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.
Current State of Transitions Market
So, where are we now? In an article I wrote for the Washington State Academy of General Dentists called The Perfect Transition Storm, I explain that we’re experiencing an anomaly in the practice transition market. I have been working with dentists since 2004 helping them transition into or out of a practice. There have been times when interest rates are good, but there are not many buyers. There have been times when the economy was doing well, but not many sellers selling their practices. But, in the past almost 15 years, I have never seen a time when everything aligned so well. Here’s how this adds up:
- The transition market is still a sellers’ market. There are not many “good” practices on the market. Good practices are producing over $600,000 per year with 65% or less overhead and at least 10 to 20 new patients per month.
- Banks love dentists. The default rate is below .0125% for dental practices. More and more, banks have been seeking to lend to dentists to buy practices. Recent offers from some banks include 1.78% interest rate for the first two years adjusting to 4.9% for 10 years after that. The average rate currently is 5.125% on a 10-year term loan.
- The economy is strong. Many dentists I talk to tell me that they are busy. Patients are employed and either has the funds or have insurance to get theirs and their family’s dentistry done.
- Competition for the good practices is up. We are starting to see corporate practices such as Heartland come into the Northwest and other markets seeking out practices grossing over $800,000 in collections. Small group practices are also out there looking for good practices. We also have solo buyers looking to acquire their first practice.
- Practices values are up due to demand for good practices. A typical practice may sell for 70% to 75% of collections in an average market. We’re now selling practices for 5% to 10% higher, mainly due to demand.
Mesh this all together and you get a formula for a good transition market. There’s high demand for good practices. Interest rates are low. Practice values are above normal ranges. If you are thinking about selling within the next 3 to 5 years, it would be prudent to sit down with your financial advisor, broker, or other advisor to take a look at your situation. Timing can be everything and good markets don’t last forever. We would be happy to buy you a cup of coffee and discuss your situation and help put a plan in place to make sure you are in the best position for when it’s time to transition. Contact us today! 877-866-6053.
5 Red Flags to Watch for When Buying a Practice
There are a few things you should be wary of when buying a practice. These are not necessarily deal breakers, but things to bring up and analyze with your team when you are buying a practice.
- 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.
- 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 benefits 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.
- 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.
- 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.
- 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.
Why Hunting for Comps Isn’t Always the Best Use of Your Time
Guest post by Tommy Leigh, Vegas One Realty
Shopping around for comps before buying a dental practice may seem like a given for some. To find the best staff with the best service and the best customers, it’s going to take some time and effort to figure out which one fits a buyer’s objective. But just like so many things in life, the answer isn’t always tied up in a simple solution. It may take a little more foresight and a different kind of planning to achieve the best possible outcome.
Every Practice Is Different
No matter how similar a practice may look on paper, the reality can be extremely different than it seems. Beneath what appears to be great promises might in fact be such concerns as a high turnover rate or an overall sense of dissatisfaction from both staff and customers alike. Just because a practice is only a few miles away from another and they both look somewhat similar at a glance doesn’t necessarily mean they should be priced similarly. The basics are just that: Basic — and looking at surface-level attributes can only take one so far.
Some Things Can Change
Excluding practices for certain reasons based on an ‘ideal’ model is one way to miss an excellent opportunity. A dental practice with an old-fashioned website or a less-than-optimal layout shouldn’t necessarily be a deal-breaker. A few bad reviews on the structure of appointments does not represent an inherent systemic issue with the practice. Dental practices are often happy to work with potential buyers to ensure they can get their practice up to speed. They may be willing to upgrade their outfit with a few extra perks while taking the time to get their staff up to speed. It may only be a few simple tweaks that need to happen before the deal becomes that much sweeter for the buyer.
Take a Deeper Dive
What may be more prudent is to take a deeper dive into the specifics of client retention rates, prices, and profitability. To really understand a practice, leaders have to perform a deep dive into the numbers behind the practice. While location and presentation are certainly draws, figures such as cash flow will give buyers a better idea of what a practice is worth. Each one of those figures tells a small story that all adds up to the actual worth of a practice. As with so many decisions, the real devil is in the details so it all starts with taking a hard look at a singular practice. From the state of the technology of the practice to the quality of the furniture in the waiting room, this is the time to discover what makes each practice different from its direct competitors.
Getting ready to buy a dental practice will be a time-consuming process no matter what approach a decision-maker takes, but there are ways to cut down on the amount of back and forth. Rather than starting with an overwhelming amount of potential candidates and then taking the time to painstakingly cross them off a larger list, it may make more sense to look at one promising practice in order to determine the real worth underneath. Make sure to keep an open mind about the ideal features of an ideal practice — they may not always be as obvious as they seem.
Tommy Leigh is the Broker/Owner at Vegas One Realty. Tommy’s team takes great pride in its ability to put clients first and provide the highest level of honesty and expertise in everything they do.
Cash (Flow) Is KING
Cash is king is an old adage used to describe one of the keys to success in business as well as personal finances. Cash is essentially physical money or liquidity you have available. While cash may be king when it comes to having cash on hand, another vitally important ingredient to the success of a practice is Cash Flow. Cash Flow is the amount of money you have available in a given time period after you have paid all of your expenses (payroll, lab, supplies, debt, etc.).
When analyzing a practice, how do you know how much true cash flow the practice has available? You cannot simply look at a practice’s tax return or a profit and loss statement and know how much cash flow the practice has. There are a number of steps that someone evaluating a practice would take into consideration when determining the correct cash flow. Those steps are as follows:
- Start with the Net Income of the practice. This is the total revenue or collections minus the total expenses.
- Add back the owner’s salary and any taxes associated with the owner’s salary.
- Go through the expenses and “add back” those items that are non-essential to the practice. These are expenses that are for extra-curricular or out of the ordinary expenses. These typically include travel, staff meetings, interest, depreciation, owner life insurance, etc.
- Calculate what your debt service payments will be by using a mortgage amortization calculator. You can use bankrate.com or another online calculator. Use a conservative interest rate based on current market rates for practice loans and a 7-year term. Subtract the debt service payments from the above 3 items.
- The result will be the cash flow to the practice after debt service based on the current state of the practice. This will be how much is available to a potential buyer for his/her personal salary, upgrades, updates, etc.
This Sample Cash Flow Analysis shows that without changing a thing, you will earn $92,041 from the practice after paying the note payment on the loan. Note that you can’t stop here. If the cash flow looks low, there may be a reason. The current state of the practice may not be the best run practice. Perhaps salaries are too high, the owner uses the most expensive vendors, or they employ a family member to clean the office at a high salary. There may also be procedures in the practice that the current doctor does not do, but you can. If you keep looking at a low cash flow practice and know how to fix the problems, you may have stumbled upon an incredible opportunity.
If you need help analyzing the cash flow of a practice, or how you can improve a practice, you can call us anytime for a free consultation. We can be reached at (877) 866-6053 or email at info@omni-pg.com.
Correction: In a previous version of this post, Net Income was incorrectly labeled Gross Income in the calculation of Cash Flow. We apologize for the error and any confusion.