Buyer Articles

 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.

 

• Minimum of 3 years Tax Returns and Financial Statements
• Minimum of most recent 3 years annual productions, collections, and adjustments
• Most recent production by procedure code report
• Fee Schedule
• Patient demographic information
• Accounts receivable and insurance receivable aging
• Employee census information
• Copy of the lease
• List of included equipment and furniture
• Outstanding treatment plan report

Now that you have these reports, it’s essential you understand what they mean.  If you don’t know how to read financial statements or tax returns, be sure you have a knowledgeable OMNI accountant on your team.  If you need help with the practice management reports, hire a consultant or third-party practice broker, like myself and my OMNI colleagues.  We can help you evaluate the practice.

In the long run, hiring OMNI experts to evaluate the reports will more than pay off.

A couple of years ago, in 2010, banks that financed buyers in a practice transition, tightened their credit requirements.  They began requiring dentists to be out of school for at least 2 years, they would only finance up to 80% of the last 12 months’ production or they would require the seller to take a note back for part of the loan.  In addition, they would absolutely not finance a new dental school graduate and many wouldn’t even do a dental practice startup.  Rates were up around 7% or higher.

It was a rough year for sellers looking to do a practice transition or sale and also tough on practice sales for practice transition brokers.  Practice sales were completely in the tank.

Fast forward to 2012, bank rates are as low as 5.25% and most around 5.75% to 6%.  They will finance up to 85% of the dental practices’ last 12 months of production and typically no longer require the seller to take a note back.  In addition, they’ll even finance dental real estate purchases if the real estate is available at a great rate.  If you’re in the market, or on finance to buy a practice, or think you can’t sell your practice because banks are not financing practice sales, think again.

Banks are back on the field of play and ready to loan you money so get in the game!