Buyer Articles

There are a number of things to look out for when buying a dental practice.  If you’re not careful, you could end up with a bag of tricks.  Here are some of the top pitfalls to avoid when buying a practice:

1.  Not understanding the numbers.  Be sure and know what normal dental expenses are and what may be extraneous.

2.  Assume the staff are all on board and will be staying with the practice.   Know who the staff is and what their relationship is with the seller.  Find out if they are planning on staying.  Know how loyal the patients are to the hygienist and the rest of the staff.

3.  Embezzlement – hire an accountant to look for any irregularities.  The ADA estimates 35% of all practices have caught their employees stealing from them.  (the other 65% just haven’t caught their staff yet).   Are courtesy credits high?   How about patient refunds?

4.  Does the procedures the selling doctor perform match the procedures that you do?   Make sure a large amount of the procedures you don’t do are not currently being performed by the seller.  You don’t want to have an immediate drop in production right from the start.

5.  What was the definition of “active” patients?  Some selling dentists use the life of the practice, others use 24 months.  I typically like to quote how many patients have been in the practice in the last 18 months.   There are several ways to estimate, but just make sure you spend some time on this area.

6.  Has all the treatment been done on patients?  Was the doctor too aggressive?  You can only find this out by spending several hours delving into patient charts.

7.  Are there capitation or other discount plans in place?  This can be a big drain on the practice.

These are only a few of the pitfalls to make sure you don’t get tricked.   Spend as much time in due diligence as you need and bring on experts to help you along the journey.

-Rod Johnston, MBA. CMA

 There are a few things you should be wary of when buying a dental 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 benefit 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.

-Rod Johnston, MBA. CMA

As you probably have seen, there are not a lot of dental practice’s for sale.  The seller’s market continues for dental practices.  The great practices get snatched up literally before they hit the market.  The practices that need a lot of work are out there, but it’s difficult to assess what you are getting.  Here are a few tips to evaluate a practice that may not be perfect, but might have some potential:

1.  Is the trend in the practice production going up by more than 10% per year for the past 3 years?  If it is that’s a good sign the practice is growing steadily.

2.  Look at the unscheduled treatment plan report.  Is there a good amount of treatment out there?  Has the doctor been diagnosing treatment, or doing a lot of “watching”.  The more treatment left for you, the better.

3.  Is there enough patients to keep you busy a minimum of 3 days per week. That typically means 500 to 600 patients.

4.  Does the practice take all the major insurances?  If not, that tell you that you can get an increase in new patients by adding more insurances.

5.  Does the selling doctor refer out a lot of treatment? – Endo, surgery, etc.,  If this is the case and you do endo and surgery, that’s a quick 10% increase in production.

6.  What’s the competition like?  Are there dentists within 3 miles?  How old are they and what are their practices like.  If they are older practices, that means those docs may be happy with their level of production and not into competing for business.

7.  Do the neighboring dentists advertise?  If not, you can beat them with strategic marketing.

8.  What type of advanced procedures does the selling dentist do?  Invisalign, implant placement, etc.  If you do these, it’s another increase in production.

9.   Are there a lot of inactive charts within the last 3 years?  You can typically activate  number of the inactive charts by aggressively calling and mailing the patients.

10.  Has the practice been remodeled recently?  A simple remodel, even painting, carpet can freshen up a practice and entice existing patients to start referring again.

The next time you’re looking at a practice that may appear run down, do a little more detective work and you may discover a diamond in the rough!

-Rod Johnston, MBA. CMA

Often times, a potential buyer of an existing veterinary 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 adviser should contact the landlord or property manager.  Be sure the seller has informed the landlord that they are selling the veterinary 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.

 I meet over 100 veterinarians each year who are looking to buy an existing veterinary practice.  Of those, I would estimate that 40% have not done any research on what is involved in buying a practice. Of the other 60%, very few of them know the beginning to end process of buying a practice.  They don’t teach you how to buy a practice in veterinary school, so we don’t expect you to know everything.  While I can’t cover all the steps in this article, I can give you some guidance on where to start and what steps to take before buying a veterinary practice.

The very first recommendation I have is that you should be at least 2 years out of school.  I have seen doctors buy a practice right out of school, but the majority of them struggled for two to three years before they finally figured things out.  So, here are the steps you should take to become educated in buying a practice:

1. Contact a bank that finances veterinary practice acquisitions and make sure you can qualify for a good loan.  The days of just having a DVM behind your name and being qualified are gone.  Banks now require decent credit scores, cash in the bank, and in some cases a current associateship.

2. The next step is to understand a little bit about veterinary practice valuations.  You don’t want to go into a sale not knowing if the practice is worth the price listed or not.  A “rule of thumb” is that a practice is typically worth between 85% and 95% of its’ last 12 months production.  Remember, that’s a rule of thumb.  I’ve seen practices go for as high as 110% of production and as low as 50% of production.  A formal valuation is the best way to get the true value of a practice as not all practices are the same.

3. Think about where you want to practice.  You’re probably going to be there a while, so you might as well like the area.   Also, research demographics.  There are excellent demographic sites that sell great demographic information for about $500.  It will tell you where the best locations to practice are.

4. Put together a good team.  Get referrals for a good veterinary attorney, a good broker or consultant and a good accountant.  They’ll help you analyze the practice, do the legal work and help you find a practice.

5. Study up on practice management and veterinary financial ratios.  You should know that lab fees should not be any higher than 10% of the practice production.  Or, that staff expense should be between 20% to 25% of production.  Be an informed buyer.

6. Be prepared for your due diligence.  You need to know what to look for when you do get to the point of buying a practice.  Scrub the financials, practice management reports and audit charts.  Work with your consultant to thoroughly go through the practice.  Take your time and do not rush into it.

7. Finally, spend some time with a broker before you go look at the practice.  Understand what the practice you are looking at is all about.  Does the broker think it’s honestly a good practice?  Why?  Once you’re comfortable with the numbers, then go take a look at the practice.

By being an informed veterinary practice buyer, you will avoid a lot of headaches and potential problems down the road.  There are practices that are excellent and practices that you may want to pass on.  Being educated and knowing the difference is critical in your veterinary practice acquisition success.

-Rod Johnston, MBA. CMA