What to Watch Out for When Buying a Dental Practice

Buying a dental practice will be one of the biggest—if not the biggest—decision of your career. It’s also the biggest risk, so it will pay, in both the short and long run, for you to be careful, get reliable professional advice, and do all of your due diligence. This is because, absent an ability to show fraud, once the practice keys are in your hands, there will be very little you can do about any overlooked details. And this landmark moment will cast a long shadow over your career.

Here at ddsmatch Southwest, while we represent the interests of our client, we view a successful transition as one where both the buyer and seller are happy with the terms and outcome of the deal. Most frequently we represent sellers (although we also have services for buyers and dental associates) but we think it’s important for those looking to buy a dental practice to know what they should look for, and what they should look out for, when considering a dental practice for sale.

What to Look for When Buying a Dental Practice

The Practice’s Financials

This might seem obvious, but it can also be complicated. It’s not just so simple as reviewing a profit and loss statement. You should expect to be provided with all recent financial statements and tax documents, along with the records of expenses for things like payroll, employee benefits, insurance premiums, continuing education, and reimbursements. You want to be able to know what percentage of collections is covering the practices overhead. That is, what does it really cost to run this practice?

The Practice’s Valuation

The seller will give you a number of what they think the practice is worth. You need to know how they reached that conclusion (the valuation method) and what are the bases of that valuation. Don’t be satisfied with the prior year’s cash flow, or a few recent years’ of cash flow. You should be prepared to review the entire history of the practice. That will tell you the whole story. For more on valuation methods, see our post “How Much is My Dental Practice for Sale Worth?

The Practice’s Brand and Goodwill

While the financial numbers are quantifiable, and easy to evaluate if properly recorded, the intangible assets—the practice’s reputation in the community and how closely it is tied to the selling dentist—are major factors in the practice’s overall value. This can be determined by looking at patient records which will show you patient retention, patient turnover, new patient referrals. These are indicators that the practice is viewed positively in the community.

Relatedly, when buying a dental practice, you need to know how the selling dentist intends to transfer that goodwill to you. This may or may not be something the selling dentist has thought about. It may mean that the selling dentist will want (or need) to stay on for a while to ease patients through the transition. How this works will vary from practice to practice. It’s a good idea to retain your own consultant or broker to help evaluate this and give recommendations of what will work best.

If the selling dentist is not retiring, you may need to obtain a non-compete agreement to keep the patients from being syphoned off.

The Practice’s Patient Base

In addition to what is discussed above, it’s a good idea to look at things such as the types of insurance the practice accepts and how many patients are with each plan, the patient demographics (older patients or young families, for instance), and how patients are retained. This information can help you project future cash flow.

What are the Seller’s Plans?

Is the selling dentist intending to stay on as an employee or contractor? If so, for how long? Does this match with your vision for the practice? While it is common, you should be wary of a selling dentist who may want to exert control rather that ease transition. However, if the selling dentist doesn’t want to stay on, you should consider whether you will have access to the doctor in case you need to consult regarding past patient treatment plans or accounts receivables.

What to Look Out for When Buying a Dental Practice

Pressure to Rush into Closing

While it may be understandable for a seller to be anxious, do not allow yourself to be rushed. Any step that is skipped will only run to your detriment, not theirs. It’s in your interest to be cautious and take the time necessary to complete all of the due diligence. A seller rushing you into buying a dental practice may be hoping that you’ll overlook a defect. It’s simply not worth the risk.

Seller Refuses to Disclose Information

If a seller refuses to make the requisite disclosures, or suggests you don’t need to see complete sets of records, or otherwise obscures information, it is likely there is something they don’t want you to see. While a dental practice can be a complex operation with legitimate issues of confidentiality, you have absolutely no incentive to overlook any detail, especially those being requested by your team of professionals (lawyer, accountant, business valuator, broker).

Declining Production or Poor Patient Retention and Recall

Sometimes selling doctors cut their hours in anticipation of the practice transition—looking forward to retirement, for instance. While this is not the best practice, it does happen. However, if there is declining production, be sure to determine the cause and make sure there isn’t a larger problem that you will be buying. The same goes for low patient retention and recall numbers. If you see this in the records, you need to know why. If the patients are going to another practice, you need to know where and why. You may want to ask the staff about this—often they have a good sense of patient issues. If the selling dentist won’t give you access to staff, that’s another red flag.

Employee Turnover

There are a lot of factors why employees leave (or are dismissed). But if the practice records indicate an unusually high turnover rate, it could indicate that wages are too low, meaning you may have to increase your payroll and benefits costs. It could also mean that the selling doctor is either poor at hiring or a bad manager. This can have an impact on the practice’s reputation and goodwill, if patients are having negative experiences with the staff.

Overreaching Non-Disclosure Agreements (NDA)

You should expect to sign an NDA before you get anything but the most basic information about a practice. For a variety of reasons, the selling doctor has a strong incentive to not let it be know the practice is for sale. However, if the NDA includes terms such as trying to establish an exclusive relationship with you as a prospective buyer or imposes an unethical requirement prohibiting you from looking at other practices for sale, you should not sign. When buying a dental practice, you need to keep all of your options open.

ddsmatch Southwest has Experience Matching those Buying a Dental Practice with The Right Seller.

When we look for the right buyer for our sellers, we consider your lifestyle and location goals, clinical skills, personality, and professional needs before we present you with a confidential list of sellers seeking to transition out of practice or bring on a new partner or associate. The ideal ddsmatch Southwest buyer candidate will have a comparable clinical skill set as the seller, associate experience, a desire to reside long-term in the geographical area of the practice, and requisite financial qualifications. If you are considering buying a dental practice in Texas or New Mexico, contact us today to review our extensive network of dental practices.