Questions Frequently Asked by Dental Practice Buyers
By Rod Johnston, MBA, CMA
Here are 10 of the most frequently asked questions we get when buyers come to us looking for a practice to purchase:
Q-1: When should I buy a Dental Practice?
A-1: Most buyers are out of school at least two years. This allows the dentist to increase his hand speed and allows them to be an associate in a practice or two where they can see how a practice is run. Many banks also require that the dentist is out of school a couple of years before they will give them a practice loan.
Q-2: Where do I look for practices for sale?
A-2: Get on the email distribution of all the brokers in the area you are looking to acquire a practice. Be sure you are a member of your state Dental Association so you can see their classified ads. Some dentists sell their practices without a broker, so they will advertise in the association’s classified ads.
Q-3: When do I form my “team” and who should be on my team?
A-3: You can form your team early on in the process. You don’t have to formally engage them with an engagement letter, but at least speak with them on the phone and be comfortable with knowing who they are. Get references for who does a good job. Your team should consist of a dental accountant, dental attorney, dental banker, dental consultant and/or dental broker. Note that I specified “Dental” before each team member. Having someone who specializes in dental is critical. I’ve seen more money wasted because someone used their neighbor who is a divorce attorney as their practice acquisition attorney. They soon regret this after they’ve spent $30,000 in legal bills.
Q-4: What do I look for in a practice?
A-4: Look for a practice within a 20-to-30 minute commute of your home. Everyone is different as far as what the practice looks like, or what procedures are done in the practice. But, in general, look for a practice that you can purchase and be comfortable doing the procedures the current doctor performs. If there are some procedures you do not do that the seller performs in the practice, know that you can learn to do those procedures, often very quickly. Keep in mind that there is no such thing as a perfect practice and things can be fixed. Overpaid staff or too many staff can be fixed. Old chairs can be replaced or recovered. Green shag carpet can be easily replaced. High rent can be renegotiated on occasion.
Q-5: I like the practice I’m looking at, now what?
A-5: Have your broker or consultant write up a Letter of Intent. This is a non-binding offer to purchase the practice. There are contingencies in place that allow you to get out of the transaction should you decide at some point to not move forward.
Q-6: How much should I pay for a practice?
A-6: Cash flow is king in analyzing a practice. Would you pay 110% of collections for a practice that would earn you $500,000 per year in income? (Hint: Yes) In the current market, practices are selling for between 70% and 85% of last year’s collections. They can go higher and they can go lower. Again, the big factor is cash flow. If the practice has good margins and good cash flow, it will sell for a higher percentage of cash flow. Lower margins mean the practice sells for a lower percentage of collections.
Q-7: What are the costs involved with purchasing a practice?
A-7: Brokers typically do not charge a fee to the buyer. Attorney fees can range from $5,000 to $10,000 for a simple, straightforward transaction. There may be an escrow agent involved and their fee is usually $1,000 to $2,000. You will pay sales tax on the equipment portion of the purchase price. You will split the cost of sending letters to the seller’s existing patients with the seller. Then, any upgrades to equipment, décor, etc.
Q-8: What is Goodwill?
A-8: No, it’s not just a place where you donate used household items. Goodwill in a practice is all of the intangibles of the practice. It’s the practice and doctor’s reputation, the location of the practice, the culture, the environment of the practice, all those things that bring patients to the office to have their dentistry done there.
Q-9: What is a typical Covenant Not to Compete?
A-9: A typical Covenant Not to Compete is for 5 years and 10 miles. This means the selling doctor cannot treat patients for 5 years within a 10-mile radius of the practice they are selling. The 10 miles is measured as a crow flies. The Covenant can be more and can be less. It is sometimes negotiated and more densely populated areas could be less and less densely populated areas could be more.
Q-10: I currently work 6 blocks as an associate dentist with a 10-mile covenant not to compete from the practice I want to purchase. Are the non-competes binding?
A-10: Yes, Covenant Not To Competes are binding, especially if it’s 6 blocks away. If it’s 9.8 miles from your current practice, you might be able to talk to your employer and get them to release you from the non-compete. But, other than that, they are binding.
These are just a few questions we often get from buyers. Hope this helps educate you a little bit more in your quest in purchasing a practice.
Here are 10 of the most frequently asked questions we get when buyers come to us looking for a practice to purchase:
Q-1: When should I buy a Dental Practice?
A-1: Most buyers are out of school at least two years. This allows the dentist to increase his hand speed and allows them to be an associate in a practice or two where they can see how a practice is run. Many banks also require that the dentist is out of school a couple of years before they will give them a practice loan.
Q-2: Where do I look for practices for sale?
A-2: Get on the email distribution of all the brokers in the area you are looking to acquire a practice. Be sure you are a member of your state Dental Association so you can see their classified ads. Some dentists sell their practices without a broker, so they will advertise in the association’s classified ads.
Q-3: When do I form my “team” and who should be on my team?
A-3: You can form your team early on in the process. You don’t have to formally engage them with an engagement letter, but at least speak with them on the phone and be comfortable with knowing who they are. Get references for who does a good job. Your team should consist of a dental accountant, dental attorney, dental banker, dental consultant and/or dental broker. Note that I specified “Dental” before each team member. Having someone who specializes in dental is critical. I’ve seen more money wasted because someone used their neighbor who is a divorce attorney as their practice acquisition attorney. They soon regret this after they’ve spent $30,000 in legal bills.
Q-4: What do I look for in a practice?
A-4: Look for a practice within a 20-to-30 minute commute of your home. Everyone is different as far as what the practice looks like, or what procedures are done in the practice. But, in general, look for a practice that you can purchase and be comfortable doing the procedures the current doctor performs. If there are some procedures you do not do that the seller performs in the practice, know that you can learn to do those procedures, often very quickly. Keep in mind that there is no such thing as a perfect practice and things can be fixed. Overpaid staff or too many staff can be fixed. Old chairs can be replaced or recovered. Green shag carpet can be easily replaced. High rent can be renegotiated on occasion.
Q-5: I like the practice I’m looking at, now what?
A-5: Have your broker or consultant write up a Letter of Intent. This is a non-binding offer to purchase the practice. There are contingencies in place that allow you to get out of the transaction should you decide at some point to not move forward.
Q-6: How much should I pay for a practice?
A-6: Cash flow is king in analyzing a practice. Would you pay 110% of collections for a practice that would earn you $500,000 per year in income? (Hint: Yes) In the current market, practices are selling for between 70% and 85% of last year’s collections. They can go higher and they can go lower. Again, the big factor is cash flow. If the practice has good margins and good cash flow, it will sell for a higher percentage of cash flow. Lower margins mean the practice sells for a lower percentage of collections.
Q-7: What are the costs involved with purchasing a practice?
A-7: Brokers typically do not charge a fee to the buyer. Attorney fees can range from $5,000 to $10,000 for a simple, straightforward transaction. There may be an escrow agent involved and their fee is usually $1,000 to $2,000. You will pay sales tax on the equipment portion of the purchase price. You will split the cost of sending letters to the seller’s existing patients with the seller. Then, any upgrades to equipment, décor, etc.
Q-8: What is Goodwill?
A-8: No, it’s not just a place where you donate used household items. Goodwill in a practice is all of the intangibles of the practice. It’s the practice and doctor’s reputation, the location of the practice, the culture, the environment of the practice, all those things that bring patients to the office to have their dentistry done there.
Q-9: What is a typical Covenant Not to Compete?
A-9: A typical Covenant Not to Compete is for 5 years and 10 miles. This means the selling doctor cannot treat patients for 5 years within a 10-mile radius of the practice they are selling. The 10 miles is measured as a crow flies. The Covenant can be more and can be less. It is sometimes negotiated and more densely populated areas could be less and less densely populated areas could be more.
Q-10: I currently work 6 blocks as an associate dentist with a 10-mile covenant not to compete from the practice I want to purchase. Are the non-competes binding?
A-10: Yes, Covenant Not To Competes are binding, especially if it’s 6 blocks away. If it’s 9.8 miles from your current practice, you might be able to talk to your employer and get them to release you from the non-compete. But, other than that, they are binding.
These are just a few questions we often get from buyers. Hope this helps educate you a little bit more in your quest in purchasing a practice.