Buyer Articles

​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.

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!

Often times, a potential buyer of an existing practice will simply take on the existing lease that the seller had with the landlord.  The seller will do what’s called a lease assignment and assign the lease over to the buyer.  But, did you know that there may be a chance you can renegotiate terms in the lease, even though there may be a few years left to the end of the term?

When you get a copy of the lease, you or your advisor should contact the landlord.  Be sure the seller has informed the landlord that they are selling the practice first.  If there is a short time left on the lease, the landlord may be willing to do an extension on the lease.  You can put conditions on the extension that can include getting a tenant improvement credit to cover new paint, carpet, etc., free rent for a few months, lower rent, etc.,  I’ve even had a situation where the landlord loaned money to the tenant to completely remodel the practice.

Remember that everything is negotiable.  Don’t automatically assume the lease is set and you cannot change anything.  At the same time, know how to negotiate.  If you go for a home run right off the bat, you may turn the landlord off and they won’t be willing to negotiate. 

If you’re working with a broker, it’s best to let them handle the negotiating.  They’re the experts and can save you thousands if done right.

If you are coming to the Pacific Northwest Dental Conference, stop by booth 604 and talk to Steve if you have more questions about this. You can also email him at steve@omni-pg.com. If you’re in Oregon, email Megan at megan@omni-pg.com.

By Jim Vander Mey

​People love benchmarks.  They want to know how many glasses of water we should drink each day.  How much we should work out every week.  Or, how many miles per gallon our cars can achieve.

There are also benchmarks to look at when you are buying a practice.  They may not necessarily be deal-breakers, but they help determine what you will need to do to get to your target.  Here are some of the benchmarks you should look at and calculate when buying a practice:

• Staff overhead as a percentage of collections – 20% to 25%.  If it’s higher, the practice is overpaying staff, underperforming collections, or too many staff.
• Facilities Expense – 7% to 9% of collections – Too high and the practice is either paying high rent, space is underutilized or production is too low.
• Supplies – 5% to 7% of collections – If this is too high, it could be that the practice is using high-end supplies, or the supplies inventory (or vendor) is not managed properly.
• Marketing expense – 3% to 5% depending on the growth stage.  A practice that is looking to grow will have a high percentage.  A static practice may not spend much on marketing at all.
• Collection Rate – Minimum of 98% for a well-run practice.  A low rate means the front desk is not keeping up or managing the accounts receivables very well.
• Total Overhead (all expenses less owner and associate pay) – Ideally should be less than 85%.

These are just a few benchmarks to analyze when looking at a practice.  Remember, if the practice you are analyzing does not meet or exceed these benchmarks, it does not mean it’s a bad practice, it simply means you have work to do in those specific areas.

Contact me if you would like more information – jim@omnipg-vet.com.

By Megan Urban

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 dental specific broker (with a 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 dental specific advisors know. It’s the same as when you refer out complete bony extractions or dentures, etc. Experience and knowledge in a select niche are worth its weight in gold.

Can I afford a practice and associated real estate?
Dental-specific lenders understand dentistry and understand that you may have student loan debt, potentially as high as $500,000. 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 dental 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 purchase.
Some dentists 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 dentist, such as “large” continuing education, cars, 401K, and family members on the payroll that may not have an active/necessary function in the practice.

• Accounts receivable. You will want to know the total and how much is over 90 days old that may not be collectible unless the practice accepts 3-4 months of in-house payment. Even if you don’t purchase the AR, you will want to know if patients are accustomed to paying at the time of service so you can slowly make changes as necessary. Any credit balances can be determined and addressed before closing.
• Procedure frequency. Confirm the services currently being done and if you are comfortable performing and what procedures you can potentially add. Check periodontal treatments and number of recare compared to active patient count.
• Patient demographics. This report will show patient age, zip code, and insurance participation. If the patient age isn’t what you enjoy, determine how you might acquire those patients. If many of the patients come from a zip code far from the office, be aware you may lose some of those patients. You may want to add or reduce insurance participation, but make sure you have a solid plan for this.

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 patients may be going to more than 1 location, ensure your dental 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 patients 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 patients and how your goal is to retain patients.
Become familiar with your dental software. Most dentists and teams do not maximize the reports and statistics available to you. Remember, your dental 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! For more information on our buyer’s program or for a free consultation, please contact megan@omni-pg.com.