Real Life Dental Practice Purchase Case Studies

These are my top five examples of how proper due diligence can avoid the overpayment for a practice, or worse, a buyer having to claim bankruptcy!

1.       Missing dental supplies – Normalization, good intentions, bad results

I gathered the information from the seller’s advisors and prepared my analysis worksheets. I noticed there wasn’t a specific category called dental supplies. That may not be an issue as they may have been thrown in with office supplies and expenses which were around 7-8% or revenue - right ? However, since office supplies and expenses run around 1-1.5% the person who did the valuation eliminated around 6% of the office supplies and expenses, adding profit of approximately $50,000 to the bottom line. So I ask two questions: the first: “why did you reduce office supplies and expenses from 7-8% down to 1-1.5%?” The reply was “because office supplies and expense are usually in that range and when we asked the seller why they were that high they said that’s the category that they run their perks through”. Fair enough, however, my next question was “so where are the dental supplies? Don’t they typically run 4-7%?” ….silence… so then I ask “isn’t it likely that the dental supplies were included in the office supplies and expenses and that’s why they’re 7-8%?” I was right and the price dropped by over $150,000 because of this one oversight!

2.       Income, now you see it, now you don’t  – Poof post settlement

After gathering all the information to prepare my assessment I was comparing the annual practice management reports of production, adjustments, collections by provider and everything looked normal. Then, I compared the practice management collections to the collections reported on the tax returns and the tax return collections for the past three years were higher by at least $85,000 and $110,000 at the most. Generally the collections between the practice management reports, tax returns and profit and loss reports are different, however, they should be close and most of the times the practice management report collections are HIGHER than the tax returns, so this was strange. After asking the question to the broker, who had to ask the seller, we learn that the seller was working a day a week in another office about an hour away from his office to earn extra money. The seller did nothing wrong as they were reporting the income for income tax purposes as they should. However, the broker only used the income tax returns for their valuation (apparently) and failed to compare them to the practice management reports. Therefore, the practice price was inflated by more than $75,000 because that income would have disappeared right after settlement…at least for the buyer !

3.       Prostho practice in sheep's clothing – Do the referrals even know you?

I was hired by a doctor to assess a GP practice that was doing just over $1 million per year in revenue, with overhead lower than 50% at a price of $765,000. On the surface nothing seems out of place so far. So we ask for the information necessary to assess the price and the practice performance and I begin my analysis. Right away I notice staff wages are hovering around 15-18%, strange, but great if that’s what the seller has been able to achieve in a GP practice. Then, as I’m going through the production\adjustments\collections by provider I notice hygiene production is only $90,000 on average. I then compare the staff wages and sure enough, hygiene wages are only around $35,000 annually. So I do some quick math and determine the dentistry should be around $270,000 for a GP practice of maybe $400,000 at best…so where’s the $1 million in revenue coming from? The seller does a ton of full mouth restoration work and we ask where these cases come from. The reply is through seminars and referrals from other professionals. Apparently this doctor had made a name for himself doing these full mouth cases and was getting referrals from other local GPs, plastic surgeons and ER docs that saw broken teeth accidents. Unfortunately the broker had valued the practice as though it was a GP practice without doing any analysis on the make-up of the revenue. My client really wanted this practice and against my advice they agreed to a $600k offer with $50k contingent on future revenue. I had suggested a base offer of $350k (the premium price for a GP practice doing $400k) plus $150k contingent on future revenue because I suspected the buyer would NOT see much, if any referrals from these other professionals. I was right, revenue in the first 12 months dropped to just over $750k only because part of the deal was that the seller would remain for two years to finish up some cases and help with the goodwill transfer. Revenues in the next 12 months barely topped $700k. On the upside my client didn’t get sucked into paying $765k, the downside is they overpaid at $600k and they are feeling it now.

4.       Invisible perks – No double-dipping allowed!

I had gathered much of the information needed to assess the asking price for a practice before getting the valuation that was performed by the broker. After receiving their valuation report I saw that their asking price was more than $300,000 higher than the top end of my price range…which is quite unusual. So as I review their valuation report I noticed that the broker had added back to profit exactly $100,000 each year and labeled it “owner perks”. This was in addition to the correct addbacks of pension, automobile, travel, ce, meals & entertainment, and other expense category normalizations. So we asked for a breakdown of the $100,000 of additional “perks” and the reply was “we asked the owner how much in perks they run thru the office and he replied well over $100,000, so we just stopped at $100,000”. Then I asked “did you ask the seller what made up the figure he gave to you? We need to see the details”. They hadn’t, however, they did after we brought it to their attention and the owner was including many of the adjustments they broker had already correctly made so in essence, they were adding back many of these expenses twice. They took the practice off the market shortly after that, we suspect because the seller realized he wasn’t going to get 95% of revenue for his practice!

5.       Created profits – The tale of two offices

A buyer wanted us to evaluate an opportunity where he was offered to purchase the satellite office from a doctor who had a primary office about 30 minutes away. Our first question was if the seller kept these locations in two separate entities and the answer was yes. Great, that’s usually good news since having two locations in ONE entity can be a very complicated assessment as you have to try to separate the two locations just to evaluate one of them. initially we only got the tax returns and we saw a practice doing about $600k in revenue with expenses of $300,000, 50% overhead… that’s pretty good. They had established a price of $475,000 for this practice which seemed reasonable based on everything we saw, especially the low overhead. So as the asset purchase agreement was being drafted and negotiated we continued to ask for the practices production reports and w-2s for the staff. We finally get the information just about when the asset purchase agreement was getting finalized (coincidence you think?) so we compared the w-2’s with the wages deductions on the tax returns and the w-2 totals were higher… that’s not right. We then compared the PM collection reports with the collections per tax returns and the tax returns were higher… that’s not right. Here’s what we determined even though the seller would not admit it: 1. They were reporting some collections from the primary location into the satellite location to inflate the income. And 2. They were paying\reporting some of the satellite expenses from the primary location to deflate expenses. the result was the appearance of a highly profitable practice worth nearly 80% of revenue when it was a practice probably doing between $500k-$550k in revenue with expenses closer to $350k, 67% overhead worth maybe $300k, a price difference of $175k.

Buyers Beware! You really need to make sure you perform a thorough due diligence and if you don’t know how to do that or what to look for you could be setting yourself up for failure at worse, a very difficult road for the term of your loan at best.

The Profession of Retirement from Dentistry

This is a guest post from one our earliest dental clients.

It seems to me there are a lot of things about retiring from dentistry that need to be addressed.  Having been in retirement for 2 years following 50 years of active practice in the specialty of Oral and Maxillofacial Surgery, the lesson to be learned is that one must study, prepare, and understand the "profession of retirement."  Just as we studied hard and long for our dental career, so should we prepare for this phase so that our natural desire to be helpful, caring, loving, meticulous, generous, exacting, tolerant and all things that combine to make us good practitioners, should be evident when we no longer take that journey to the office every day.

The first obvious preparation for retirement is financial.  Those of us who were fortunate enough or wise enough to have good advisers probably feel quite smug about our situation at the end of our career.  However, this is not an end, but the beginning of a new journey and in most cases, it is an unknown journey.  The use of time, the discipline of daily planning, the desire to contribute are but a few of the areas of preparation that need to be addressed and to be learned.  The financial issue is so important.  To that end, I would advise every student, young practitioner and even the mature doctor to make it mandatory to contribute to their retirement fund. It is essential that they have the best advisers that are available and willingly compensate them for their time and talent just as we were compensated for ours.  This begins with an attitude first.  Then the accountant can bring together the people necessary to reach the goals, needs, and wants that you are seeking. It is never too late to begin this phase of the journey.  What are the financial goals, what are the needs (health, insurance, family obligations) etc. that are required to give you financial stability in retirement.   If this sounds like a team effort, you are correct.  Just as we had a team in place (front desk, treatment coordinator, chair side assistant, RN, etc.) so do you need the team for retirement.  That might just be a coined phrase - The Team For Retirement. 

This begins with the accountant and extends to the banker, insurance broker, investment adviser along with other specialists as necessary in a given situation.  Then a goal is made, an end-point established and success for financial security become a reality.  It only happens with a plan and the plan must start with mandatory investment while earning power is there.  It can even start with the senior practitioner if he was not wise enough to begin in "embryo."  The first step is always the hardest, but it is the beginning to that new journey called retirement.

More mistakes made and lessons learned next time.

Dr. Donald B. Lurie, DDS

donald.lurie@att.net

phone:  717-235-0764

cell:      410-218-2228

What Percentage of Production Should a Dentist Pay an Endodontist?

I was hoping for some recommendations for how to pay my Endodontist. 

We are a GP practice, and for the past year we've hired an Endodontist to work a couple days a month for us. We have given him 37% of production of his specialist fees; however recently he wanted to know if we would give him 50% of production of his specialist fees.  I guess this is what he is used to receiving as an associate at endodontic offices, however I didn't know what was standard when an endodontist works in a GP office.  

He pays for no instruments, materials, equipment etc, and has his own chairside assistant at no expense to him. 

Thanks!

Generally 45-50% of COLLECTIONS. 

If they want payment on production make it adjusted production.

This first appeared on Dentaltown.

Expectations of Dental Associateships

Here is another guest post from our friends at ETS Dental.

Associateships begin and fail everyday. Why do they fail so often? A simple way to answer this is that either or both sides failed to meet expectations.More specifically, the expectations were never even laid out at the beginning, so one side was letting down the other and never knew why or that he/she was doing this.

Some common feedback I get from owners when I ask them about their previous associates is that it didn't work because that doctor could not produce enough, or that doctor did not want to buy-in, or that doctor needed more mentoring than owner was willing/able to give.

Upfront communication during the interview process could have helped a lot of associateships succeed better, or simply never start in the first place. It is better to find the right person rather than hire the wrong person and have to repeat the interviewing and onboarding process over and over again.

What the owner/practice should lay out upfront:

(simple examples, not comprehensive)

1. Production goals


2. Required schedule


3. Transition plans


4. Associate's leadership role in the practice in relation to staff


5. Compensation


6. Whether the associate will have any say so in equipment, office systems, and staff management


7. Insurance accepted by the practice


8. Particular cases or situations which must be handled by the owner


9. What must be referred out

What the associate prospect should lay out upfront:

(simple examples, not comprehensive)

1. Income goals


2. Transition or practice ownership goals


3. Skill sets


4. Comfort level with various cases and patient types


5. Length of time willing to commit to a practice/area

Remember not to rush into hiring an associate or becoming an associate when you still have a lot of questions or uncertainties.

Related articles by ETS Dental you should check out:

1. Will My New Associate Be Here In 6 Months?


2. Associate Dentist Interview Tips


3. Can your Dental Practice Support an Additional Dentist as an Associate or Partner?


4. Resources for a Practice Owner Preparing to Interview Associate Candidates

Carl Guthrie is a Dental Recruiter with ETS Dental. He covers the Western U.S. Region. Carl can be reached at cguthrie@etsdental.com or www.facebook.com/carl.guthrie

Top Employer Concerns for 2013

This is a guest post from our friends at Bowie and Jensen law firm.

Many employers may be surprised to learn that their personnel policies and procedures may actually violate the National Labor Relations Act, especially if they operate in a union-free environment.  Here are the top concerns employers should be made aware of in 2013. 

Employee Manual Language

Under the National Labor Relations Act (NRLA), non-union employees have the right to engage in concerted activity for themselves or on behalf of other employees with similar concerns or complaints regarding the terms and conditions of their employment.  Protected Concerted Activity can include two or more employees addressing their employer about improving pay, workplace conditions, and safety.

This year the National Labor Relations Board (NLRB) is cracking down on the language employers are using in their employee manuals regarding concerted activity.  Language that was previously considered standard may now violate the NLRA. 

At-Will Employment Policy

Some of the common “at will” language used in basic employee manuals now violates the NLRA by discouraging “at will” employees from engaging in protected concerted activity.  Previously, at-will employees were essentially signing a waiver agreeing that their at-will status could never change and thereby foregoing their rights to advocate concertedly. 

The following two examples show the common wording that the NLRA now finds non-compliant:

“I acknowledge that no oral or written statements or representations regarding my employment can alter my at-will employment status, except for a written statement signed by me and either Company’s executive vice-president/chief operating officer or Company’s president.”

“I further agree that the at-will employment relationship cannot be amended, modified or altered in any way.”

The NLRB, however, has said that the following disclaimer language in handbooks is lawful:

“The relationship between you and the Company is referred to as ‘employment at-will.  That means your employment can be terminated at any time for any reason, with or without cause, with or without advance notice, by you or the Company.  No Company representative has the authority to enter into any agreement contrary to that employment relationship.  Nothing in this handbook creates an express or implied contract of employment.”

Those examples may appear that the NLRB is splitting hairs, but at least the agency has provided some guidance to employers which should insulate them from liability for unfair labor practice charges.

Social Media Policy

One of the biggest mistakes that an employer can make in 2013 is assuming their social media policy is NLRA compliant.  Many employers prohibit employees from posting comments that may be damaging to reputations of a company or employee. The NLRB recently found that such policies violated the NLRA. One thing employers can do is make sure their social media policy clearly states that it is not intended to restrict concerted activities.  The social media policy may include examples of activities that violate the policy and definitions of the terms used in the policy. 

Criminal Background Check Policy

Employers who frequently obtain background checks or consider arrest records should review their policies. The Equal Employment Opportunity Commission (EEOC) is aggressively pursuing compliance with its 2012 guidelines on when a criminal conviction can disqualify an applicant from employment and when it cannot.   In addition to the EEOC, the Maryland’s Job Applicant Fairness Act also regulates the use of credit and criminal records for employment purposes.

Fair Credit Reporting Act

Starting January 1, 2013, enforcement of the Fair Credit Reporting Act has been shifted from the Federal Trade Commission to the Consumer Financial Protection Bureau.  Employers will be required to use new FCRA forms.  These forms can be accessed at the Consumer Financial Protection Bureau’s website.

Confidentiality Directives during Internal Investigations

NLRB has declared that a broad statement to employees that the contents of a complaint and/or investigation should not be discussed with co-workers violates the NLRA.  Employers must now show that the need for confidentiality outweighs the employee’s NLRA rights.

It is possible that an open discussion regarding a complaint or other matter would cause a cover-up of the issue.  Confidentiality is more important in instances when an employee needs protection, evidence is in danger of being destroyed, or a testimony could be fabricated. 

Employers cannot simply prohibit discussions about internal investigations.  Each case must be evaluated by the above factors before employers can prohibit employees from discussion of an investigation with co-workers.

Implementation of an Effective PTO Policy

An effective Paid Time Off (PTO) Policy should be included in the employee hand book and outline various procedures; including how much notice does an employee have to give before taking PTO and how much of an employee’s PTO can be carried over from year to year.  Employers should make sure that paid leave is earned on an accrual basis and also address whether unused PTO is paid upon termination.  In most instances you can dock hourly employee’s pay and refuse to permit them to use paid leave if they fail to provide proper notice of an absence. In addition, there are also many situations when exempt employees pay may be docked for full day absences. 

The original blog post can be found here.