I meet over 150 dentists each year who are looking to buy an existing dental practice. Of those, I would estimate that 30% haven’t done any research on what is involved in buying a practice. Of that 30 %, none of them know the beginning-to-end process of buying a dental practice. While I can’t cover all the steps in this article, I can give you some guidance on where to start and what steps to take before buying a practice.
The very first recommendation I have is that you should be at least 2 years out of school. I have seen dentists buy a practice right out of school, but I’ve seen the majority of them struggle for two years until they finally figured things out.
Now that I’ve got that out of the way, here are your steps:
- Contact a bank that finances dental practice acquisitions and make sure you can qualify for a good loan. The days of just having a D.D.S., or D.M.D. and being qualified are gone. Banks now require decent credit scores, cash in the bank, and in some cases, a current associateship. Try to avoid SBA loans if you can as they can be expensive with early payment penalties.
- The next step is to understand a little bit about dental practice valuations. You don’t want to go into a sale not knowing if the practice is worth the price listed or not. A “rule of thumb” is that a practice is typically worth between 65% and 75% of its’ last 12 months production. Remember – that’s a rule of thumb. I’ve seen practices go for as high as 110% of production and as low as 50% of production. For a book on Dental Practice Valuations, contact me and I’ll send it to you.
- Think about where you want to practice. You’re probably going to be there a while, so you might as well like the area. Also, research demographics. There are excellent demographic sites that sell great dental demographic information for about $500. This will tell you where the best locations are to practice.
- Put together a good team. Get referrals for a good dental attorney, a good broker, and a good accountant. They’ll help you analyze the dental practice, do the legal work, and help you find a practice.
- Study up on practice management and dental financial ratios. You should know that lab fees should not be any higher than 10% of the practice production, or that staff expense should be 20% to 25% of production. Be an informed buyer.
- Be prepared for your due diligence. You need to know what to look for when you do get to the point of buying a dental practice. Is it an older dentist selling that hasn’t done much treatment in the last 5 years (buyer beware)? Or, is it a conveyor belt dentist that has done every speck of dentistry, and then some, on all the patients, so there’s none left for you? Know how to spot these things.
- Finally, spend some time with a dental broker before you go look at the practice. Understand what the practice you are looking at is all about. Does the broker honestly think it’s a good practice? Why? Once you’re comfortable with the numbers, then go look at the practice.
By being an informed buyer, you will avoid a lot of headaches and potential problems down the road. There are practices that are gold mines and practices that you should not touch. Being educated and knowing the difference is critical in your dental practice acquisition success.Read More
These DSOs are groups who are looking to consolidate the dental industry similar to what has been going on with pharmacies, surgery centers, and hospital systems for many years. In fact, as a side note, two-thirds of pharmacy revenues come from corporate-owned pharmacies. The DSOs, especially the large ones, are backed by private equity money looking for good returns on their money. Smaller group practices are typically backed by local or national banks. The private equity groups like the dental market as there are good margins in owning a dental practice. I’ve heard they can typically get a return of 15% to 20% after paying an associate salary and all other overhead. They don’t require financing, so they don’t have the debt service payments that individuals may have. They often consolidate the “back-office” functions – Human Resources, accounting, and billing to save money. They also can negotiate better insurance reimbursements and dental supply prices than the solo practitioner. For staff, they can offer decent benefits packages as a result of economies of scale. However, they may not pay staff wages as well as solo offices. The larger groups range from 30 practices under ownership up to several hundred locations with groups like Heartland Dental.
What are they looking for when they acquire a dental practice? Many of them claim they will pay a premium for a practice. I’ve been working as a practice broker for almost 15 years, and I’ve never seen a group, DSO, or Private Equity investor purchase a practice for an above market price. Most have purchased practices at market, or even slightly below. They like larger practices doing at least $800,000 and up. That doesn’t mean they won’t buy smaller practices, but the larger ones are more appealing. They like to acquire smaller practices in the area where they already have a larger practice so they can consolidate the smaller practice into the larger practice. Most of them want the selling doctor to stay on and work in the practice. Many of them want the seller to stay for up to 3 years. Most will negotiate down to 2 years. They usually do not give you your entire purchase price upfront. They’ll give you 80% of the purchase price at closing, you will have to wait for the other 20% to be paid out upon certain conditions being met. Those conditions include serving your agreed-upon employment term, the practice production staying at where it was before or even growing, and other conditions may be possible such as hiring an associate, managing the practice, etc. If you don’t meet your conditions, the DSO may pay none or only a part of the last 20% of the purchase price. And, if after a few months you decide that working as an employee for the group isn’t what you thought it would be, or you decide to move out of the area for health reasons, or for some other reason you decide to leave the practice and not meet your term, then too bad for you. You forfeit the 20% that the DSO owes you.
The small groups, DSOs, etc., will also tell you that they prefer you not get someone to represent you. That includes an attorney, a consultant or a practice broker. They want to use their experience, their sales tactics and their gaggle of attorneys to negotiate a great deal, FOR THEM! Yes, they’re not looking out for your best interest. They could care less if most of your retirement nest egg is in your practice. They care about building their market share so that they can make as much money for their investors as possible.
My advice if you have received a letter in the mail from a DSO or small group is to don’t go it alone! You’ve been a dentist for quite a few years for crying out loud and haven’t negotiated a multi-million-dollar deal, dealt with aggressive attorneys or a large corporation. Whether you use a broker, attorney or consultant, get someone on your team to represent you. Our group at Omni has negotiated many deals ranging from $500,000 to $7 million and up. This is what we do and have expertise. Feel free to call us anytime to discuss your transition, an offer you received, or anything else where we can provide knowledge. We’re always glad to help.
*Footnote: “Dental Service Organizations – The What and Why of DSOs – Part 1 of 6” Posted on May 13, 2019 by Sara K. Stock. www.stocklegal.com/blog/dental-service-organizations-the-what-and-why-of-dsos
Price is the consideration (cash, note, barter, etc.) paid to a seller to acquire an asset. Sellers receive price. Value is the benefit received by the buyer from the use and ownership of the acquired asset. Buyers receive value.
I illustrate this point by asking buyers to consider four similar practices:
Practice A grosses $400,000 and is priced at $275,000. All too frequently, buyers zero in on price as the primary practice purchase issue while ignoring the issue of value. However, buyers stand to benefit much more by receiving high value than by paying a low price, since the primary practice value is the net income the buyer takes home from the purchased practice. I ask buyers if this is a good deal. Most buyers admit they do not know.
Then, we look at Practice B, which grosses $400,000, of which the hygienist produces $100,000 and the seller produces $300,000. After paying all the overhead expenses and all of the purchase payments, the buyer will have a net income of $140,000. Without even knowing the price, most buyers believe that Practice B is a good opportunity. Knowing the price and gross alone does not make for a well-informed decision. Knowing the cash-flow derived value, or net income, received in return for work performed by the buyer, does allow for a well-informed decision.
Consider Practice C, which grosses $400,000 and is priced at $300,000. After paying all of the practice-overhead expenses and all of the purchase payments, the buyer will receive value, or net income, of $150,000. Now examine Practice D, which is very similar to Practice C. It also grosses $400,000 but is priced at $250,000. After paying all the practice-overhead expenses and purchase payments, the buyer will receive value, or net income, of only $125,000.
This comparison shows that it is possible to pay a higher price for a practice and still receive more value, or net income. Differences in fixed expenses, such as rental cost, can cause such differences. Which practice would you choose?
While we do not suggest overpaying for any practice, we do point out the old saying, “You get what you pay for.” Since “what you pay for” is net income in the case of dental practices, higher-priced practices generally will yield higher net incomes, even after making the payments. In the case of purchasing a practice, it often is safer to pay slightly too much than too little.
We strongly suggest that if you are considering buying a practice and are seeking professional advice on price, be sure that you also receive a practice cash-flow analysis to learn all of the important facts — especially the answers about practice value, the net income you will earn.
When you get a copy of the lease, you or your advisor should contact the landlord. Be sure the seller has informed the landlord that they are selling the practice first. If there is a short time left on the lease, the landlord may be willing to do an extension on the lease. You can put conditions on the extension that can include getting a tenant improvement credit to cover new paint, carpet, etc., free rent for a few months, lower rent, etc., I’ve even had a situation where the landlord loaned money to the tenant to completely remodel the practice.
Remember that everything is negotiable. Don’t automatically assume the lease is set and you cannot change anything. At the same time, know how to negotiate. If you go for a home run right off the bat, you may turn the landlord off and they won’t be willing to negotiate.
If you’re working with a broker, it’s best to let them handle the negotiating. They’re the experts and can save you thousands if done right.
If you are coming to the Pacific Northwest Dental Conference, stop by booth 604 and talk to Steve if you have more questions about this. You can also email him at firstname.lastname@example.org. If you’re in Oregon, email Megan at email@example.com.
Who can help me?
This is a very important decision and time for you and your family, so it’s critical to build your team of trusted advisors, such as dental specific broker (with a real estate license), lender, CPA, attorney. These professionals have done many unique transitions, and often with each other, so they work well together and know how to provide you with a successful transition. You can use your relative or friend in these professions, but they can’t know the things dental specific advisors know. It’s the same as when you refer out complete bony extractions or dentures, etc. Experience and knowledge in a select niche are worth its weight in gold.
Can I afford a practice and associated real estate?
Dental-specific lenders understand dentistry and understand that you may have student loan debt, potentially as high as $500,000. If the practice cash flows and provides you with the money to pay your practice and student debt, plus living expenses, you may be good to go. If you are thinking about a start-up, you will most likely need to work part-time somewhere else as you grow your new practice. Your trusted advisors can provide you with ideas to assist with your startup as well as potentially referring to a dental specific marketing company. So, the answer is, typically, yes, you can afford a practice and associated real estate.
Sometimes, depending on the seller and your finances, you may rent a few years. The things to consider here are that if you rent, you may still have the seller “visiting” when they want and still act as though it’s their building and try to deter you from making your own decisions. It’s hard to make changes and you will someday understand this! If you rent, you will want your attorney to ensure there are solid details surrounding future purchase.
Some dentists prefer to own their own real estate and that can be beneficial for those with property ownership goals. Leasing in a commercial space or strip mall can be worth the potentially high rent if you have the opportunity to gain increased collections.
What do I need to know when looking at potential practices?
Where do you want to live and work? Once you determine the general location, look for a practice with a good and visible location and parking.
Work with your broker or buyer-representative to assist you to review the formal valuation or the following statistics.
Last 3 years financials to see collections and expenses. Some expenses may be backed out that would not pertain to the new dentist, such as “large” continuing education, cars, 401K, and family members on the payroll that may not have an active/necessary function in the practice.
- Accounts receivable. You will want to know the total and how much is over 90 days old that may not be collectible unless the practice accepts 3-4 months of in-house payment. Even if you don’t purchase the AR, you will want to know if patients are accustomed to paying at the time of service so you can slowly make changes as necessary. Any credit balances can be determined and addressed before closing.
- Procedure frequency. Confirm the services currently being done and if you are comfortable performing and what procedures you can potentially add. Check periodontal treatments and number of recare compared to active patient count.
- Patient demographics. This report will show patient age, zip code, and insurance participation. If the patient age isn’t what you enjoy, determine how you might acquire those patients. If many of the patients come from a zip code far from the office, be aware you may lose some of those patients. You may want to add or reduce insurance participation, but make sure you have a solid plan for this.
I want multiple offices.
Having multiple offices can be profitable if done correctly. Ensure you have solid processes in place that can be replicated. Consider doing a demographic study to determine where you want your locations. If patients may be going to more than 1 location, ensure your dental software is capable of being accessed by all locations.
What do I need to know/do before starting my first day in my new practice?
Work with your CPA to set up your entity, accounting system, payroll, and tax payments. Plan to have a confident first conversation with your new team. They will be anxious about the transition so you will want to put your arms around them and help them understand you want to continue the quality care and any small changes will only be for the better for patients and team. Be prepared for difficult questions such as asking for a wage increase, change in schedule, or complaints about other team members. Guide the team on how you want them to discuss you to the patients and how your goal is to retain patients.
Become familiar with your dental software. Most dentists and teams do not maximize the reports and statistics available to you. Remember, your dental software and accounting system are the 2 biggest tools you have to run your practice.
PURCHASING A PRACTICE, with your team of trusted advisors, should be a pleasant process that leads to a profitable and enjoyable career! For more information on our buyer’s program or for a free consultation, please contact firstname.lastname@example.org.