Buyer Articles

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.

When you get a copy of the lease, you or your advisor should contact the landlord or property manager.  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 off the landlord 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.

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.

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 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.
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.

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.
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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.