Buyer Articles

By Rod Johnston, MBA, CMA 
 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.

If you have been out of veterinary school for a few years, you may be contemplating owning your first practice.  But, for one reason or another, you have not taken that first step.  Maybe it’s the fear of not knowing the process of what you need to do to buy or build a practice.  Or, it could be you are afraid you may not have what it takes to be a practice owner.  Or, possibly, you believe the corporate veterinary practices are taking over the veterinary ownership world and you’re afraid of competing against them.  We are here to help educate you and calm your fears away.

Owning a practice should be on nearly every veterinarian’s list of things to accomplish.  Pride of ownership, directing your own clinic or hospital, and treating those types of animals you want to treat are just a few reasons why you should want to be an owner.  In addition, veterinary practice owners typically make 22% more in annual salaries than an average associate veterinarian.  On top of that, the equity you build in your practice will contribute towards your retirement nest egg.

The process of owning a veterinary practice can be simple if done right.  Simple, but it does require work.  Having a good team on your side keeps the workload down and alleviates road bumps.  One of the first decisions is should you buy an existing or build a new practice?  That decision comes down to whether you want to buy an existing practice with potentially good cash flow, but also potential problems?  Is there a practice available to your liking and in the area you want to practice?  Do you want something that truly has your stamp on it that you have built from the ground up?  A self-evaluation and talking about it with a few experts will enlighten you into knowing which route is best for you.

The other question is whether or not you have what it takes to be a practice owner?  The simple answer is “yes, you do”.  Even if you don’t want to manage staff, do bookkeeping, or handle other management tasks, you can still outsource all of that and enjoy being a practice owner.  Proper guidance and education are key if you have not ever done any of those things before.  A consultant, accountant, broker, and others can help guide you in practice ownership.

Corporate practice owners are here to stay.  I would not be afraid of a corporate practice as a competitor.  You can open a clinic across the street and out personalize their services.  Some corporates are just in it for the money.  Not all of them mind you, but quite a few of them.  They don’t provide the personal touch and sense of community that you can in your practice.  Many also have an associate turnstile where they change associate veterinarians every six to twelve months.   I don’t know about you, but if I’m taking my beloved dog Fi-Fi, who is a part of my family, I’m going to get to know my vet and make sure Fi-Fi sees that same vet every time.  I don’t want someone whom I’ve never met and don’t know anything about them.  I think the majority of the pet-owning public feels the same way.

Fears are a product of the unknown.  You fear there’s a monster under your bed because you cannot see under the bed in the dark and you don’t know what’s under there.  You fear broccoli as a kid because you don’t know what it’s going to taste like.  Fear of practice ownership is similar.  If you educate yourself, you can squash those fears.

To help facilitate this, we are offering a seminar called “Build or Buy – Your Pathway to Practice Ownership”. This seminar will help you begin the process of educating you on what you need to do to be a practice owner.  There will be experts from various fields of buying or building a practice.  You’ll learn everything from finding the right practice or location to analyzing the value of a practice.  You will receive continuing education credits while you learn about the process of owning a practice.  It will be an evening full of information with dinner provided as well. For dates, locations, and registration information, visit our calendar.

• Corporates are continuing to expand.  Not only in the U.S. and Canada, but this corporate buyer has begun acquiring practices in Australia and New Zealand.
• Some corporates have begun to do de novo practices.  They are filling the gaps where they don’t have ownership of a practice with a startup practice.  If you can’t buy it, build it!
• The DVM retention rate for the industry is 62%.  A particular corporate claimed to retain DVMs at a rate of 82.5%.  They said it’s due to how they treat the DVM and staff leaving everything as close to the same as possible. They also give the owners a piece of the pie.
• There currently is a shortage of DVM associates. They are putting a heavy effort towards recruiting DVMs at Veterinary Schools as well as the general public.
• This corporate has three commitments – Wellness Plans, Dentistry, and Fear-Free Clinics.
• They expect the current acquisition trend to continue for the next three to five years.
• Valuations are different among the various corporate buyers.  Their add-back for DVM salaries is 20%.  Another corporate buyer uses 22%.  That can make a big difference in the purchase price on a large practice. Another example is adding back an office manager salary.  That can vary significantly amongst corporate buyers.  These are just two of ten examples of the differences they provided.
• Valuations have gone up over the past 5 years.  Five years ago, they were buying practices at 4x to 5x EBITDA.  They are now acquiring practices at a broader range of 6x to 9x EBITDA.
• They believe valuations are currently at their high peak with the expectation that they will start tapering back down to the 4x to 5x EBITDA range they saw five years ago.
• General Veterinary Practices that are in the sights of corporate acquisition teams represent 50% of all General Veterinary Practices.  Corporates currently own 30% of all of these practices.  The expectation is that once total corporate ownership hits 50%, the acquisitions will taper off dramatically.  Corporates then may turn to specialty clinics.  Note, we’re already seeing this in the marketplace.  They also may focus on de novo practices.

In summary, the presentation confirmed what our thoughts have been:

1. Corporates are here to stay.
2. Corporate ownership will continue to grow.
3. There are some good corporate buyers who treat their staff and DVMs well and there are others that do not.
4. Corporates will go the de novo route when they can’t find a practice in an area they want to have a concentration.
5. Valuations will begin to trend down in the not too distant future.

The number of corporate buyers in the market and the supply of practices corporates want all play into this.  Whether good or bad, the corporate veterinary practice is here for the long haul.

This is just meant as an educational document and we are not promoting this or any other corporate buyer. ​

• Corporates are continuing to expand.  Not only in the U.S. and Canada, but this corporate buyer has begun acquiring practices in Australia and New Zealand.
• Some corporates have begun to do de novo practices.  They are filling the gaps where they don’t have ownership of a practice with a startup practice.  If you can’t buy it, build it!
• The DVM retention rate for the industry is 62%.  A particular corporate claimed to retain DVMs at a rate of 82.5%.  They said it’s due to how they treat the DVM and staff leaving everything as close to the same as possible. They also give the owners a piece of the pie.
• There currently is a shortage of DVM associates. They are putting a heavy effort towards recruiting DVMs at Veterinary Schools as well as the general public.
• This corporate has three commitments – Wellness Plans, Dentistry, and Fear-Free Clinics.
• They expect the current acquisition trend to continue for the next three to five years.
• Valuations are different among the various corporate buyers.  Their add-back for DVM salaries is 20%.  Another corporate buyer uses 22%.  That can make a big difference in the purchase price on a large practice. Another example is adding back an office manager salary.  That can vary significantly amongst corporate buyers.  These are just two of ten examples of the differences they provided.
• Valuations have gone up over the past 5 years.  Five years ago, they were buying practices at 4x to 5x EBITDA.  They are now acquiring practices at a broader range of 6x to 9x EBITDA.
• They believe valuations are currently at their high peak with the expectation that they will start tapering back down to the 4x to 5x EBITDA range they saw five years ago.
• General Veterinary Practices that are in the sights of corporate acquisition teams represent 50% of all General Veterinary Practices.  Corporates currently own 30% of all of these practices.  The expectation is that once total corporate ownership hits 50%, the acquisitions will taper off dramatically.  Corporates then may turn to specialty clinics.  Note, we’re already seeing this in the marketplace.  They also may focus on de novo practices.

In summary, the presentation confirmed what our thoughts have been:

1. Corporates are here to stay.
2. Corporate ownership will continue to grow.
3. There are some good corporate buyers who treat their staff and DVMs well and there are others that do not.
4. Corporates will go the de novo route when they can’t find a practice in an area they want to have a concentration.
5. Valuations will begin to trend down in the not too distant future.

The number of corporate buyers in the market and the supply of practices corporates want all play into this.  Whether good or bad, the corporate veterinary practice is here for the long haul.

This is just meant as an educational document and we are not promoting this or any other corporate buyer. ​

Markets ebb and flow like the tide. In 2010 when the economy was down, no one was selling or buying practices. Banks were a bit more speculative on lending to buyers. Patients were more worried about their finances and paying their mortgages than getting their work done.  Corporate practices were hesitant about growing their footprint.  The economy was down and it was a tough couple of years.

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:

1.  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.
2. 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.
3. 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.
4. 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.
5. 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.