’s program can always help you to make sure you don’t step into something you’re not expecting. For more information, give us a call at (877) 866-6053 or email info@omni-pg.com.
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
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.