Purchasing a dental practice is both a rewarding and audacious undertaking. However, is it not the dream most associates have; to become owners and build a practice, successful beyond expectations?
1. Getting Started – The Self–Assessment
Purchasing a dental practice is both an exciting and a risky endeavour. Most graduating dentists dream of having their own practice and building it into a success beyond expectations.
Once you are ready to take this step, the key is finding the right practice for you. With the right practice, you can make money and have fun—proof that the two are not mutually exclusive.
Making the wrong move, on the other hand, can be a career buster. The grief and the financial consequences of getting into a bad deal are devastating.
The bottom line: You must find the right practice the first time. Period.
The first step in seeking a practice opportunity has nothing to do with the mechanics of purchasing a practice, but rather with finding out if owning a practice is for you. Owning a practice is a long-term commitment, and it is critical that practice ownership meets your personal goals, aspirations, and capabilities.
Start with a personal assessment by asking yourself these questions:
- What are my main reasons for purchasing a practice? More income, being my own boss, or satisfying professional challenges?
- Do I have the entrepreneurial bent to accept the risk of ownership and take full responsibility for the success or failure of my practice?
- What type of dentistry do I enjoy? What are my long-term professional goals? Will owning a practice help me achieve these goals?
- Where do my spouse, children, and I want to live?
- Am I willing to make the sacrifice of time and energy necessary to build up the practice?
- Do I have the confidence in my leadership abilities and practice management skills to be a successful business owner? Am I prepared to learn the business skills of becoming a team leader, communicating with patients, and assuming the role of CEO of my practice?
- Do I want or need to practice with an experienced dentist for mentoring and sharing management responsibilities? Do I want to join a group?
- Am I willing to make a large financial commitment? Am I prepared to spend perhaps the next 10 to 15 years on the treadmill, paying off house and practice loans? Would that interfere with the lifestyle I want to lead?
- What are my spouse’s career needs?
- What are my children’s education needs?
- Can I count on the unwavering support of my spouse, particularly during the start-up phase of practice ownership?
Obstacles to Purchasing a Practice
On your journey towards owning a practice, you must overcome some hurdles. Here are some major obstacles which prevent many dentists from making the move to ownership.
- The money factor
With ballooning student loans and a house mortgage, the idea of borrowing an additional $1million to purchase a practice can be daunting for an associate. But the extra income you can earn as an owner will be enough to pay back the purchase loan within a relatively short time, perhaps as little as five to seven years. This makes a practice purchase a great investment. If the bank is reluctant to lend you the full purchase price, consider approaching the vendor to finance the balance of the purchase.
- The self-confidence factor
You may shy away from practice ownership because it is outside your comfort zone. Not everyone has entrepreneurial talent. In reality, what you require is a dose of common sense, lots of hard work and the desire to put the needs of your patients and your staff ahead of your own. Surround yourself with a team of capable advisors to help you make ownership a reality.
- The fear of failure factor
Buying a practice involves a certain risk. No matter how thoroughly you investigate the target practice, you will never eliminate the element of risk. On the other hand, many dentists overestimate the risks when buying a practice. For instance, many dentists perceive a greater loss of patients on a transition than typically occurs.
- The spouse factor
Never buy a practice in a location that your spouse does not particularly care for. The decision to buy a practice must be made jointly. By having your spouse on your side, you will save yourself a lot of grief, and possibly a costly future practice relocation.
Finding transition expertise
Just as the marine pilot takes over the ship as it heads into harbour, you require seasoned professionals as well, so that your journey to practice ownership does not end up on the rocks.
You need to retain professionals with expertise in dental practice transitions. Never compromise —tap into the transition expertise of PURTZKI TRANSITIONS.
The scope of our engagement includes:
- assisting in the search for the most suitable practice;
- helping you assess the prospective practice in terms of meeting your long-range financial objectives;
- reviewing the vendor’s practice valuation;
- leading the purchase negotiations;
- preparing the initial letter of intent;
- assisting legal counsel as required;
- coordinating the services of outside advisors;
- assisting in arranging financing; and
- structuring the business arrangement for the purchaser in multi-practitioner relationships.
We are the quarterback on your team. You should expect your transition expert to take a business approach to your proposed practice purchase: practical, no-nonsense, creative, and cost-efficient.
2. Buyer Representation
Purchasing a dental practice is one of the most important financial decisions in your career. Often you are left to fend for yourself in the evaluation of the practice opportunity. Even though your accountant or lawyer may assist you in this process, they are frequently unfamiliar with the complexity of a dental practice transition.
We can help you to:
- find the most suitable opportunity
- Establish the fair market value of the practice
- negotiate the best deal and prepare a written offer
- provide you with knowledgeable and experienced answers to the many questions you have during the process
- arrange favorable bank financing
3. Conducting The Due Diligence
Once the letter of intent is signed by both parties, Purtzki Transitions assists you with the detailed investigation of the practice, called due diligence. Due diligence ensures that you are actually receiving what you have agreed to purchase. The process should uncover any skeletons in the closet.
Due Diligence Checklist
Here is a due diligence checklist to help you systematically analyze the proposed purchase opportunity.
- Select a sample of patient charts and check for frequency of visits, treatments that are not completed, types of treatment, and whether or not the dentist takes an aggressive approach to the treatment.
- Spend some time in the office and observe communication between the dentist, the team, and the patients. Is the practice really patient-focused or do the dentist and staff just provide lip service regarding this important issue?
- How does the practice communicate with patients? Does it utilize birthday cards, newsletters, and follow-up calls for treatment?
- Are last-minute cancellations and no-shows an issue? Are patients billed for no-shows? Are patients treated promptly?
- Analyze how many patients were seen in the last 18 months. What is the new patient count?
On average, how many patients are seen in the clinic each day?
Does the practice have a high patient percentage of a specific ethnic background which could create a language or culture barrier when the practice changes hands?
Facilities and Staff
Review the premises lease and ensure it can be properly assigned when the practice is sold. Observing the practice, how would you rate the office morale? What is the relationship between the team and the dentist?
From your assessment, would you like to keep each staff member after the purchase? Who? Why? What is the likelihood that the staff member(s) will stay with you upon purchase?
Obtain a copy of the employee benefit plan and review it.
Financials and Operations
- Analyze the income statement and balance sheet. Review profitability ratios so that you can determine whether or not the revenue and expenses compare favourably to similar practices.
- If the revenues are lower or the costs are higher than comparable practices, you need to first further investigate if these unfavourable variances are caused by poor management or are the result of competitive pressures. The analysis of profitability is key in order to make a reasonably accurate income projection.
- Is there a computer maintenance agreement in effect?
- What is the collections performance?
- What percentage of accounts receivable is outstanding more than 90 days?
- Are you comfortable with the fees that are charged?
- What percentage of billings is covered by dental insurance?
- How far ahead are hygiene appointments booked?
- What are the annual gross billings for the last three years?
- What component of the total office production is the hygiene?
- How many hygiene days are undertaken per week?
- Obtain the gross production for each provider, including hygienists, for the last five years.
- What proportion of endodontics, periodontics, pedodontics, oral surgery, and implant placement is referred out?
- Evaluate other practices in the neighbourhood in terms of how busy they are and the scope of services they provide.
- Determine if you want the vendor to stay on for some time after the purchase date.
- Determine the number of hours and days worked per month by the dentist and other providers, including the hygienist.
- Assess the effectiveness of the management reporting system.
- Assess the effectiveness of the patient recall system.
Review the lease for the premises:
- Lease terms
- Renewal options
- References to new lease rates at time of renewal
- Assignability of the lease by the landlord
- Exclusivity clause
- Relocation and demolition provisions
- Signage installation
- Exclusive parking spaces
4. Start-up or purchase? What’s best for you? – A case study
After 5 years of associateship, Dr. Al Dente realized his dream of buying a practice. With a huge demand for practices in the city, he paid top dollar for the three operatory practice that produces an annual gross revenue of$750,000, with a net cash flow before taxes, debt servicing, and owner compensation of $250, 000. In addition to the $800,000 purchase price, Dr. Dente is planning to inject $200,000 for new equipment and upgrading of the premises. The annual debt servicing cost on a $1 million loan is $90,000 amortized over 15 years. The $160,000 projected practice income is less than his associate pay of $230,000. To make ends meet, Dr. Dente has decided to continue working 2 days a week in his old associate job. In order to ensure a smooth transition of patients, the vendor will work a couple of days a week. Dr. Dente’s ownership dream, however, comes with significant challenges. With only 10 new patients a month, he finds it difficult to increase the patient volume. Young families, the biggest source of new patients, have long left the neighborhood for more affordable homes in the suburbs, leaving behind mostly single and retired condo dwellers. Eighty percent of existing patients are over the age of 55, and most of the complex and profitable dental treatments have already been done. A second limiting factor to growth is the restricted capacity of a 3-operatory practice. To accommodate an increase in patients means expanding hours and incurring the cost of associate dentists and additional staffing costs. The easier route to increase the bottom line is to reduce expenses, which turns out to be Dr. Dente’s biggest challenge. A 10% reduction in overhead from the current 62% of gross means a 30% increase in net income from $250,000 to $330,000. Though, this strategy is easier said than done. Dr. Dente’s idea to bring in a practice management consultant to make the office more efficient was met with open resistance, whereby he dropped this approach. Likewise, to reduce salary costs is also difficult. How do you tell the $50 per hour hygienist, who is friends with every patient that you want to drop her pay to the going rate of $35 per hour. Knowing that the existing staff is critical in the retention of patients, Dr. Dente thus has to wait to make the necessary staff changes.
Dr. Susie Zahnarzt celebrated the first anniversary of starting a practice. A year ago she took the plunge of setting up a practice in a rapidly growing area of the city. With a gross monthly practice income of $60,000 and 90 new patients each month, her 3 treatment rooms produced $600,000 in the first year. Dr. Zahnarzt invested in professional help to set up efficient business systems, resulting in an overhead of less than 50%. The premises are designed for 6 operatories with enough capacity to hire an associate for the evenings and weekends. The bank provided her with a $800,000 loan for the leaseholds and equipment and $200,000 of working capital to draw on before she broke even after 9 months. By being available to patients most evenings and weekends, Dr. Zahnarzt found it easy to grow her practice.
It is no doubt a risky business venture to spend $1m on a practice start-up without any patients. This uncertainty is the reason why young dentists choose to buy even overpriced practices. Yet still, to invest $1,000,000 for an existing practice with a cash flow of $250,000 that barely pays the bills is just as risky. By inheriting patients and staff of an existing practice, the risk is that a dentist lacks the control to manage the practice to maximize its profitability.
From an investment point of view, it is worthwhile to consider the scratch start vs. the existing practice option. Practice values have peaked and the best Dr. Dente can hope for when he sells his practice is to get his investment back. Dr Zahnarzt on the other hand is creating wealth with every new patient. With a goodwill value of about 70% of her revenues of $600,000, she increased her investment by $420,000 in the first year.
The cost of postponing the buying decision
- Suffocating under a $300,000 student loan, most dental graduates decide to work as associates until the student debt is gone. If you really want to pay off your loan quickly, consider becoming an owner as soon as you can. Use a short-term associateship to hone your clinical and patient communication skills and enjoy the benefits of ownership sooner.
- Below is a comparison between a new graduate who becomes a practice owner after two years of associateship and another dentist who works as an associate for seven years and then purchases the practice.
- Over a 10-year period the dentist who chose the early ownership option in year 3 has over $800,000 more of excess cash flow than the dentist who did not become an owner until year 8.
||Owner in Yr 8
||Owner in Yr 3
|Associate income: Yr 1: $500,000 gross at 35%, increasing 5% p.a.
|Owner income: Yr 3: $700,000 gross ($200,000 hygiene), 55% overhead, $20,000 interest on purchase loan of $700,000 increasing 5% p.a.
Short-term associateships resolve your debts faster and speed you towards ownership and its many rewards