5 Elements of a Successful Practice Purchase After COVID Emergency Shutdown
What a year it has been. Dental practices went through a mandatory shutdown for three months or more. When the practices re-opened, no one knew what to expect. There were dentists in the middle of purchasing a practice or even doing a startup. These potential new practice owners knew what they were looking for when there wasn’t a pandemic. But it is a whole different ball game now. So, what’s the new game plan? Should you wait? What should you look for when purchasing an existing practice? What are some of the red flags?
We have had quite a few successful practice purchases and startups since practices re-opened. We have checked back with all of the new practice owners and found that all of them are doing well. There are some things that have changed, and you should be aware of when purchasing or starting up a practice in this new dental practice environment. Below are a few of those items:
- Collections/Production – Has the practice come back to near its full level of collections prior to the mandatory shut down? If not, why not? Is there a staffing issue? Does the practice have a lot of patients from a few large employers where the employer now allows the employees to work from home? When is the employer requiring employees to come back to work in the office?
- Staffing – Have all the staff come back after the shutdown? Are they all back full time? Or are they working part-time while their kids are home-schooled because of schools being closed? Some assistants and hygienists have decided they are going to continue to stay home and have left their jobs. They decided their spouse does well enough financially and they enjoyed being home with the kids, so they are moving to a one-income household. If there are staff that has left, have they been replaced, or if not, what is the plan to replace them? There is a shortage of hygienists in quite a few areas right now. Finding a replacement can be difficult, so make sure there is a plan in place to get one into the office quickly.
- Patients – Are patients coming back and booking appointments? For most practices, the answer has been “Yes”. The tell-tale sign for a practice is after they have gone through the second cycle of hygiene, that’s usually after the first six months. Some practices have seen a slight drop in hygiene appointments after the first cycle. The question to ask is are the staff members working hard to make sure the schedule is filled? If the answer is no, then the practice needs to improve their recall. It’s not a patient problem, but a management problem.
- Payroll Protection Plan (PPP) Loan – Did the seller take out a PPP Loan? If so, how much and has it been forgiven? The PPP loan agreement states that if a loan has not been forgiven and the practice is sold, then the loan will be the responsibility of the seller to repay the loan. It still “may” be able to be forgiven, but the best practice is to get the loan forgiven as soon as the practice is eligible. The sellers are now required to put the loan amount into escrow at closing until the seller receives their Loan Forgiveness document.
- New COVID-19 Safety Protocol and PPE – Does the practice have the suggested COVID-19 Safety equipment and protocols in place? New air filtration system? Procedures to test for COVID-19 before patients come into the office. Procedures to sterilize operatories and other areas between patients. What happens if a patient has tested positive? Is there a good inventory of PPE in the practice? At least one month’s supply is recommended with two months being optimal.
By just asking a few additional questions, you can tell if a practice has been severely affected by COVID-19, or if the practice has endured the pandemic. With the right protocols, equipment, and staffing in place, most practices have come back, and in some cases, are near above pre-shutdown numbers. Patients still need to see their dentist. Dentists are an essential part of the health of this nation. We will shortly put 2020 and the pandemic behind us. Getting into practice ownership is your next step in achieving financial freedom and developing your own personal practice.
Read MorePPP Loan Forgiveness and Your Practice Sale
A tip from Jen Bennett, Certified Broker with OMNI Practice Group, for anyone with a PPP loan getting ready to sell.
Read MoreBuying a Dental Practice During COVID
Our owner and founder, Rod Johnston, gives his thoughts about buying a practice today during the COVID pandemic. Rod has helped hundreds of dentists purchase practices for over 15 years.
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Exit Planning in the COVID Era
By Are you ready to transition?
Is your practice ready to transition?
What is the market like?
These are all key questions to ask yourself. When is a good time to start thinking about all of this? The real answer is as soon as you buy or start your practice, but the more practical answer is dependent on you. If there any chance you will want to transition in the next five years, you should start working on your transition today.
Personal readiness and practice readiness are both more important than current market conditions; however, considering the COVID crisis, I am going to focus on market timing.
If any of the following sounds even slightly familiar, raise your hand:
I was ready personally, and my practice was ready in August 2019. I choose to wait because (pick one or more):
- I have a kid with one year left in college
- I have one year until I can draw Medicare
- There is one more room in the house I would like to finish
- My spouse retires in a year
- I pay off my house in a year
- I turn (insert round number like 60 or 70) next year and I would like to wait until then
- Etc. …
Now, for those of you that raised your hand, consider the reality of August 2020. How does that August 2019 decision to wait look? Questionable at best.
My intent is not to beat up on those of you that this struck a chord. Rather, I want to emphasize the need for starting early and getting help.
Transitioning is a difficult process. Do not go it alone. Contact an experienced, qualified transition specialist and get the ball rolling. We are here to help.
Do you have more questions? Attend our Practice Transition webinar on Thursday, 10/1 at 6pm ET/ 3pm PT, presented by Corey Young, DDS, MBA, and Katie Collins, CFP. Reserve your spot today at omni-pg.com/register.
Read MoreThe Cost of a “Perfect” Practice in the COVID Era
Should you buy now in this COVID environment? Everything seems kind of scary. It might be better to stay with that nice, safe, secure job and wait for the perfect opportunity to come along? That said, there are a lot of practices coming on the market. Maybe now is the perfect time to buy? Let us look at two hypothetical practices and see where you would be in ten years with each.
PRACTICE A: The practice is located a little further out than you would like. The equipment, while exceptionally well maintained, is twenty years old. The doctor, who is booked out for weeks, does zero marketing and restricts new patients to about ten a month. Additionally, the doctor wants to be able to fully retire as soon as possible.
- Overhead: 50%
- Gross: $700,000/year
- Net: $350,000/year
- Acquisition price today, due to COVID environment: $350,000
- Current interest rate: 4%
- Loan of $385,000 (acquisition price plus one month of working capital) over ten years: $3,898 monthly payment/$46,775 annually/$467,753 over life of loan
HOW IT PLAYS OUT: Despite the doctor leaving fairly quickly, patient retention is strong. By employing a modest marketing program and updating treatment planning you grow the practice by fifteen percent each of the first two years, leveling out to 5% growth for the next eight years.
Total income over ten years: $4,705,000
In ten years, banks are willing to lend up to 110% of annual gross, having adjusted their arbitrary ceiling a few years earlier. Your practice, still operating at 50% overhead, can be sold for 110% of annual gross. Plus, as a bonus, you just paid your practice off.
Net asset value of practice year ten: $1,433,000
Sum of income and asset value: $6,138,000
PRACTICE B: The practice is in a great spot. There is even a coffee shop next door! The doctor is current and has a robust marketing program bringing in fifty new patients a month. It took you three years to find this “perfect” practice, but your patience paid off.
- Overhead 60%
- Gross $900,000/year
- Net $360,000/year
- Acquisition price in three years, market having recovered $600,000
- Interest rate in three years 6%
- Loan of $660,000 over ten years: $7,327 monthly payment/$87,924 annually/$879,282 over life of loan
HOW IT PLAYS OUT: The transition goes very well. Being the well-oiled machine that it is, annual growth of five percent continues for the next seven years. Though it took you three years to acquire, you did make $200,000 a year while working at your corporate job prior to purchasing.
Total income over ten years: $2,651,841
While your practice is profitable, it is not at the top end of profitability, the bank is willing to lend 95% of gross. Additionally, you still have three years left on your loan with outstanding principle of $240,858.
Net asset value of practice, ten years from now: $904,924
Sum of income and asset value: $3,556,765
The cost of a “perfect” practice (at least in this scenario) versus jumping on the great opportunity? About 2.5 million.
Thinking about buying a dental practice? Attend our webinar on Friday, 10/2, presented by Corey Young, DDS, MBA and Katie Collins, CFP. FREE – space is limited! Earn 1 hour of CE – reserve your spot today: omni-pg.com/register
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