What Information Do You Need Before Buying a Dental Practice?

One of the most important decisions you can make in your career is about buying a dental practice. It is essential that you be thoroughly informed in order to make a decision that will be a solid foundation on which to build your career. Your clinical skills can only get you so far. In order to run a successful practice, you must also have the requisite business knowledge and acumen to manage every aspect of your practice. And, in order to make a strong choice in what dental practice for sale you choose to buy, you should be working on developing those skills now.

However, there is truth in the saying that a jack of all trades is a master of none. It’s simply not possible to be an expert in everything. As you’ve likely heard, you will need to surround yourself with a team of professional advisors who have the education, training, and experience to be the expert in areas where you are not. These include, at the least, a lawyer, an accountant, and a dental practice transition specialist. In particular, a reliable dental accountant will help you evaluate potential dental practices for sale to determine their viability as good options for purchase.

Below we will discuss some of the essential information you will need about a dental practice for sale before you can make a fully informed decision. If a seller is unable or unwilling to provide this information, that should be noted as a warning sign. It indicates that they either don’t want you to know it (a major red flag) or that they don’t have or aren’t able to provide it (indications that the practice may be poorly managed on the business side).

Financial Information

  • Tax Returns – You should expect to see three to four years of tax returns for the practice. These documents provide insight into the historical financial performance and illuminate the practice’s earning trends and stability.
  • Practice Valuation – If the seller is serious about selling the practice, they should have had a professional valuation by a certified valuation expert. Here at ddsmatch Southwest, we use Blue & Co. for our valuations. Regardless of the valuation expert, you should consider how thorough the valuation report is and look into the qualifications of the firm that prepared it.
  • Cash Flow Model – This model is a projection of the practice’s earnings over the next five to ten years. The model should take into consideration growth rates, operating expenses, debt service for the practice purchase loan, and your take home pay.
  • Accounts Receivable – This will show you how well the practice is doing at making its collections.
  • Lease Agreement or Real Estate Appraisal – When considering buying a dental practice, you have to consider whether the practice is leasing space or whether the seller owns his own building and land. Taking over the lease, buying the real estate, or leasing from the seller are all options, but these arrangements are separate from the agreement to buy the practice. In any of these instances, you have to look at what the seller has and whether a deal can be reached that will work for the long term viability of the practice. Also, your lender may have terms that need to be satisfied (e.g., the lease being equal to the term of the loan).
  • Production/Collection Reports – These reports should break down what procedures the seller is performing and what they are actually collecting from those procedures, including those performed by associates and hygienists.
  • Associate Agreements – If there are associates, you need to review their agreements with the practice, especially the restrictive covenant mileage, the length of the agreement, and the non-solicitation terms (of both patients and staff). If there are associates, but not associate agreements, be aware that the associates are free to leave at any time and poach employees and patients. 
  • Employee Salaries and Benefits – This information provides two functions. First, it shows you in detail who the employees are and what they cost the practice. Second, it can show you whether the practice is appropriately staffed or over-staffed. While it is typically advisable to keep current staff on at their current compensation for a certain period of time, you will likely have no legal obligation to do so. However, staffing decisions, especially immediately after a dental practice transition, need to be made carefully. Staff morale can have a significant impact on patient retention.
  • Financing Ability – This involves two factors: your ability to borrow and the practice’s ability to be financially viable enough to service the debt and cover its other expenses, including your take home pay.

Information About the Office

In addition to financial information about the practice, there are some important things you need to know about the office before making a decision about buying a dental practice. 

  • Site visit – You must make a visit to the physical space and be able to see every part of it. Is it in an appropriate location? If it’s in a building with other tenants, how is the property maintained?
  • Equipment and Improvements – You must be able to see the equipment and its condition. If its old and outdated, or in poor condition, that may communicate things to you about the practice. Importantly, it will let you know what you are going to need to replace or upgrade.
  • Ability to Expand – If the practice can be expanded in regards to procedures and patient base, will the office space be able to accommodate it? If not, do you have the option to expand? You don’t want to be locked into a lease that will hold you back. 

Patient and Practice Characteristics

Finally, there are aspects of the patient base and other practice characteristics you need to examine.

  • Active Patients – How many patients have had appointments in the last 12 to 18 months?
  • Insurance – What percentage of the patients participate in insurance plans accepted by the practice?
  • Demographics – What are the patients’ age groups and zip codes?
  • New Patients – How many new patients are coming into the practice each month?
  • Hygiene – How many hygiene appoints are made each month and how much revenue are those generating?
  • Appointment Schedules – Ask to review several weeks of appointment schedules for both doctors and hygienists.
  • Fee Schedule – This would include the list of procedures offered and what the practice charges for out of pocket patients and what they get from insurance reimbursements. How are the normal procedure fees being adjusted for insurance reimbursement? This should be compared to local competitor fees and industry standards.
  • Office Hours – What days is the practice open and for what hours on those days? Consider whether this may be expanded to increase revenue.
  • Reason for the Sale – Why is the seller transitioning the practice? Retirement? Relocation? Selling off a second location? Financial distress? Licensing issues? Other reasons?

While this is a fairly comprehensive list of considerations, it’s not exhaustive. As you review the information relevant to these categories, it can point you to other areas where you may have questions. Be sure to ask those questions. The more information you have, the better prepared you are to make a reliable decision about buying a dental practice.

Considering Buying a Dental Practice for Sale in Texas or New Mexico?

At ddsmatch Southwest, we have dental practices available for sale throughout Texas and New Mexico. Contact us today for more information.