Guest blogger Rod Johnston from Omni Practice Sales knows about buying and selling dental practices. Here is his expert advice on how to buy a dental practice in 16 steps.
Buying a dental practice is like getting a colonoscopy. You know you should probably do it, but it can sometimes be a pain in the nether region. But just like getting a colonoscopy, it can go very smooth if you follow the right steps and use the right professional. Here are a few steps to consider which can make for happy times in the end. No pun intended.
1. Have good clinical skills. Be sure you have the clinical skills to produce the same or more production than the average dentist. In other words, don’t buy a practice right out of dental school when it takes you two hours to prep a crown. Unless you’re super-dentist and can prep a crown in 45 minutes right out of school.
2. Buy existing or startup new. Decide if you want to start up a new practice, or buy an existing practice. We recommend starting by looking for an existing practice in the area you’d like to practice. If after a period of time you cannot find a practice and the numbers make sense in your location of choice, analyze doing a startup. Cash flow is king in dental practice financing and in paying your student loans, so look for an existing practice first and then look at doing a startup.
3. Dental Professional Team. Get professional help from professionals that specialize in dentistry. This includes your attorney, CPA, Banker, and Broker. Just like you don’t want your plumber doing your colonoscopy, you don’t want a bankruptcy attorney helping you with your dental practice purchase and sale agreement.
4. Educate yourself on buying a practice. Know how to read a financial statement, practice management reports, lease terms, etc. There is a lot of information online, such as in the Dentaltown Forums, and other areas where you can get this for free. Your professionals that you will be working with can also help educate you.
5. Find your practice. Use the brokers in the area to help you, as well as study club and state and local association contacts to find a practice of your choice.
6. Stop looking for the Unicorn! Neither a unicorn nor a perfect practice exists. Don’t cross a practice off a list because the carpet is green and you wanted brown. Or, everything else in the practice looks good, but the staff is overpaid. You can’t glue a pointy horn on a horse and call it a unicorn. But, you can change the carpet, paint the walls, reduce staff pay, add endo to the practice, etc. You will be in the practice for a long time, so don’t poo-poo the practice because of a change that the practice can handle.
7. Gather practice documents. At a minimum, you want the following:
a. 3 years tax returns
b. 3 years profit and loss statement
c. 3 years production by procedures and production by provider report
d. Copy of the current lease and any amendments
e. Practice statistics report showing patient demographics and other information
f. Aging balance
g. List of staff salaries and benefits
h. Any associate dentist agreements
i. List of any vendor contracts
j. List of equipment
k. Fee Schedule
8. Consider your offer. So you like most everything about the practice and you want to make an offer. You can work with your professional dental broker or consultant and put together an offer. You’ll want to analyze the purchase price. If you’ve educated yourself, you can do this on your own. If not, you can use a dental professional broker, CPA or consultant to help you put the offer together. The offer is in the form of a Letter of Intent.
9. Get a Loan. Banks love dentists. The failure rate is less than .0125%. Being a successful dentist is like finding a coffee shop in Seattle. It’s pretty hard to miss. Ask your broker, attorney, consultant, etc., for a referral to a lender. Use someone reputable who does dental practice financing. Do not use Suzie Q the local commercial banker. She will treat it like any other commercial transaction and try to run it through the SBA ending poorly with high fees.
10. Completing Due Diligence. After you have agreed to a purchase price and both parties have signed a letter of intent, you will want to schedule due diligence in the office. Prepare ahead of time for due diligence. Know which reports you want to run and what the plan is for the due diligence. You’ll want to truly see what the active patient count is. You will want to review charts. You will want to take a closer look at the equipment. I would also suggest seeing if the seller is available for lunch, or to at least come into the office after due diligence. This will help you get all of your questions answered by the doctor himself/herself.
11. Preparing to Transition. The real work begins here as far as the transition goes. There are somewhere between 50 to 70 items to get done prior to the closing of the sale. We have a checklist if you’d like to see it. This includes everything from setting up a legal entity to getting insurance credentials to ordering a credit card terminal.
12. Staff. All through the process, the staff is hopefully unaware there is a sale going on. The meetings and due diligence have happened in the dark of night, or on weekends all while wearing camouflage. (Kidding about the camouflage.) The reason the staff is not informed of the sale is there is a potential they may leave. Part of the goodwill of the practice is staff. If they all leave, there may be a potential loss of goodwill. We recommend the seller tell the staff when there is a 99% certainty the transaction will go through to closing. Sometimes that may mean a month before closing and other times it may mean the day of closing. Every transaction, every staff, and every dentist is different. It’s a gut feeling we get from experience. Consult with your professional.
13. Closing the Sale. Awe, the day is finally here. It’s similar to any major purchase. Some transactions require an escrow company or attorney to handle the closing. Others can be done by a broker. You will sign the purchase and sale agreement, bill of sale, closing certificate, loan documents and other agreements. It’s a pretty painless process.
14. Notifying Patients. As with staff, patients are not notified until the contracts are signed and the money is in the bank. We don’t notify patients as they may leave the practice just as staff may leave. There is a patient letter that is worked and agreed on between the seller and buyer. The cost is typically split 50/50 between the buyer and seller.
15. Post Sale. If the practice is running well, do not make any major changes for 6 to 12 months. The more changes make the staff and patients uncomfortable. Go in keeping things business as usual. Of course, if there is an ugly orange shag carpet with teal painted walls, by all means, bring the decor up to date. Also, if the practice is on a downward trend, you may need to make major changes including letting a staff member or two go, adding procedures, etc. You need to make sure it will be successful and again, your dental professional advisers can help you.
Following these steps will make your acquisition of a practice a smooth process and not a pain in the end (get it?). Because you want to step into your new practice with a smile on your face on your first day and not looking like you just had a colonoscopy.
MedTrust Capital Group guest blogger Rod Johnston has a vast amount of knowledge, experience and education in all aspects of business and real estate that provide an incredible value to every medical practice. He has managed, owned, partnered and consulted with numerous practices throughout the Northwest over the past decade. All have benefited from Rod’s experience in staff management, accounting, marketing, and practice management. Prior to Omni, Rod spent 15 years as Director of Treasury and also Director of Accounting for AT&T Wireless.
Rod is a licensed commercial broker in Washington, Oregon and Arizona and specializes in commercial real estate. He has an MBA from Seattle University, is a Certified Management Accounting, and is a member of the Institute of Business Appraisers and the National Association of Practice Brokers.