Buying a dental practice is one of the most important decisions a new dentist or dental associate can make in the course of their career. No detail is too small to consider, and there are a lot of factors outside your area of dental expertise that require skilled advisors.
While that may seem daunting, the good news is that people have been doing it successfully for years when they’re backed by the right team. There is a tried and true process, and a clear set of considerations. When you follow the guidance of experienced professionals, it will greatly enhance your chances for success.
In this post, we discuss things to consider as you get ready for the next exciting step in your career.
Start Day One with an Existing Patient Base
An existing patient base means a paying patient base. If you start a new practice, unless you have a loyal base of patients who will follow you from an associateship, you are starting from scratch. You’ll invest a lot in overhead to establish an office and hire staff and then . . . wait for the patients to come. But, when you buy an existing practice, you have patients in the door from day one. Now, that doesn’t mean you’ll keep all of those patients (more on this below) but you will be starting ahead, instead of behind.
This, of course, doesn’t mean you don’t have debt to worry about. The practice will likely have been purchased with a loan, and you’ll need to be able to earn enough to keep the lights on, service your debt, and take something home for yourself. Look at the practice’s cash flow and expenses to see if your expenses will match that, whether you can cut costs, and whether the practice is really sustainable. According to Bank of America, “Lenders usually look for the practice and doctor’s personal income to cash flow at a ratio of a 1.20%, which means the practice is expected to generate a $1.20 in revenue — or collections — for every $1 spent between the practice expenses and the doctor’s personal expenses.”
Rely On a Team of Experience Professionals to Do what You Can’t
It’s likely you haven’t had experience buying and selling small businesses, dental or otherwise. There can be a lot of complexities in these transactions, depending on how the practice is set up, and there will be a lot of details you won’t even know you should worry about. Without a team of experienced professionals, you could walk right into a common pitfall without even knowing it.
To be successful, you will need these members on your team:
- Dental Practice Broker. Like any other business or property, a dental practice can be sold directly from one person to another without any intermediaries. Yet this is much more complicated, however, than buying a residence or automobile. And if you’ve never done it before, you don’t know what you don’t know. Working through a broker, such as DDSmatch Southwest, helps ensure that both parties are aware of all of the essential considerations and that no critical steps are missed.
- Dental CPA. Dentistry is a unique business, with accounting issues that don’t apply to other business, from dental equipment valuation to tax strategies. Find a CPA with a large roster of dental clients, they’ll understand the accounting side and be able to advise you better than a general CPA. Your dental practice broker should be able to recommend a reliable CPA. At DDSmatch Southwest, we work with Blue & Co., where they have both dental CPAs and certified business valuators.
- Dental attorney. The law is like dentistry, you have generalists and you have specialists. The generalists are good for small, everyday matters, but once you get beyond that, you really need a specialist. When buying a dental practice, you are going to be dealing with a host of legal issues: a sale contract, a lease, non-compete agreements, patient privacy disclosures, incorporating or other business organization set-up, and they may even help with lender requirements. Like the CPA, find an attorney with extensive dental experience, and ask your broker for recommendations. We can refer several affordable experts that we know and trust.
- Dental lender. Your local bank may not understand the dental profession and could err in valuing the practice. Also, there are loan terms typical for the purchase of a dental practice that don’t fit into a typical loan. You need to work with a banker who understands they type of business you are buying and what kinds of loans work in that field.
The Term of Your Practice Loan
There is some flexibility here, with most loans ranging from five to 15 years. A longer term can be beneficial, as it will reduce both the impact your debt service has on the practice’s cash flow, and the risk inherent in losing some of the existing patient base (it will happen to some degree). You also may want to consider a flexible repayment option. If you grow your practice or otherwise increase your cash flow, you want to have the option to prepay the loan. If you are concerned about cash flow in the early days, ask about the loan being structured for interest-only payments for the first six months to a year.
Also, as with any loan, consider your interest rate. Often, a low, fixed rate is the best option. While an adjustable rate can have lower payments initially, eventually rates will rise, and so will your payments.
The Advantages of Buying a Dental Practice
As discussed above, an established practice has an established patient base, with a cash flow from day one. Also, the practice has established relationships with the local insurance providers.
The practice has an experienced staff. You don’t need to find, hire, and train a staff. However, remember that the practice was built around the dentist who, depending on the term of your contract, may not be around. Try to arrange to keep the existing staff on for at least a year. This way, you don’t have the hassle and expense of hiring new staff while learning how to run a practice. Also, the patients know the staff, and familiar faces will help with patient retention.
On that point, while the practice has a patient base, despite your best efforts, you will lose some of that base. Your broker can help advise on the best strategy to retain patients, which often starts with a letter explaining the practice transition. Ideally, the selling dentist will write the letter, as that dentist is someone the patients know and trust.
The Disadvantages of Buying an Existing Practice
While there are several advantages, there can be downsides as well. You aren’t just buying a business, you are buying the philosophy upon which that practice has been built. Your approach will certainly be different, and that may cause some strife with staff and patients, who may look for a new dentist.
Changes in workplace practices and policies can be tough for staff, especially when they don’t see why change is necessary or desirable. Also, if the staff members have been around for awhile, their compensation may reflect that, making them seem overpaid. Carefully consider this before making any staffing changes.
Before you finalize the sale, look closely at the office equipment and decor. Consider what updates or upgrades are required and what the cost of those will be. Factor this into the valuation process.
You Are Not Just Buying a List of Patients and an Accounting Ledger
As indicated above, the practice you’re buying was built around a personality and method of organizing that practice. This brings in a lot of things beyond just dentistry. The selling dentist had a vision for their practice and worked to achieve it. Is your vision for your practice compatible with that? If not, it may be a painful transition for you, the staff, and the patients.
When you own a dental practice, you quickly learn that you have to become a jack-of-all-trades. You are the CEO, CFO, and the human resources department. This is all in addition to being both a practicing dentist and the lead clinical director. Be sure you are ready to take on these responsibilities.
Other things to think about include:
- What quality of care does the practice offer?
- What types of dentistry does the practice offer? Are there services you don’t want to offer? Are there services you think should be offered? How will this impact the practice, staff, and patients?
- What is the ratio of restorative or cosmetic services versus hygiene?
- What services are referred out? Could they be kept in house?
- Is it fee-for-service?
- What percentage of the patients are capitation?
- What percentage of the patients are PPO?
What Type of Acquisition is Best for You and for the Practice?
The common types of acquisitions include:
- 100% Buyout. Just as the name indicates, you exchange the full cash price for ownership of the entire practice. The selling dentist may exit immediately after your close the sale, or may elect to stay on for a period to aid in transition or to ease into retirement. These terms are negotiable.
- Buy-In. Here you would buy-in for a portion of the practice, typically between 25-50%, and purchase the rest later when the selling dentist opts to transition into retirement. This may be a good option for someone who wants to ease more slowly into the responsibilities of full ownership.
- Associate with the Option to Buy. An established dentist may be looking down the road to retirement. The dentist isn’t ready to sell yet, but wants to train a potential buyer in the existing practice, the associateship agreement includes the option to buy. At DDSmatch Southwest, we help place associates, and can provide guidance regarding options to buy.
As in most transactions, there is frequently a gap between what the seller thinks their practice is worth and what the buyer thinks it is worth. As the buyer, you should consider that, for the seller, it’s very personal. They have spent their career building their practice and represents a significant investment of time, money, blood, sweat, and tears. Also, depending on the practice, the dentist may have provided care for generations of families and have strong community ties. All of this will impact the value they place on their practice.
Typically, what buyers are willing to pay (market value) is what the practice will sell for. A rule of thumb can be 70-90% of the last year’s revenue. Speciality practices may value for less because they rely on referrals, which are less predictable.
If You’re Planning Changes for the Practice, Take it Slow
Unless you’ve done a buy-in or option to buy, you are well advised to take your time to get to know the practice: the staff, the equipment, the patient flow, the patients themselves, the billing, and all of the processes and policies. Make sure you understand how it all works together (or doesn’t work) before you start making changes. There might be things that seem odd, but become clear once you are on the inside. Making changes too fast could create disruptions that would cause staff and patients to go elsewhere unnecessarily.
In every business transaction, due diligence is essential. This means that you undertake a comprehensive appraisal of every aspect of the practice. You may want to retain a consultant to evaluate each aspect of the practice, including staffing, systems, and a complete chart audit and patient count. This type of consultant can also advise post-sale on ways to improve the practice according to your career goals without too much disruption.
At DDSmatch Southwest, we specialize in bringing sellers, buyers, and associates together. Using the experience of hundreds of transitions all across the country, we can help you with buying a dental practice and help it go smoother by avoiding common mistakes and finding the right match for your career goals. Contact us today and find out what we can do for you.