PURCHASING A PRACTICE
SOME COMMONLY ASKED QUESTIONS
The purchase of an established practice can be one of the most important decisions you will make in your entire career. You will be glad to know that the track record for this venture is excellent, since the majority of dentists that buy established practices are economically far ahead of those who go into associateships or set up practices from scratch. Once you’ve located a practice in a geographic area that you and your family would like to live, and you feel good about the specific location of that practice within that area, then you should begin asking yourself some of the following questions:
1. What size practice should I look for?
In looking at practice size, there are two factors to consider –the physical size of the office itself and the production history of the practice
As far as physical size is concerned, determine whether the current, (as well as the potential) patient load can be adequately handled in the current space. If not, could the office space be expanded or laid out differently, or would staggering the hours of the practice be a solution? And if you are interested in growing your practice in the future by merging with other dentists in your area who may selling their practices, think about how your facility or practice hours could be modified to accommodate such an expansion.
Another important factor to consider is the production history (as well as potential) of the practice. Ultimately, the size practice you purchase will probably be dictated by your prior practice experience, and/or your overall comfort level with the current production numbers of the particular practice you’re looking at. It may also depend upon whether the selling dentist will be helping to maintain the production of the practice by providing dental services during the transition, and if so, for how many days per week, and for what period of time following the purchase date.
2. How do I know if I’m paying a fair price for the practice?
One of the first things you should do is to make sure that the purchase price of the practice reflects fair market value, which can be verified through using services of an experienced transition consultant. There are certain guidelines that have been established for the valuation of dental practices so that purchasers can be assured of paying a fair price. In fact, a formal valuation of the practice is always a good investment for a purchaser to consider prior to purchasing. This tool enables the purchaser to determine whether or not they are making a sound investment, and may also be used to compare against any valuations that have been provided by the seller.
3. How will I know how the purchase of a particular practice will work for me financially?
As a purchaser of a practice, you should be provided with a proforma-projection of what your net income will look like during the time that you’re paying for the practice. Without this, you have no way of measuring the economic viability or true value of the practice you are purchasing. This financial projection is based on the present overhead and collections of the practice, less the practice payments. In order to project an accurate picture, it will be necessary to determine what the “true net” income of the practice is — that is the total compensation the seller is receiving from the practice, including all benefits paid on the seller’s behalf. This projection should also reflect expenses the seller currently has that the purchaser won’t, as well as expenses the purchaser will incur that the seller doesn’t have.
4. How should the seller’s transition be handled after the purchase?
Two important issues come to mind regarding the seller’s transition out of the practice — The first is how to successfully transfer the patients to the new owner and the second is — how to maintain reasonable cash flow during the initial transition.
First of all, a great deal of misinformation and concern surrounds the patient transition and retention process. After all, what did you buy if the patients of the practice didn’t transfer to you in a reasonable period of time? When the patients are informed properly about the transition, the seller’s exit should not cause a mass exodus of patients. Even though most people avoid change, patients are accustomed to this type of transition, and have experienced this with their physicians and other professionals who provide them services.
In addition, the staff should be well prepared with scripts for introducing the new doctor in person as well as over the telephone. A personal letter of introduction from the seller is also important to consider.
Some practice transitions are very brief, requiring that the transfer of the seller’s patient base to the buyer occur as quickly as possible. This is particularly true when the buyer’s income needs, or the seller’s personal or health situation require it. When the seller leaves the practice quickly, it may actually shorten the time required for the patients to transfer to the purchaser. Contrary to what many dentists think, the successful transfer of patients depends mostly on the people skills of the buyer, the performance and attitude of the remaining staff, and not necessarily on the seller’s presence after the sale
5. Should I keep the seller working in the practice after the purchase?
In some situations, you may want to protect the cash flow of the practice initially by having the seller stay with the practice, providing dental services during a transition period. This can be particularly important during the first few months following the purchase. Each transition should be handled on an individual basis — in some situations it is most advantageous for the seller to stay – while in others, it may be best for the seller to leave as soon as possible after the sale, staying only long enough to finish up any cases in progress.
Another common mistake made is allowing the seller to continue working in the practice for a longer period of time than the practice can support. As we discussed earlier, protecting the initial cash flow of the practice by having the seller work for you can make a lot of sense in certain situations. However, before agreeing to such a arrangement, make sure that you have constructed accurate cash flow projections showing you how this will impact your bottom line.
5. What are some of the most common mistakes made when purchasing a practice?
Business decisions do not come without potential for mistakes, and purchasing a dental practice is no exception. Though the track record for dental practice acquisitions is excellent, there are still certain pitfalls to watch out for.
One of the first mistakes made is paying too much for the practice based on fair market value. A similar problem occurs when the terms of the purchase are not structured with enough flexibility to allow reasonably good cash flow during the payout period. The terms of the purchase (that is, how the payments are structured over time) are often equally (if not more) important than the price. Both of these problems can be eliminated by utilizing the services of an experienced transition consultant to value the practice, as well as to suggest terms that will make economic sense for the buyer.
Another common mistake made is allowing your advisors to negotiate your proposed practice purchase to death. You see, some advisors that you hire for the job often think that you want them to be your “hired gun”. They feel almost compelled to look for as many things wrong with the practice as they can, so that you’ll feel they’ve really “gone to battle” for you. They often treat the situation like a divorce instead of a marriage like you’d prefer – a marriage. Remember –a win-win end result should be your goal, so be extremely careful that your practice transaction (as well as the relationship you’re trying to establish) isn’t destroyed in the process of negotiating a fair deal. I have seen many excellent opportunities lost this way – that is, great practices opportunities that were “negotiated to death” by the advisors, only to be lost to another purchaser who recognized a good opportunity when he saw it.
6. What type of lending institution should I use for financing for the purchase of the practice?
Another common mistake made is using the wrong lending institutions for financing. Traditional banks are notoriously clumsy when it comes to approving loans for the purchase of an established dental practice. They often act like they are doing you a favor by even discussing the possibility of such a loan. Nothing can be more frustrating to a buyer than losing thousands of dollars in “lost practice income” while waiting weeks and months for the loan to be approved, the funds to be distributed to the bank lawyers, and the closing date to be agreed upon.
There are specialized lending institutions that will loan up to 100% of the value of a dental practice based on appraisal. The funds are often available within days of providing them with requested information. This can be a great benefit to both parties, but is especially helpful to the buyer, who is usually anxious to begin making an income. I highly recommend checking-out these new loan sources as sources for practice purchase financing. They know the process, they service their loans quickly, and they understand the needs of dentists. .
7. Who should I use as an advisor to oversee the purchase of the practice?
A common mistake that I see young dentists make is seeking advice from the wrong people – often they will talk to other dentists they may know, rather than seeking out an experienced transition consultant. Another is using advisors with titles that sound like they ought to know what they are doing, but often they have had little or no actual experience in handling dental practice transitions. Be sure to hire a consultant who is willing to give you a list of referrals of other buyers and sellers that were happy with the results, and felt that they were treated fairly. Hire one with a win-win attitude.
Once you are sure that the location of the practice you’ve chosen to purchase is in a geographic area that you and your family will be happy with long term, make sure that the specific location within that area will continue to be a good one for the practice.
Make sure the terms of the purchase price will allow you to make a reasonable living while paying off the practice. And remember to check with some of the new lending institutions that loan money to dentists strictly for the purchase of established practices. They are quick to respond, and are willing to offer a number of flexible payment plans.
Be sure to choose right transition scenario that best fits your situation. Remember, in most situations, the patients will transfer to the new owner without any extended working relationship between the buyer and seller after the sale – and if you are able to maintain the normal and necessary production of the practice without the help of the seller, then keep the transition time to a minimum if you wish. However, if the seller’s production is necessary from a cash-flow perspective for some period of time, then consider setting up such an extended working arrangement with the seller following the purchase.
And finally, choose an experienced transition to help you with the purchase of the practice. This individual can advise you on the price and terms of the practice, provide practice valuation services, negotiate the terms and conditions of the sale, and provide extensive practice sale agreements that have been specifically designed for dental practices – all the while providing comfortable insulation between you and the seller. And most importantly, hire a consultant who has a win-win attitude – – all is lost if you enter this arena from an adversary position.