The Cost of a “Perfect” Practice in the COVID Era
By 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.
Read MoreWhat You Need to Know Before Buying a Dental Practice
By Kevin Brady, OMNI Practice Group
Your dental practice will most likely be the most expensive purchase you will ever make. It is a considerable investment, not only financially, but as an investment in your family’s future. Ensuring that you are looking at the right metrics will ensure that you are not setting yourself up for failure before you even step foot in the practice.
Learning about the practice and using experts to help you understand what kind of business you buy and identify any potential red flags that could save you thousands of dollars and a lot of headaches.
Five things to know before buying a dental practice:
- Certified Valuation of the practice has completed. Make sure you review with your buyer broker or CPA to understand the Valuation and the financial methods used to get fair market value. Keys areas are overhead expenses, cash flow, and profitability. Knowing what your projected overhead and profit will allow you to forecast future business and personal expenses.
- Demographic information, understanding the current market demographics and the number of competitors in the area, will help show the practice potential for growth and what marketing expenses will be needed in the future.
- Professional Advisors, having competent and experienced advisors that you can trust and rely on to provide you guidance without any conflicting interest. Do not make one of the most significant business decisions of your career without experts to guide you.
- Transition Plan, developing a detailed checklist, and a strategic plan will help ensure a smoother transition from the selling doctor. Getting your list done before you open the practice will save you a lot of “time, effort, and energy.” We at Omni have developed a “72 point” checklist and are continually adding to it with every transition that is completed.
- Review existing staff benefits, knowing that the typical staff salaries range from around 20 to 25 percent of the annual collections and how this compares to the current staffing expenses. Knowing this information will allow you to have a plan for future benefit negotiations with the existing staff and especially the “highly paid and compensated” staff. Developing an employee handbook and reviewing this with all the staff will help with the transition. If you are going to make any transitions in staff, make sure to first consult your attorney and professional liability carrier for possible recommendations or advice.
Your understanding of these areas and more about the practice will make your decisions to move forward with buying the practice that much easier. Omni Practice group has been helping dentists with selling and buying practices for over 15 years. Omni’s trusted team of experts is here to help you find a successful practice.
Read MoreScheduling After Covid
By Megan Urban, OMNI Practice Group
You are probably tired of thinking and talking about LAC, or Life After COVID, but it is coming ready or not. Here are some simple ideas that can make “re-entry” into your dental practice safe and smooth for you, your staff, and your patients. These are not necessarily new concepts, but they are not typically practiced in most offices and it is time to take them seriously.
Cleaning and treatment same day
Multiple offices discuss at morning huddle which patients in the dentist’s schedule need a cleaning. Be proactive and look 1 week ahead instead of the same day to allow more control of your schedule. Contact the patient ahead of time and create a schedule where the patient comes in for treatment and cleaning. Utilizing just one op would be ideal if possible.
Think in terms of patient families
Since most families have been quarantining together, look at all family members and have them all come in together for cleanings and treatment. They can fill the waiting room together and you can treat an entire family each morning. This will probably be more convenient for many patients too. Make sure you confirm these appointments properly, so you don’t have an empty half day.
Full mouth treatment
Don’t assume patients will not want to invest in cosmetic treatment. During quarantine, some of the most missed aspects of daily life were hair appointments, beard trims, manicures, pedicures, salon services, elective surgery, Botox treatments, etc. Personal appearance is definitely more important than many will admit and are willing to spend the money to make it happen. Even if it’s not cosmetic work, consider completing more than one quadrant of treatment at a time. Complete all treatments at one appointment reduces clean up and reduces time away from work for patients – which is more important now as everyone gets back to work.
Go forth and prosper.
Connect with Megan on LinkedIn!
Read MoreEffectively Managing and Maximizing the Value of your Practice
By Kevin Brady, OMNI Practice Group
Dental Practice owners know, there’s a lot more to running the business than treating patients.
Owners are responsible for hiring and managing staff, billing patients and insurance companies, handling accounts payable and receivable, and becoming proficient on dental software to operate the practice.
All these duties have a negative impact on both the time dentists are available to their patients and the profitability of the practice.
Practice Demands
It’s no secret that dentists face increasing constraints on their time. This means providing high-quality care for their patients, which entails creating treatment plans and participating in continuing education to keep abreast of the latest innovations in dentistry.
At the same time, the dentist needs to be CEOs of their practice. In this capacity, they are tasked with:
-Hiring, training, firing, and managing staff
-Marketing the practice
-Understanding insurance changes and HIPAA regulations
-Managing the billing, collections, and account payables/receivable processes
-Ensuring the office is running smoothly
-Maintaining and enhancing office technology
-Dealing with economic conditions affecting the bottom line of the practice
A lot of dentists come out of school dreaming about doing dentistry and they become disillusioned after a short time learning that not only do they perform dentistry, they have to run a business. When a dentist is overwhelmed with the business aspects of their practice, it is time to seek help.
Outsourcing
Employing third parties to help with the daily business aspects can allow dentists to focus more on their core competencies to enrich patient care. Dentists have many choices when seeking advice and outsourcing partners. Most major software companies have additional services to help with outsourcing patient billing and insurance billing, which allows the office to go paperless. Enhancing the Billing/Collections and freeing up doctor and staff time allows the practice to be more productive and profitable.
Marketing
Developing a Marketing plan is important in building a sustainable practice over time. The ADA says a good rule of thumb when budgeting for marketing expenses is to allow 3-6% of a new practice’s expenses; 2-3% for mature practices; and about 4% for practices that are in the middle. A start-up practice should plan to spend about $40,000 on marketing during the first year, with those costs incorporated into the overall practice financing.
Internal marketing is the least expensive way to build and maintain existing patients and generate new patients. Practices that successfully connect with patients have the best marketing vehicle available – positive word of mouth that current patients share with families, friends, and coworkers that generate new patients for little or no cost.
Having a website that connects the practice with your ideal patient is critical to keeping existing patients and generating new patients. Once you have a branded site, make sure you continue to enhance it with Search Engine Optimization – (SEO). Keeping up with SEO will increase the quality and increase the visibility of the website to internet search engines.
Making sure you have the right branding and marketing strategies designed to endure the current market conditions and changes are critical for the practice to compete with larger corporate dentistry groups.
Practice Transitions – Buying or Selling a Practice
Just as dentistry is a profession that is highly trained and practiced, so are the professional services recommended for selling and buying a practice. A dentist that is looking to sell or buy a practice should seek professional help. Selling or buying a practice can have very complex processes and numerous legal, financial, and tax implications.
OMNI Practice Group is one of the experts in the industry helping dentists with developing plans for adding associates, developing transitions plans, and selling or buying a dental practice and real estate.
Omni provides:
-Practice Appraisals
-Web Practice Listing Services
-Marketing and Listing services
-Practice Real Estate and Lease services
-Banking Referral Options
Being a Dentist/CEO can present a lot of challenges with operating a dental practice in today’s market. Using the right partners can help improve efficiencies, generate new patients, and increase the value of the practice.
Contact us today for a no-obligation consultation with one of our expert Practice Transition Advisors.
Click here to connect with Kevin on LinkedIn!
Read MoreBuy a Practice Now?
What a crazy time we are in. At least to me, this is a sober reminder that major disrupters are almost impossible to predict. I am reassured that our nation seems to be taking the situation seriously and I do firmly believe we can weather this storm. Most of you reading this have had your professional world rocked. You’ve probably had your hours cut, maybe by 100%. Unemployment is likely a new reality. Fortunately, there is a strong support system in this industry ready to help. Don’t hesitate to reach out. I think you will find all of us willing to go the extra mile right now to help you keep your ship afloat.
Most of you have thought about buying a practice at some point, some of you have been seriously pursuing ownership. There is going to be a lot of advice out there right now saying that it is far too risky to buy a practice and it is better to get/keep a nice safe, secure job. I am going to give you four reasons why you should do exactly the opposite.
One, financing. Interest rates are at an all-time low. Most banks are willing to defer principal payments or even the entire payment for months. Some have even said a year. I’m not going out on much of a limb to say these are the best lending conditions you will see in your career. Historically, there have been periods of higher interest rates. When I was a kid in the early eighties, they were fourteen percent. There have been many times when banks weren’t as generous on the amounts they would lend. One hundred percent financing is not a given.
Two, taxes. The government is going to spend a fortune to deal with this crisis, we have an aging population, new social safety nets will probably be put in place, etc… It is hard to imagine a scenario where taxes don’t go up, maybe way up. Nobody gets hit in a tax hike as hard as a non-business owning high wage earner who makes between $150,000 and $300,000 per year. That $200,000 salary doesn’t look as good when half of it is taken out for taxes.
Three, working for a corporation in a down economy. Corporations aren’t inherently bad entities. Many are fabulous. That said, unless they are a non-profit, they aren’t set up to be a charity. The shareholders and private equity backers are going to demand performance once this crisis is over. If patients hold off on elective treatment, keeping revenue up will require a high volume, much like a Medicaid clinic. You could be expected to see many more patients, in less time, than you currently do. It happened to physicians, it happened to pharmacists, it could happen to you.
Four, time. Odds are you have more free time than normal. No one, especially the bank, is going to expect you to complete a practice purchase before this crisis is over. That said, doing the work now could put you in a position to complete the purchase when the restrictions are lifted and capitalize on the built-up demand, which inevitably will occur.
In the words of Rahm Emanuel, “Never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”
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