Steps to Purchasing a Practice
Happy New Year! Thank goodness 2020 is over and we can start looking forward to 2021. We all hope this is a year of change. We hope to begin getting control of COVID-19 with vaccines and some immunity for those who caught and survived COVID. There will be a change in the Presidency. Hopefully, there will be a change and restaurants can be fully open again. But what about you? Is this the year you change and become a practice owner?
Most dentists dream of eventually owning their own dental practice. But dentists tend to put off ownership for a variety of reasons. A couple of big reasons are that you have never done it before, you are not familiar with the process, or you’re just completely afraid of the unknown.
A great philosopher once said, “If you can dodge a wrench, you can dodge a ball”. What does that have to do with buying a practice? A lot actually. What the philosopher is referring to is that if you can dodge an object, a wrench, for example, you can dodge another object, such as a ball. Applying this theorem to the practice buying world, if you have ever completed a major purchase, or made a major decision, the process and steps are the same.
We know you have made major decisions in your life, otherwise, you wouldn’t have a D.D.S. or D.M.D. behind your name. You decided which dental school to go to. In doing so, you did research. You looked at the pros and cons of each dental school and weighed them. You may have talked with some friends or mentors who went to those schools. You analyzed other factors like the location, cost, and how good of dentist the schools have turned out. You also may look at socio-economic considerations. Then, you made the decision and lived with it. And here you are facing another major decision in your life. Purchasing a dental practice.
Buying a dental practice is similar. The first step is figuring out the variables of what type of practice you want. Where do you want to practice? How many operatories do you want to have? Do you want to own the real estate? Do you want a practice with high production or one that you can build? Cosmetic, or bread and butter crown and bridge practice? Once you’ve come up with your criteria, the next step is to locate potential practices that may be on the market. You may also consider doing a startup. You analyze the practices that are on the market. You may see one or two you like. You contact the broker to get information on the practice. This is typically called a practice prospectus or practice offering memorandum. Some brokers will send tax returns, profit, and loss statements, and practice management reports upfront. You get all this information, and it looks like it’s written in Latin. You may not have any clue how to read the reports. The broker can go over the numbers with you, or you can also hire a Buyers Representative, phone a friend who knows the business, or possibly a CPA. After you have looked at the numbers and that passes your and your advisor’s scrutiny, the next step is to go see the practice.
You contact the broker and set up a showing of a couple of practices. Looking at a practice is like looking at a house for sale. You may see things you like and things you don’t like. But know that things can be changed. I have had doctors decide they don’t want a practice because the carpet is outdated, or the paint is ugly. There are people who can paint and change out the carpet. They do it for a living. They’re called painters and carpet layers. So, don’t exclude a practice because it’s ugly. Have a little vision and think about how you may make it your own style.
Another one that throws potential buyers off is equipment. The patient chairs may be older, or they may not have a pano or cone-beam. Chairs are very reasonable these days. I have seen middle-range quality chairs for $5,000 to $7,500. Remember, you may be in this practice for 20+ years. Spreading out the cost of new chairs, even if it’s $50,000, can be as little as $2,000 per year. That’s a few crowns a year.
After you have looked at the practice, you like the location, but there may be one or two things that do not fit your criteria. Remember that the cash flow of the practice is always the number one consideration. I have been selling practices for 15 years and I have seen some ugly, small, outdated practices collecting $1,000,000 and taking home $500,000. I have seen ugly practices collecting $400,000 and taking home $250,000 on 3 days of work per week. Don’t judge the book by its cover. It’s what’s inside, or the cash flow inside that really counts.
After you have decided that this is a good practice and you would like to purchase the practice, you make an offer through a letter of intent. It’s a non-binding agreement where the broker typically provides a template. You can either come up with your own offer or work with your advisor to come up with the offer. If it’s a good practice and the broker has reasonably priced the practice, make a good offer close to or at the asking price. DO NOT LOW BALL THE PURCHASE PRICE IF YOU ARE SERIOUS ABOUT PURCHASING THE PRACTICE! You will just upset the seller and they won’t even want to work with you after receiving a low-ball offer.
You will want to begin contacting bankers who specialize in dental practice financing. Brokers know most all of them and which ones are lending at the moment. Ask the broker for a name or two. The banker will ask for your personal financials. They love to see you have some cash in the bank and not much credit card debt. Bankers will be more interested in how the practice is doing. They love to see a practice with great cash flow.
You next jump into due diligence on the practice after the offer has been accepted. You go into the practice on the weekend and go through the charts, x-rays, equipment, etc. There are checklists you can use to do the due diligence or bring along an advisor. However, be careful with advisors as some will just want to look for the bad things in the practice. Don’t throw out the baby with the bathwater if they point out the hygiene is only 23% when it should be 30%. Remember, almost everything can be fixed. Just note it and continue on.
If everything goes well on the due diligence, you let the broker know you are moving forward. The seller’s attorney will draft up agreements. You will then hire your own attorney. Ask your advisor or broker for a dental-specific attorney. Using a non-dental attorney will cost you additional money. After the agreements have been “agreed” upon, the next and final step is closing. At closing, you sign the agreements and take over the practice.
There are some additional steps in the process that your broker can help you with, but these are the basic steps in purchasing a practice. So, just like purchasing anything else or making any major decisions, you just need to go through the steps, rely on your advisors, and dodge those wrenches! As always, we are here for you for a free consultation, just give one of our experienced brokers a call.
Read MoreImportant Information for Associates
Frank Sciabica, DDS, and broker at OMNI Practice Group offers some words of advice for dental associates. If you have questions, call Frank at 425-985-8390 or email frank@omni-pg.com. He’d be happy to help!
Read More5 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 MoreAccounts Receivables in a Transition
Buyers and Sellers – One of the things to look out for in a dental transition is Accounts Receivables. What should you be looking for? Megan Urban, Practice Transition Advisor with OMNI Practice Group, will get you started:
Read MoreBuilding a Dental Practice FAQ
Steve Kikikis, Healthcare Real Estate Broker, answers 3 of his most frequently asked questions – How long does it take to build out a dental practice, how much does it cost, and how can you save money?
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