How Much is Your Dental Practice Worth?

Brian Hanks Practice Transitions 1 Comment

When buying or selling a dental practice, one of the key elements of the deal is the ability to accurately answer the question – how much is your dental practice worth?

For buyers, specifically, the answer to this question is the second of the three big questions we help them answer when buying a dental practice:

  • Is this a good practice to buy?
  • If yes, what price is fair to pay?
  • If I pay that much, how much should I expect to make?

As a seller, the selling price of the practice can feel like the culmination of a career’s worth of effort growing and developing a dental business.

When I help buyers consider the price of a practice, I remind them of a key fact: you don’t want to overpay for a practice, BUT wealth in dentistry does not come from buying and selling dental practices. The true value of a dental practice is the ownership of a stream of income – hopefully for a period of decades.

Still, as the buyer, you want to feel like you’re not getting ripped off.

Analyzing Dental Practice Values

We’ve analyzed the data of the fifty+ transitions we’ve been involved with at Practice Financial Group recently and compared it to public data provided by Jonathan Martin, CPA in the McGill Hill Group Newsletter. Full disclosure: Jonathan and the folks at McGill hill did the heavy lifting here, and we supplemented with our own data. Their original article is definitely worth a look. The total number of transitions analyzed is 816 over the last 15-year period beginning January 1, 2003.

dental-practice-value

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Negotiate the Asset Allocation When Buying a Dental Practice

Brian Hanks Practice Transitions 1 Comment

When trying to negotiate buying a dental practice, it’s important to find ways to negotiate beyond just the price. A good negotiation is one where you can avoid simply haggling over one number. In last week’s post, we discussed how a buyer can get real dollars in their pocket by negotiating the purchase of the accounts receivable. Today we’ll discuss another great way to find real value when you negotiate buying a dental practice – the asset allocation.

What is the Asset Allocation on a Dental Practice Transition?

Asset allocation is an accounting term. Asset allocation is a fancy way to say how much value the accountants in the deal are assigning to the different items being purchased.

“But I’m only buying one thing,” you may say, “a dental practice!”

Not true, says the IRS.

When you buy a pair of shoes in the store you really are only buying one “thing.” It’s a one-for-one exchange. Money for a sweet pair of kicks.

When you buy a business, however, you’re paying for multiple different types of assets. You’re buying supplies, equipment, goodwill, and other types of assets.typical-asset-allocation-in-dental-transition

There are different accounting and tax rules around those different types of assets. If you’re savvy, you’ll look at the asset allocation as an opportunity to negotiate a win/win for you and the seller.

Depreciation is Why Asset Allocation Matters

The primary reason the asset allocation matters is the IRS allows different depreciation time periods for different asset types. Depreciation is easy to understand with a quick example. Pretend you stumbled upon a genie right after graduating dental school. One of the wishes the genie offered you is for your first job as a dentist to pay you for the next 5 years of work all in advance.

(Ignore for a minute your stunningly inept ability to think of better wishes and go with this example…)

There you are, the morning of your first day as a real dentist, gigantic check in hand and feeling good. You’ve got a pile of money and haven’t had to work for it yet. Honest person you are, you are still going to show up to work and work just as hard as if the owner was just paying you as you go.

But what about the owner? Does she get to say she had a gigantic expense in year 1 and avoid taxes that year?

Nope.

The IRS would apply depreciation rules to my completely ridiculous example and only allow the owner to count 1/5 of that gigantic check of yours for each of the next five years. After all, the gigantic paid-in-advance check is for your next 5 year’s work.

The same principle applies to any asset you purchase as a business owner that has a value of more than $600 and a useful life of more than a year. For example, when you buy a computer, you’re probably going to use it for more than 1 year, and as such there are rules about how much of the computer’s price you get to expense on each year’s tax return.

Depreciation is the rule that allocates value to a tangible asset over its useful life. It’s an attempt by the IRS to match the expense of an item to the revenue that the asset helps you earn.

Typically, the depreciation rules break the assets of a dental practice into the three main buckets seen in the images below.  

asset-allocation-depreciation-for-buyer

asset-allocation-tax-treatment-to-sellerHow does this affect the seller? The seller doesn’t care about depreciation, so why not try and just load everything into the categories most helpful to you as the buyer? Let’s stick everything in Dental and Office Supplies and Dental Equipment!

Not so fast.

On the other side of the transaction, the IRS has different rules for the seller for the tax treatment of different assets sold.

How the Seller Gets Taxed when Buying a Dental Practice

The IRS has two ways to tax sales of assets where the seller makes money – ordinary income and long-term capital gains. Let’s look at ordinary income first. This is the type of tax most people are familiar with. The ordinary income tax rates start at 10% and go up to a whopping 39.6%!

The second way the IRS taxes gains on asset sales is called capital gains. The basic theory behind capital gains is the IRS wants to reward people who invested in resources productive for society, like a business, with a lower overall tax rate on any gains from those investments.

The difference between the two is substantial, anywhere from 0% for low-income taxpayers to 20% for capital-gains-rates-comparison-2017those in the top tax bracket.

If you are a seller, the obvious takeaway from this difference is that you want as much of your income to fall in an asset category where the IRS will tax it as capital gains, and not ordinary income. Doing this could save you as much as 20% on whatever money you can move from an ordinary income category to a capital gains category. Huge savings!

The Amounts are Negotiable

An important point to consider is as long as the buyer and seller are both consistent in how they treat the values in the different categories (they are both required to report these numbers to the IRS independently), the actual amounts allocated to the different assets is negotiable.

What does the law say? According to the IRS, the technical way to allocate the purchase price among the different assets is to allocate the Fair Market Value to the identifiable assets (patient records, equipment, supplies, etc.), then the remainder, if any, is allocated to Goodwill.

Many buyers assume the values assigned to the different categories are predetermined and set in stone. However, the definition of “Fair Market Value” is the price an independent buyer and seller can agree upon. So basically as long as you and the seller agree on the price allocated to the assets, that price is correct.

How to Negotiate Asset Allocation when Buying a Dental Practice

So what’s the point? As the buyer, you’re looking for opportunities to negotiate with the seller on more than just the asking price. Ideally, there are lots of different areas where your interests overlap or, at least, aren’t directly opposed to one another. We now have three categories with significant dollars behind them where the buyer and seller can move levers to find the option that works best for everyone and leaves everyone happy – price, accounts receivable, and asset allocation.

For example, Dr. Seller could feel very strongly she wants a full-price offer on the practice she’s worked hard to build over the last 25 years. Dr. Seller is going to be on the golf course a lot with her dentist friends and wants to be able to say she got a full price offer for her practice.

Dr. Buyer could ask if she would be willing come down in the percentage of the sale in the goodwill category and increase the amount allocated to equipment to allow her to depreciate the total cost of the sale more quickly.

Alternatively, Dr. Seller might be very sensitive about the large tax bill coming when he sells his practice. “No problem,” says Dr. Buyer, “if you can come down in price a bit, I would be willing to increase the asset allocation of goodwill to allow you to have more of the sale taxed as long-term capital gains.”

I’ve seen this happen frequently. Everyone walks away feeling like their needs are addressed and ultimately more satisfied with the deal.

Other Things to Negotiate When Buying a Dental Practice

Purchase price, accounts receivable and asset allocation are not the only items you can negotiate when buying a dental practice. They’re the main items with real dollars behind them. But what if you need a little more ammunition as the buyer? What if you need a little extra push to get a seller on board with a plan that works well for you?

Other common areas of negotiation include:

  • Start Date
  • Letter to active patients
  • How to handle current employees
  • Right of first refusal on the purchase of the building
  • Redos
  • Restrictive Covenant
  • Deposit

Wrap-up

If there’s one eternal truth I’ve seen when helping buyers purchase a dental practice, it’s this: The more knowledge and more options there are, the higher the chance of pulling together a deal.

Ultimately, most buyers and sellers want the same thing. They want to successfully transition the business into new, responsible hands that will take great care of the staff and patients. They want to be rewarded for all the hard work they’ve done to that point – the seller with a gigantic check and the buyer with a steady income stream from a healthy business.

You’re more likely to get a win/win with a seller if you know what you can negotiate. Price is always negotiable. Purchasing the accounts receivable is a good negotiating point too. A great third option with real dollars behind it is the asset allocation. Know a few of the basics and work with your dental accounting firm to advise you on how you can profitably negotiate with the seller and create a situation where everyone wins.

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Know someone about to buy a practice? Share this article with them! Or, have them reach out directly to me via email: brian@practicefinancialgroup.com to help them through the process.

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Read more below about dental transitions because you want to negotiate a great deal!
Four Things Your Attorney Should Do for You When Buying a Dental Practice
A Letter of Intent Should Include This When Buying a Dental Practice
Why You Should Buy a Dental Practice BEFORE Your Student Loans are Paid Off

Negotiate the Accounts Receivable When Buying a Dental Practice

Brian Hanks Practice Transitions Leave a Comment

On Friday I experienced a parenting moment that reminded me of trying to negotiate buying a dental practice and how quickly things can go badly.  

I had promised the kids each a small bag of M&Ms after work. I followed through and delivered. I tallied the dad points in my head. Then, of course, I watched as the 2 year-old ripped open the bag and one single, solitary green M&M escaped and fell, rolling onto the floor.

Her 3 year-old sister was fast.

She jumped down, snagged it, and popped it in her mouth in full view of the 2 year-old who still had an entire bag of chocolate happiness, minus one escapee.

You know what happened next.

The 2 year-old dissolved in tears and threw a fit.  One escapee M&M made her so angry that the rest of the bag in front of her didn’t even register.

claire-crying
It’s the kind of thinking that can ruin a perfectly good deal.

This is the very definition of a scarcity mindset. If you’re read Steven Covey’s “7 Habits of Highly Effective People,” you remember this principle. Dr. Covey outlines how zero sum thinking makes people sad, jealous, and greedy. Scarcity makes you think there’s only so many M&Ms in the world and if you share any of them with anyone you’ll miss out and starve to death. This kind of thinking happens when negotiating buying a dental practice all the time.Read More

After the Letter of Intent

Buying a Dental Practice – After the Letter of Intent

Brian Hanks Practice Transitions 2 Comments

When buying a dental practice, how do you know what to do after the letter of intent? Almost always, there is a period of time between when you’ve negotiated the letter of intent and when you walk through the front doors of your new practice, keys in hand, as the brand new owner.

Picture the moment: You park the car and start walking toward those front doors you own for the first time! The opening few bars of “Sweet Emotion” by Aerosmith are running through your head. You own your own practice now, you stunning piece of humanity! If there was a confident emoji, it would look like you.

But what if you don’t feel confident?

What if you show up on your first day, like a pediatric dentist I know in Arizona, and you realize the schedule is only half-full and your front desk can’t bill to insurance yet because credentialing hasn’t happened?

What if you’re like an orthodontist in Texas who had to keep pushing back the close date on his practice three times because the bank wouldn’t release funds due to lack of life and disability insurance?

What if you’re like a general dentist I know in Seattle who showed up on his first day of ownership to find out two of the five employees had quit and weren’t coming back?

With a little knowledge of what to do, you can feel confident. You can feel ready. You can walk through those doors, humming Aerosmith, knowing you’ve taken care of the essentials and you’re ready to wow your patients and continue an amazing career! The steps below outline what to do after the letter of intent.

Step 1: Make Sure Your Dental License is in PlaceRead More

A Letter of Intent Should Include This When Buying a Dental Practice

Brian Hanks Practice Transitions Leave a Comment

When buying a dental practice, one of the most important documents in the process is the letter of intent (or LOI, for short). The letter of intent is the legally non-binding document that contains all the elements of the practice transition that you have negotiated with the seller. The letter of intent saves you money by allowing you to negotiate with the seller before you begin paying an attorney for drafting documents or other related services.

Getting the Letter of Intent Right is Crucial – But How Do You Know?

Getting the letter of intent right is crucial, and typically leads to much smoother transactions where everyone is happy – the buyer, seller, staff and patients.

If the letter of intent is so important when buying a dental practice, how do you know what it should contain? How can you be sure that you’ve negotiated the key elements and nothing is missing that might come back to bite you later on down the road?

Missing Elements in a Letter of Intent Can Be Disastrous!

I recently got involved helping a buyer purchase a dental practice after the initial negotiations and letter of intent had been signed. I asked the buyer to send me a copy of the letter of intent. The price of the dental practice was on the paper, but not much else. Over the next few weeks, the buyer asked for deal elements that would ensure a smooth patient transition and help his tax situation.  The seller was offended that the buyer would “change the deal.” The seller assumed that because an LOI was signed, the buyer should just take whatever else was offered. The transition ended on a positive note, but not with some serious risk of the deal falling apart.

You need to get the letter of intent right the first time! Making sure the elements below are included is a key step in the process. A letter of intent for a dental transition should include at a minimum the following: 

Included and Excluded Assets

One dentist I talked with recently told me about the first day she showed up at the practice she purchased, only to find every single piece of furniture and fixture gone. Every couch. Every painting. The chairs the front desk had used for years – gone. Even the little potted plants around the office had walked away. She just assumed those were part of the transition. She spent the first few days making Costco and Ikea runs instead of being focused on the staff, patients and processes in the office.

A good letter of intent will call out specifically which assets are included in the sale and which are not. Typically, included assets will be equipment, supplies, instruments, furniture, fixtures, computers, digital assets (website, phone number), etc.

Assets typically not included are cash, personal effects, employee benefits, liabilities of the seller and any cars the practice might own.

Less important is the actual list. More important is that you and seller are on the same page and that you won’t have any surprises.

Accounts Receivable and an A/R Purchase Schedule

You need to know if, and under what terms, you are purchasing accounts receivable. Not every seller wants to sell the accounts receivable, but many do. I recommend purchasing them if you can – if done correctly, it’s like buying cash at a discount.

Most importantly, you need to spell out under what terms you’ll purchase the accounts receivable. Typically, this looks like a table with the various aging categories and the value you will pay for them.

 

accounts-receivable-letter-of-intent-buying-a-dental-practice

If you don’t purchase the accounts receivable, I recommend making it clear that you are willing to collect and remit payment on the selling doctor’s accounts. But you’ll do it for a fee of around 5% of the value of those accounts collected.

Purchase Price and Asset Allocation

Of course, you’ll include the price of the practice in the letter of intent with the breakdown of the allocation of that total price. When purchasing a business, the IRS gives different tax treatment to the various assets being purchased – dental supplies, equipment, patient records, goodwill, etc.

The asset allocation is one of those negotiating areas where a win/win arrangement is tough. Typically, if the seller wins, the buyer loses and vice versa.

As the buyer, you care about the asset allocation because how the purchase price is broken out will affect how quickly you can depreciate and write off the value of the practice you’re buying. Thus, potentially lowering your tax bill.

As of 2016, the assets can be depreciated as follows in the table below. Lower numbers generally are better for you as the buyer (but not always, so talk with your accountant to know for sure).

letter-of-intent-asset-allocation-buying-a-dental-practice

Due Diligence Period

Make sure you and the seller are clear on how long you and your dental accountant (you have one, right?) will need to review the practice and financial information. I typically recommend at least 30 days.

You’ll also want to be specific about what access you and your dental accountant will need in order to complete the due diligence.

Intentions Around Real Estate

Are you going to buy the real estate? Are you going to rent from the seller? If renting, would you like the right of first refusal on the sale of the building? Don’t leave those questions to chance and make sure they’re spelled out in the letter of intent.

Details Around the Seller’s Transition

Each situation will be unique, but you want to make sure the seller helps set you up for success as the buyer. You will want the seller to author a letter (that you help edit) informing patients from the last three or so years about the change in ownership and how amazing you as the buyer are. In fact, many state dental boards require this letter be written and sent. Spell out who is going to pay for the letter.

Also, you will want to talk with the seller about their availability post-transition to help understand the operations of the practice and possibly help with consultations in-person, or via telephone, email, etc.

Employees

One seller I know gave his employees all big raises between the time he agreed to sell the practice and the time the buyer actually took over. Staff compensation went from 28.5% of collections to 31.8%. I don’t know for sure the motivation for the change, but you can be sure that the buyer wasn’t able to show up on the first day and say: “Just kidding everyone! Let’s go back to your pay level from six months ago!”

Make clear to the seller that all accrued benefits (bonuses, paid time off, etc.) are the responsibility of the seller before you take over the practice. I strongly, strongly recommend making as few changes to the staff, pay, benefits, etc. as possible in the first few months of business (with the one exception being the 401k or another pension plan). Make it clear to the seller that you intend to keep all the staff, but that all accrued benefits and promises are their responsibility.

Redos and Rework

Decide with the seller up front how you will handle patient cases that were originally handled by the seller but come back to your office to be fixed after you’re the owner. Who will do the work? Who will pay for it?

If the seller hasn’t left town, I like to see the seller have the option to come back in and do the work (of course, paying for staff time and materials required).

Restrictive Covenants

Make sure you negotiated upfront in the letter of intent the restrictive covenant that the seller will be subject to. Include both the time and distance (e.g. 5 years and 15 miles) in the LOI. You will also want to include language around recruiting former employees and marketing within that same distance.

Wrap-Up

A good letter of intent is one of the keys to successfully buying a dental practice. You will minimize misunderstanding, maximize your use of time and energy, and even save money when you turn over a document to the lawyers that is complete and doesn’t require a lot of back and forth.

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Need help evaluating your LOI? Reach out to me at brian@practicefinancialgroup.com for a free consultation around your situation because this is an important decision!

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Like what you read? Read more about successfully buying a dental practice:

How to Analyze a Dental Practice for Sale – The Quantitative Factors
How to Analyze a Dental Practice for Sale – The Qualitative Factors
Why You Should Buy a Dental Practice BEFORE Your Student Loans are Paid Off

4 Common Mistakes Dentists Make with Student Loans

Brian Hanks Financial Planning, General Leave a Comment

A few weeks ago I had the chance to scratch an item off my bucket list when I flew to New York and saw the US Open tennis tournament live. As a casual fan and player, I loved the opportunity to sit as close to 10 feet away from Nadal, Murray, Djokovic and Williams – the best in the world. As I watched them play, I could predict who would win almost every time by looking at only one statistic: unforced errors. An unforced error is a lost point entirely the result of a player’s own blunder, and not because of how well the other player has played. As dentists struggle to repay record levels of student-loan debt, many are making unforced errors that threaten their long-term financial security and delay retirement.

Unforced Error #1: Assuming Income-Based Repayment Plans are the Best OptionRead More

5 Reasons a New Dentist Should Buy Term, and Not Whole Life Insurance

Brian Hanks General 3 Comments

Life insurance is a crucial topic for new dentists to get right. After such an enormous investment of time, money, energy and effort in school, should the unthinkable happen you want your family and/or loved ones to be taken care of. (You? Peacefully in your sleep, of course. Me? Wingsuit skydiving, probably!) You want to be able to replace your income if you’re not around to provide.

I can hear the whole life insurance zealots now, “Whole life offers great returns!” and “It’s much safer than the stock market!”

I’ve heard it all before. Every time I sit and analyze a client’s whole life policy they’ve been paying on for a number of years, what they were told they would have in their account is never even close to what they actually have.

A few times a year I go to various dental schools and residency programs to talk with dentists about their upcoming careers. When I ask who some of the other speakers have been, insurance agents are always top of the list. It makes sense – as a newer dentist, you’re going to have a LOT of insurance policies. And life insurance should be among them.

In case you skipped all those lunch and learns at your school, the two types of life insurance you’ll need to decide between are term and whole life insurance. The differences in a nutshell are basic. Term insurance is a monthly bill you pay, hoping you never see any benefit from (because you’re not dead! That’s good!) Whole life insurance is also a monthly bill, but instead of you never seeing your money again if you don’t die, when you’re much older, the policy has a cash value that you can then borrow from, withdraw, pass on to heirs, etc.

With the knowledge that chances are good you’ve talked with at least one insurance agent, here are five reasons why you should stick to term life insurance as a new dentist:

  1. Cost. I ran a quote on myself for a $2.5-million-dollar term life policy. (For the record, I’m 35, a non-smoker, and frequently offered underwear modeling contracts that I graciously decline. Two out of three of those facts are true.) The cost was $1,760/year. I then ran a quote for a whole life policy worth $250,000 (10% of the amount my wife would get if I die, compared to the term policy.) The cost was $3,440/year. This is double the cost for 10% of the benefit with whole life. Term insurance is always much cheaper. The brutal fact is  in order to be adequately covered, you’ll probably need a large amount of coverage. If you feel better with a whole life policy, the cost to get to that big number becomes so prohibitive, that most choose inadequate coverage and the family suffers as a result.
  2. Timing. Today, right now, you’re as young and likely as healthy as you’re ever going to be. That means, that your insurance policy is as cheap as it’s ever going to be too. Truthfully that applies equally to both types of insurance. However, when you’re older, term life insurance may not be an option. Or, it may be so expensive that you may not want to purchase it. I spoke with a dentist recently who, in his 50’s, had not been as successful in his career as he thought he’d be in his early 30’s. He had a whole life policy, but was concerned about large family obligations and debt load. He had recently lost a parent unexpectedly and, being reminded of his mortality, was surprised to learn insurance companies were quoting annual premiums 10- to 15-times higher than he thought he’d need to pay. He is still uninsured.
  3. Term is straightforward and easy to understand. One thing that drives financial advisors like me up the wall is when we see the assumptions in the presentation given to dentists about choosing a whole life policy. So often the assumptions are not realistic. As a new dentist, you don’t know any better. Why would you? Just like I don’t know that one dentist’s choice to choose a cheap composite on my filling was a poor choice, often times I see people making poor decisions about insurance based on assumptions that are very unrealistic. Term insurance is simple. Pay a small premium, and if you die, your heirs get a big check. That’s it. Simpler is better here. Trust me. If I could get back the hundreds of hours I’ve wasted trying to understand the inner workings of whole life, and reinvest it with my kids, I’d do it in a heartbeat.
  4. Insurance is not an investment. Insurance is a transference of risk. You transfer the risk over many people similar to you, which reduces everyone’s risk. When you try to overlay investments on top of that, it gets exponentially more expensive. Keep your insurance in its own lane, and keep investments in their own lane. Besides, as a new dentist, you’re probably more focused on increasing your earnings and paying down debt. Investing serious amounts of money probably won’t come for at least a few years into your career.
  5. You’re not making your insurance agent rich – Commissions on insurance policies can run anywhere from 55% to 100% of the first year’s premium. You saw how differently term and whole life policies get priced with my own example. Thus, human nature being what it is, your insurance agent has a strong incentive to sell you the more expensive policy. Not every insurance agent will push you towards an inferior option. In fact, we work closely with several insurance agents we know and trust. However, we’ve seen the results of enough poorly understood and poorly placed whole life policies, that we know bad actors are out there.

Practice Financial Group could be MUCH more profitable if we jumped on the whole life bandwagon. Many financial advisors and dental CPAs love whole life because of the income it provides their business. The numbers have not worked for our clients. We choose to recommend term life insurance as the best option for dentists – especially new ones. And we sleep so much better on our thinner wallets.

While it’s true whole life rarely gets recommended for our clients, there can be situations where it makes sense. Typically, whole life insurance has a place in the portfolios of high-earners who have maxed out their other investment opportunities and are looking for an ultra-conservative place to invest. If you’re looking for whole life insurance as a new dentist, and thinking that it will mean smooth sailing in your retirement years, you are probably wasting your money.

How to Analyze a Dental Practice for Sale – The Qualitative Factors

Brian Hanks Practice Transitions Leave a Comment

Have you ever had a friend who wanted so badly to be in a relationship they talked themselves into being with someone who was a horrible match for them? I had a roommate in college who wanted to be married so badly that he talked himself into relationships that were obviously a poor fit. Being the good roommates we were, we’d kindly point out obvious flaws with his latest girlfriend.

We’d point out, “Dude. She’s still dating other guys! We just saw her with Brad down the street.”

Of course, he would defend the decision, “Her mom told her to not stop dating until she’s serious with someone. I think proposing will make things serious!”

Buying a dental practice is a lot like finding someone to be in a serious relationship with. It’s a huge decision. It’s vitally important to get right. And the consequences of choosing well or poorly will impact the quality of your life.

You’ve got to get the analysis right and for a dental practice, that means getting the numbers right. But it also means getting the non-numerical numerical right. The qualitative factors.

When looking for a practice to buy, it’s obvious to an outsider when things aren’t a good fit. I had with a dentist with a few years of an associateship under her belt about her search for a practice in the suburbs of Seattle. Married with a few kids, she and her husband spoke at length with me about the importance of good schools and a short commute. They wanted to raise her kids in an environment similar to their suburban upbringing. But, like a lot of doctors looking for a practice to buy, she was having trouble finding one that fit her criteria. She called me about a practice in Downtown Seattle, outside where she was normally looking. We looked at the numbers of the practice, and the quantitative side of the analysis could work. However, I was concerned about her desire for a short commute and the practice location.

I asked her, “Where would you live if you bought this practice? Have you found a neighborhood close to the practice with good schools?”

(Long Pause)

“The closest one my husband and I feel comfortable with is 15 miles north of downtown.” She replied sounding a little guarded.

Personally having been stuck in Seattle traffic many times I responded, “That’s…what?…a 30 minute drive on I-5 one way, on a good day, right?”

A second pause, “About that, yes.”

“And about an hour in traffic, right?” was my follow up question.

Knowing what I was going to say next, she replied, “Or more.”

I asked my last question “…so why are we even talking about this practice??”

Don’t get married or buy a practice, just because you’re mentally ready to move on to your next career step. How do you do that? The numbers have to work, obviously. But you’ve got to get the qualitative side of a dental practice right too.

And just like deciding whom to marry, would you ever get married without dating first? Would you buy a car without at least taking it for a test drive? Would you buy a house without seeing and inspecting it first?

You’ve got to get out and see the practice first-hand. And when you do, there are seven areas to pay special attention to. I’ll give you a few of the questions for each of the seven areas you need to ask when looking.

Key Area #1 – The Family Test

This is the Monopoly Test. This is called the Monopoly Test because if the answer is “no” to any of the above questions, do not pass go and stop analyzing this practice. You’re considering living somewhere for a period of, probably, decades. Consider the following questions:

  • Can you live in this city, and (more importantly, if applicable) can your spouse live here?
  • Will you have the kind of life you want in this area?
  • Will you be able to do the things that are important to you, if you spend 50 weeks a year in this part of the country?
  • Will the cost of living here enhance or detract from your financial goals?

 

Key Area #2 – The Selling Doctor

Interview the selling doctor; get to know him or her.  If your style doesn’t match the selling doctor, it will be more difficult to carry the practice forward in the way it has been carried so far. Consider these questions about the selling doctor:

  • Does your personality style match the selling doctor?
  • Do you have similar values and philosophy on life and business?
  • Do you share a similar clinical diagnosis philosophy?
  • Do you feel comfortable with the selling doctor’s ethics?

Key Area #3 – The Facility

Don’t even think about purchasing a practice unless you have, or plan to visit the practice in person. There is no substitute for a boots on the ground inspection of the facility, grounds and area. Consider asking these questions as you consider the facility:

  • Are the office and signage easily visible to the public?
  • How is the physical appearance of the building, inside and out?
  • Are there major changes you’ll need/want to make to the building?
  • Is there sufficient parking?
  • Is the building in a part of town that has the demographic of your target patient base?
  • Would you want to get your dental work done in this office?

Key Area #4 – The Equipment

The tools you’ll be working with can enhance or detract from the practice you purchase. If you’re a recent grad, you’re probably used to the latest and greatest equipment most dental schools seem to have. Consider the following questions regarding equipment:

  • Does the seller have the equipment/instruments you’ll need and want to do your work?
  • If not, how much will it cost you to acquire the equipment you need/want?
  • Is the equipment left or right-handed?
  • What does the local equipment rep have to say about the quality of tools in use?
  • Open bay vs. quiet rooms for doctor and hygiene?
  • What do you notice about the non-front-and-center equipment: delivery units, compressor, vacuum, nitrous, etc?

Key Area #5 – The Team

Your team will be your family away from home. Getting along with them is important. But even more important is understanding who they are as individuals. Their reasons for being in their careers. Their hopes, dreams and goals. Their ability to be coached, and expectations of their new boss. Consider these questions as you analyze the team:

  • What is the staff’s general attitude towards the transition?
  • Will they be staying with you or leaving? Who will you have to replace?
  • What is the tenure of the staff?
  • What do you think of current salaries, benefits and any existing employment contracts?
  • What are the main reasons other staff have left this practice in the past?
  • Does the staff see any problems in the practice?
  • What changes would they recommend making in the practice?
  • How often do they receive feedback (both positive and negative)? How often do they improve their ability to contribute value to the practice?
  • Do they know the practice goals? Do they have personal goals or development plans?

Key Area #6 – The Patients & Scheduling

Patient flow and scheduling are the circulatory system of any practice. Without it, the practice dies. If there are problems with patients & scheduling, everything else becomes harder. Consider these questions when considering patients and scheduling:

  • How long is the doctor booked in advance? (Hopefully 70-80% full for the next two weeks)
  • Is there room for emergency visits?
  • How far is hygiene booked out?
  • Are there gaps in the hygiene schedule?
  • What are the primary sources of new patients?
  • What are the current internal marketing programs?
  • What are the primary external marketing programs?
  • How are you going to attract new patients to the office?
  • Does the office have an online marketing plan integrating website, social media & SEO?
  • What changes would you make to the scheduling process?

Key Area #7 – Production & Chart Audit

Patients may be coming in the doors, but how do you know they are the types of patients you will be able to help? Or the types of patients you want to help? Consider the following questions about the production and charts in the practice:

  • Do they use digital or paper charts?
  • What percentage of active patients come from fee for service, PPO, HMO plans, Medicaid?
  • What percentage of total annual production is from Hygiene?
  • Review the x-rays in the chart and compare them with the work diagnosed and performed. Do you agree with the diagnosis?
  • Are the treatment notes complete and legible? Could you pick up this chart and treat the patient without trouble?
  • Can you find any patterns of patient treatment and acceptance?
  • Do you have the expertise to confidently perform the treatment in a chart?
  • How much accepted treatment is there not yet performed? (*Rule of thumb: for $500k of revenue, there should be $300k of diagnosed, presented and accepted, untreated dentistry)

A final tip as you consider the list above: the help of a professional who specializes in helping dentists with this type of analysis is invaluable. Not only can they help you think through all of the above and more, they can give you a sense of what the answers to those questions mean. If the quantitative side of a practice analysis works, and the qualitative side in the questions above work, you may have found a practice worth buying! Good luck!

How to Analyze a Dental Practice for Sale – The Quantitative Factors

Brian Hanks Practice Transitions 6 Comments

Recently, I was approached by a dental student with financial papers in hand wanting to know “Is this dental practice I’m thinking of buying a good one?”

“It depends,” I replied, “on what you want. Do you have student loans and want to be able to pay them off quickly?”

With a touch of “duh” in her voice, she replied “yes”

My next question was, “Do you want to retire when the average dentist retires today at 68.8 years old, or would you rather have the freedom to walk away earlier in your 50’s if you wanted to?”

Horrified, the student replied “That’s the average retirement age?!”

Feeling a little bad about bursting her bubble, I continued, “does this practice collect enough, and have enough profit to support your debt pay down, savings and lifestyle goals?’

“….um….I’m not sure…” was the response. We talked for a few minutes about how much she wanted to make and when she wanted to be debt free.

From there I took a quick glance through the financial documents she had and, focused on six or seven numbers. Within a few minutes I had a pretty good idea of whether or not this student was considering a financially “good” practice.

What are those numbers?

I’ll outline exactly what to look for in a practice you’re considering purchasing.Read More

What Can Dentists Learn About Leadership from Marshawn Lynch?

Nate Williams Leadership Leave a Comment

Leadership is a difficult concept to teach. It’s easier to show an example of a good leader than to describe what makes a good leader.

For this example, we’ll turn to the colorful Marshawn Lynch, Mr. Beast Mode himself. What can we learn about leadership from Marshawn Lynch? From this clip, just about everything. Cue the video…

Well, what did you learn about leadership? Perhaps you should watch it again…

Read More