Clear objectives are key when going into a buyer-seller meeting. They can mean the difference between a smart purchase and a risky one.
The goal of any practice purchase is to eliminate as many risks of losing patients as possible. And that means having a plan. Before you meet with the seller or get on a call with the broker, write down your questions. Sometimes it can be hard to narrow down all of the key points, so pick your top concerns and go in order. Clear your mind and know exactly why you are asking the question and what response you want to hear. Be alert to “red flag” responses. Listen to what isn’t being — what is conveniently left out or glossed over.
Active listening is challenging in the best of times. In a stressful conversation, it becomes even more so. Case in point, in hostage situations, the FBI always has two agents on the phone: one for asking the questions and the other to actively listen. Take a play from their book and have someone with you to listen and take notes. This is where a buyer’s representative becomes invaluable.
Having the right representative on your side frees you up to focus on the clinical aspects of the transition (what you know best) while knowing your representative is focusing on the business and transition plan. In my work with individual clients, we strategize the meeting and go in with a game plan. The doctors feel secure in the knowledge that they have a partner on their side.
Whether you’re going into the meeting alone or considering a representative, be organized with your thoughts and consider asking one (or all!) of the following nine questions. Purchasing a practice will be one of the biggest decisions of your life. Educate yourself. Ask smart questions. And don’t hesitate to call in a rep.
Question 1: Why are you selling your practice?
The right answers would be:
- They have saved enough money to retire
- They are ready to settle down and enjoy life
- They are experiencing some health issues
An answer that is too far from one of these three could signal a problem. Some sellers put their practice up for sale because they are simply trying to get out of a bad situation. Typically, unless there is an unusual situation, practice owners do not sell their business overnight.
Ask as many questions as you can around this if the story does not make sense.
Question 2: When does your lease end?
Dental lease traps are real.
And they can cost you thousands of dollars. Many sellers put their practices up for sale when their lease is about to expire. If you’re thinking that’s no big deal because you can simply renew it, think again.
Leases are one of the biggest deal killers in this business. Renewing requires time, energy, and money to renegotiate the terms that are favorable to you. Relocating also costs a substantial amount of money and risks of losing patients. Make sure your practice can financially absorb those costs if you absolutely need to move.
I highly recommend my clients to get a lease that is coterminous with their bank loan. Meaning, the same term length as the bank term length. This will ensure that your lease does not expire before your loan is paid off. Getting a ten-year lease will ensure you have plenty of runway to ramp up and be able to afford a possible relocation down the road.
Question 3: How are we handling your credit balances?
As a practice owner, it’s normal to have credit balances. Unscrupulous sellers will try to pawn these credits onto the buyer, hoping that it was missed during due diligence.
Every practice will have some accounts payable and there are a couple of ways you can deal with the credit balances specifically.
- Shore up the balance at closing
- Invoice the seller for the credit when the patient is credited
Of the two options, I recommend the first option, mainly because it is easy and settled all upfront. You may have a preference for one over the other, however, it must be agreed on before the sale. I find that both of these arrangements prevent you from paying out of pocket and spare you from painful conversations with the patients and seller post-transition.
Question 4: Are you running any personal expenses through your practice?
Every practice has the major expenses such as rent, dental supplies, wages, lab, and advertising. As the buyer, you need to know these numbers intimately.
However, it is also imperative to ask about hidden personal expenses such as auto, cell phone, insurance, 401k, and pension. Think about the doctor that pays his spouse a salary for doing the “bookkeeping.” Or the personal Amazon accounts linked to the “office expense.” These are expenses that need to be identified upfront so that you can evaluate the practice’s true profitability.
Make no mistake, most practice owners have these expenses, so you should not hesitate to ask this question.
Question 5: Are there any KEY team members planning to leave with you?
This question is intended to smoke out one of the most dangerous risks of any dental transaction. Most sellers and buyers believe that the patients’ goodwill is with the dentist. While this is true in many cases, in my experience the TEAM collectively carries the majority of the positive feelings about the practice. Having to replace the practice’s 10-year veteran hygienist would hurt any transition.
I want to make this point clear. No one single employee could impact a practice in a way that would ruin the business. However, losing both the doctor and one of the key members of the practice at the same time would be hard to rebound from quickly.
Question 6: How would you describe the culture of the practice?
This is an open-ended question. It’s meant to be. Sit back and learn about the philosophy and culture of the office. How have they handled difficult situations with patients and team members? How does the team communicate with one another? Solve problems? Welcome new team members? Vet new ideas?
By asking this question and being inquisitive, you get a sense of the culture and the communication style of the practice. This is also an opportunity to gain insight into the team members’ relationships with one another and the benefit packages that the owner currently offers.
The goal here is to mimic the seller’s style to make sure the entire team and patients are comfortable and not shocked post-transition. Can you realistically emulate what they are already doing? It’s for you to judge!
Question 7: How many weeks of hygiene are fully scheduled?
It is no secret that the hygiene department is the beating heart of any dental practice. Having a solid base of patients to exam right out of the gate will give you the opportunity to present dentistry. From this department, the average dentist can expect to collect $3 of restorative work for every $1 dollar of hygiene. Without patients in the hygiene columns, a buyer will have a hard time filling their schedule from day one.
Based on the answer to this question, I would also suggest evaluating the overall health of the Recare program. Hygiene appointments booked out between 4 to 6 months is a good sign the practice’s recare program is healthy. You can learn a lot about how an office operates by simply paying attention to the numbers and painting “the story.” If the office is not rescheduling hygiene or avoiding cancelations, then you may have issues with the overall culture of the practice. It’s all there you just have to look for it!
Question 8: How would you describe the office’s clinical philosophy?
For a transition to be successful, it is important the new dentist replicates the previous owner’s practice style, at least initially.
I have seen it both ways. The buyer is too aggressive right out of the gate, making clinical changes that scare both the patients and the team. Or the buyer is too conservative and quickly runs the practice into the ground.
By asking this simple but pointed question, you can learn so much about how the office takes care of their patients. Before leaving your due diligence meeting, have an idea about how conservative or aggressive the office really is. More importantly, be brutally honest with yourself. Can you replicate what the seller is doing? You should not have to convince yourself on your ability to maintain the cases the practice is currently performing.
Simply put, it’s important for the buyer to walk in the seller’s shoes.
Question 9: What marketing worked or didn’t work in the past?
There is a good chance that the seller has tried many things throughout their journey of being a practice owner. Marketing is one of those things that takes trial and error. Asking this question could save you a lot of time and money!
You may be thinking this question does not pertain to the office you are interested in because they are not spending anything on advertising. Do not be fooled. Many sellers love dentistry so much that they hold onto their practice way too long and keep it more as a hobby than a business. What you will probably find is that the seller has stopped their marketing spend due to a lack of ambition. What you want to know is what worked and what didn’t back when they were growing!
Asking key questions, active listening, and a curiosity to learn from the seller will do more for you than any number crunching. Numbers are black and white, but it’s the gray area that will make or break your transition.
The interview with the seller is by far one of the most important things in the due diligence process. But hopefully, with these 9 intentional questions, you can avoid major landmines and capitalize on an enormous opportunity.
No doubt, buying a dental practice is stressful. There are lots of things to consider, lots of pitfalls and lots of money involved. But, on the flip side, taking your career into your own hands is priceless.
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.
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: www.omni-pg.com/registerRead More
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 More
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.Read More