The ABC's of Buying a Practice
Find an experienced dental accountant, who has a number of dentists in his portfolio as clients, to assist in assessing the value of the practice.
Your accountant's assistance is an absolute requirement for such areas as:
- tax considerations in purchasing a practice
- assessing the quality of the valuation on the practice
- assessing the leases on both the premises and the equipment
- reviewing the financial statements to ensure that they have been normalized for a purchaser such as yourself
- to assist with advise on how to best finance the practice, re leases VS loans; banks VS other financial institutions
- to review the distribution of the value of the practice
- to ensure that the values assigned to the hard assets are reasonable
- to review the remuneration of staff: re pay, hours, vacation and other benefits
- to review abnormal expenses
- to advise re computers and software
- to assist with the selection of experienced "non deal-breaking" lawyer
- PLUS many other items which will arise in the purchase of a practice
Understand that all practices are not worth the value to all purchasers! One should focus in on all the things that make the practice different. The following are some things to look out for:
- ethnicity of the client base (language, customs should be comfortable to you)
- the reputation of the vendor (your lawyer and accountant cannot fully protect you if the vendor is not reputable)
- parking for you, your staff and patients (this can be a turn off)
- natural lighting is nice (certainly better than four walls)
- children and seniors as patients (there is a difference)
- expanding community is often desirable (but not necessarily a necessity)
- ability to expand the facility, to add extra operatories without having to move
- old computer systems may need an upgrade
- does the vendor perform procedures that you do not perform
- deal through an honest, reputable, experienced, licensed broker
- PLUS many other potential problems in which your accountant and lawyer will have experience
There is no substitution for an in depth chart review of the practice! The reason you are purchasing the practice is for the billable patient base; equipment is secondary as it can be replaced in less than a month. You want to establish a sound understanding of the patient base with regard to:
Number of RECALL patients (which have been in the practice in the past 12 months and have a pattern of coming to the practice at least annually), SEMI ACTIVE patients (who have been in the practice in the past two years but are not recall), INACTIVE patients (not been in the practice in the past two years).
- proximity of the patients to the practice (local or remote)
- quality of the dentistry being done by the vendor
- rates that the vendor is charging
- percentage of insured patients in the practice
- percentage of welfare patients in the practice
- ethnicity of the client base
- the type of procedures performed in the practice (amalgam VS composite)
- the extent of perio, endo, ortho, and oral surgery compared to your abilities
- what procedures are being sent out which you would like to perform
- the extent of the different age groups
- PLUS any other features unique to that practice
Broker - a friend indeed
The Broker generally represents the vendor in a sale of a practice. As such the purchaser may see the Broker as acting for the Vendor against the purchaser but I see the Broker's role as a "marriage councilor" who brings two parties together for their mutual benefit. The Broker guides the two parties through a maze of pitfalls to ensure that each party is successful in achieving reasonable goals. Matching the two parties so that the vendor feels comfortable with the purchaser and the purchaser can continue the care of the patients that the vendor had nourished through the years.
Often the Broker presents innovative concepts for the sale to occur. Tax planning strategies, timing of the sale, preparation of the sale contract, associate agreements, consulting agreements and imaginative transition procedures are but a few of the benefits of using a Broker.
If the vendor does not wish to use a Broker to sell the practice, the purchaser may well ask for a discount because the vendor did not have to pay a Broker. When this happens the vendor does all the work of the Broker i.e. showing the practice, negotiations with lawyers and accountants as well as direct interfacing the purchaser without the use of an intermediary (the Broker). If the Broker does not sell the practice there is no fee! He is paid for success!
Charts - Patient retention - the key to practice value
You cannot have too many patients or too much profit! The patients are the life line to the billings of the practice which is where the business begins. It is important to have new patient flow as well as a sound patient retention emphasis. Purchasers will be very concerned that the patients are truly in the practice and active. The actual count of the patients will be examined in detail by the purchaser. A practice billing $600,000 with 3,000 patients is very different than a practice billing $600,000 with 1,500 patients. Understanding the difference is important.
It is not important to clear out old inactive patient files. It would be reasonable to keep them current to save space and time but the actual number of active files is the reality. The practice would be enhanced to have a computer to control their records if there were over about 1,200 active patients.
Having a team approach toward patient satisfaction and retention is certainly important because perception of care is as important as the actual care that is given. A strong team is a definite asset that is part of the goodwill of the practice and is reflected in the active patient count which is part of the goodwill component of the value.
Charts - Patient education
The patients, who know their needs, make the best patients. The team approach to educating patients is the responsibility of the owner. To think that the staff can or would educate the patients without the direct support and commitment of the owner is being over optimistic. Without continual involvement of the owner, most systems will degenerate. I cannot over state the value of continuing education of the professional staff in order to support the team effort in educating the patients.
Let the patient know that they are important to you and that you care about their dental health.
Take the time to ensure that the patient perceives that your practice cares about their dental health. There are only a limited number of things the practice can do if there is no commitment by the patient to keep up their dental health.
Committed patients come back time and time again to make a strong practice. Remember dental services are only as good as they are perceived to be by the patient. It is important that the team is in place to ensure that the patient is aware of the superior team of caregivers you have assembled around you to support your dental philosophy. Repeat patients are what a purchaser is looking for in a practice.
Charts - New Patients
New patients are the sustaining force that allows the practice to move forward. Practices, which have only a limited new patients count (10 per month), will not be as attractive to the purchaser as one with a high new patient count (60 to 100 per month). The purchaser generally thinks of purchasing a practice and taking it to the next level or higher. If they figure that the new patients are not available to the practice, it would be detrimental to the value of the practice.
New patients are attracted to a practice because:
- Location, location, location with free parking and visible to drive by potential clients.
- Friendly caring staff and professional team - never under estimate the value that each member of the team can bring to the value of the practice.
- Hours of service is important to today's busy work force which cannot always come in during daytime hours.
- Recommendation from other patients - let your current patients know that you appreciate referrals to your practice. Newsletters, an Open House and other social events are great practice builders.
- Lower treatment rates - I am not a fan of this technique. I would rather attract patients which appreciate the quality of the service to win their heart rather than their pocket book. I would view my services as affordable and fair for the services I provide.