Buying a Practice

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

Caveat Emptor is not a garnish at your local Italian restaurant.  As you go through the steps in buying a practice, you should be cautious while going through due diligence.  Due diligence is the thorough, in-depth analysis of the practice charts, equipment, systems, computers, and everything else in the practice.  If you missed our buyers’ seminar last month, you would have received our very lengthy due diligence checklist.  There is a lot to cover and a lot that can be uncovered in the process of due diligence, and there is a lengthy checklist involved, embezzlement, fraud, misstatements of numbers including active patient counts, faulty equipment over and under-treatment are just a few things that can be uncovered during the due diligence process.  Do not take the word of the seller or broker, dig in and find the information yourself.  Caveat Emptor is prudent advice when shopping for a practice.

-Rod Johnston, MBA. CMA

I get the question a lot, “do you think I am ready to buy or start a new practice?”  I’m probably the wrong person to ask as I’m somewhat of a serial entrepreneur.  I tend to live by the quote “Fortune favors the Bold”.  Maybe I can answer better by giving you a few real-life case studies.

Case Study #1 – I helped this young dentist locate a practice right out of school.  He was a typical new graduate.  He was clinically sound, somewhat slow with procedures as expected, and not confident at all in managing a practice.  However, he found a decent practice that I helped him evaluate.  It was not great, but it was producing $45,000 per month.  He struggled for the first six months to make ends meet.  He had to dip into his working capital to keep things going for a couple of months.  We continued to work with him and help him ramp things up.  He said he felt more and more confident as time was going on.  His hand speed improved and he worked through a few management issues that helped him get respect from the staff.  Fast forward 3 years later and he’s now producing $125,000 per month, has low overhead, and is well on his way to a potential early retirement.

Case Study #2 – A dentist had been out of school for about 4 years.  He kept looking for that perfect practice in King County.  I showed him a number of practices, but nothing fit his model.  He finally decided that if a practice wasn’t going to come up on the market that fit his needs, he would need to create one from scratch.  We found him a nice location in the heart of the area he was looking.  He went from $0 to $40,000 per month within 9 months.  Five years later, he’s comfortably doing $80,000 per month.

Case Study #3 – A dentist searched for several years for the perfect practice.  There were over 20 practices in a five-year period I have shown this person.  We even looked at starting up a practice.  We put letters of intent on a number of practices and new start-up locations, but nothing stuck.  This dentist is still looking and still has yet to find the perfect practice.  By the time they find the perfect practice, their friends will have owned a practice for 7 years and be well ahead of them in terms of building a practice and being in a better financial position.

The moral of the story is that you are never 100% ready to buy or start a practice.  Dental schools do not spend enough time teaching you to manage or own a practice.  If you have been out of school for a few years, have a good number of associate jobs under your belt, and have a desire to own or start your own practice, it’s time.  Find a good practice or location, do your due diligence, get good advice from your advisory team and go for it.

-Rod Johnston, MBA. CMA

When buying a dental practice, there are several essential reports you absolutely must have in order to evaluate the practice.  The reports are as follows:

• 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.
-Rod Johnston, MBA. CMA

• 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.