Buying a Practice

Over the past several months, the economy has been going quite well.  The Dow Jones average is up over 21,000 and setting all-time highs.  Employment levels are up while unemployment levels are down.  Current unemployment levels in King, Snohomish and Pierce counties are at 3.3%.  Amazing numbers for a strong economy.
The strong numbers have played a part in the increase in practice sales.  Practice owners who are over 55, are seeing the strong numbers and returns in their portfolios and deciding now is the time to retire.  Buyers are also watching the economy and realizing it’s a good time to buy a practice.  Interest rates are still good at between 5.25% and 5.5%.  Consumer’s discretionary income is up freeing funds for consumers to do elective and cosmetic dentistry.   (I know you shouldn’t base your dentistry on discretionary income, but many do).
The result of all of this is that practice listings and sales are up.  We typically carry an inventory of 10 to 15 practices and we’re now up to approximately 25 practices.  We have spoken to other brokers and most are experiencing a similar increase in business.  The interesting thing is that valuations are still staying true to normal formulas and historical numbers.
What this means to you is you can either be a participant in this booming market, or you can be a bystander and watch opportunity pass you by.   If you would like to get any information on any of our practices, let us know.  Consultations and phone calls are always free!

Understanding how many patients, or what type of patients, are in a practice is an important part of evaluating a potential practice to purchase.  What is one man’s trash is another man’s treasure.
When you are evaluating a practice, you may be told that there are a certain number of “active” patients in the practice.  That term “active” is one of my least favorite terms when trying to evaluate or sell a practice.   One person may define “active” as having been in the office once within the past 24 months.  Another person may define it as the patient having been in the practice once in the last 12 months.  And yet a third may say the patient is “active” because they came into the office at one point or another while the doctor was practicing.  It doesn’t even matter to them how long ago it was, or if the patient is even alive.  If I were in your shoes, I would throw out what anyone says and count the charts myself.  If the practice is digital, I would look at the number of hygiene appointments seen in the past 12 months and divide by two to get the number of active patients seen that year.  You can gross it up by 50% to account for walk-ins and other types of procedures, but that should give you a ballpark of the number of active patients.  Another quick rule of thumb is to divide the annual collections by $1,000.   A practice producing $500,000 per year, should have in the neighborhood of 500 patients ($500,000 divided by $1,000 per patient)Patient demographics is another thing to be aware of.  Buyers often blow off a practice that has an aged patient demographic.  Little do they know that a lot of elderly patients pay cash for their treatment and they still want their treatment.  They also have more required work than patients that are in their 20’s, 30’s and 40’s.   These patients are very profitable patients.

Hopefully looking at these two areas of patient demographics will help you make the right decision when evaluating a practice.

Owning and growing a dental practice can be one of the most challenging things in dentistry.  Advertising for new patients can be hit and miss and expensive.  That’s why one of our favorite strategies is to purchase another practice and merge it into your existing practice.

The reason you would consider doing a merger is because you get all of the revenue and current patients from the new practice, but you don’t get all of the expenses.   You don’t bring over the fixed expenses like rent, telephone, electricity, etc.,  You already have those in your practice and don’t need to incur them again when you bring over the practice you just acquired.

As an example, say you own a practice that collects $600,000 per year. You have overhead of $390,000 with 30% of the overhead in fixed expenses – rent, utilities, insurance, etc., Another practice comes on the market that collecting $500,000 with overhead of $325,000 with fixed expenses again at 30% or $150,000. You purchase the practice for $350,000 giving you a debt service payment of $3,500 per month.  You work closely with the broker to ensure 100% of the patients transfer to your practice. Your practice now goes from $600,000 up to $1.1 million in revenue.  You incur the variable expenses of the second practice, but you do not incur the 30% fixed expenses of $150,000 because you already have rent, utilities, insurance etc., at your current office. In essence, you just gave yourself a $150,000 raise, less $42,000 in debt service and dropped your overhead to the neighborhood of 55%. It would take you much longer to do this if you just did marketing and advertising. By consolidating practices, you get instant growth and income. If you have a practice for sale near you, you should consider merging it into your practice in order to achieve quick growth.

​​Buying a dental practice can be and is a daunting task. It’s much more involved than purchasing a car or even a house.  You have to wear many hats including shopper, negotiator, accountant, finance, lawyer, practice management expert, equipment specialist and even human resources manager. One wrong step and you could set yourself back financially, legally and even personally if something goes wrong.  You have to know what to look for every step along the process. But, what is the process?  Here is an abbreviated version of what those steps are:

1. Find a practice.  Finding a practice isn’t hard. Finding a good one is. Get in touch with all of the brokers and get on their e-mail lists.
2. Begin speaking with banks that specialize in dental practices.
3. Review the documents the broker sent you. You should get a prospectus that gives a decent summary of the practice along with demographics. You should get at least 3 years tax returns, profit and loss statements, production by procedure report, production by provider report and an accounts receivable aging balance. And, that’s just the start.
4. Review financials with your accountant. Or, if you minored in accounting or understand numbers, you can review them yourself.
5. Make your offer and negotiate. Don’t low-ball the offer unless you know they may accept any offer. A good practice will go quick, so wasting anytime will result in missing out on the practice. Add your contingencies in the letter of intent.  Review with an attorney.
6. Do your due diligence – review charts, x-rays, staff pay and benefits, equipment, UCC filings, the reputation of the doctor and practice, state licensing review on the seller, etc., Get in as deep as you can.
7. Review the lease. Make sure it’s not too high, no tear down clauses, lease expiring, etc.,
8. Begin legal review of agreements. Get your attorney involved.  Choose a good dental attorney.
9. Complete the Omni 70 point checklist for closing the sale of a practice.
10. Hold staff meeting to be introduced as the buyer
11. Work through escrow in closing the sale.
12. Begin your new life as a practice owner.

As you can see from this abbreviated  list, there’s a lot to do.  You can go it alone and swim with the sharks, or, you can have our Buyer’s Transition Consultant help you through the process.