Thursday, December 3, 2015

Why You Need Certain Information for Your Due Diligence – Part I

I decided to write this blog series mainly because of the pushback we get from sellers advisors on some of the information we ask for when representing the buyer. The first item I’ll discuss are W-2s by year along with an employee roster for that year noting positions, average hours worked per week, hourly rate and any other benefits received.
Naturally one of the first responses we get is “why do you need to see the W-2s, all that information is either on the tax return or in the practice profile under the staffing section”.
Unfortunately, while the advisors mean well, they’re incorrect. The tax returns don’t list each employee, their wages, the department they work in, the hours they work, their hourly rate or the benefits like paid vacation and sick time. The tax return does show total wages; maybe an expense category called employee benefits and/or group insurance, however, it won’t tell you how much is for the staff and how much for the owner.
The practice profile may list this info in more detail, usually ONLY for the current year though and we all know employees come and go and sometimes the practice changes on the number of staff, etc.
Another reason we want to see the details is to help the buyer assess the performance of the practice. We want to be able to tell the buyer what percentage of revenue is assistant wages, hygiene wages, front desk wages and admin wages. We also want to be able to verify any adjustments the seller’s advisors made to wages for owner family members who may get paid, but their compensation may not be market value. While we’d like to accept their adjustments as accurate, you’ll see below it’s not always the case.
So here’s a list of real life experiences we’ve encountered by having the W-2 and employee roster information:
  1. I’m in the middle of an assessment right now where the owners’ wages per the tax return were shown as $210,000 while the W-2 showed $260,000. Why the difference? The owner took a $50,000 bonus in December and when the internal p&ls were prepared they were coded to office wages (front desk/admin) and the tax preparer used the p&ls to prepare the tax returns. Needless to say, after normalization adjustments to overhead it was still overstated by $50,000.
  2. We’ve seen on numerous occasions where the seller’s advisors who prepared the work to establish an asking price made reductions to overhead for family wages based upon what the seller told them about how much their family was getting paid. Unfortunately, that information was for the current year and not necessarily the same for the prior years, and the advisor assumed the same reduction in prior years for the family wages. In one case, the reduction was $35,000 for three family members where the owner JUST put them on payroll for the first time. So the $35,000 reduction in prior years was incorrect.
  3. We had a case where the advisor reduced owners wages to normalize overhead by the tax return wages noted on line one for “officers” which most of the time is JUST the owner. They also reduced the staff wages by the spouses’ wages of $75,000. That would have been fine EXCEPT the owners wages were $75,000 lower than what was stated on the tax return because the tax preparer added the spouse wages to that line since she was listed as an officer. So they reduced overhead by the spouses’ wages TWICE.
  4. We’ve seen on numerous occasions where potential buyers will back off their pursuit of a practice because the total wages are very high as a percentage of revenue compared to the norm. However, when we break it down by department and realize the hygienist and front desk wages as a percent of revenue is fine and it’s the assistant wages that are out of whack, the potential buyer reconsiders because they know they can likely improve upon that issue fairly easily.
  5. We’ve seen advisor worksheets that reduce overhead by the amount the associate was paid in wages for all years, again, based on current year information. However, when we get the W-2s for prior years, we see that the reduction for prior years isn’t accurate. The advisor simply assumed the associate made about the same.
  6. And lastly, my personal favorite…..we’re assessing a practice and when we ask for the W-2s we get a LOT of pushback….the seller and their advisors kept insisting we didn’t need them, the wages on the tax return were accurate and they could give us the breakdown by department. We insisted and the buyer was willing to walk away if we didn’t get this info. When they finally decide to give us the info they then proceed to tell us the W-2 totals will be greater than the tax returns because the doctor also works as an IC about 30 minutes away and receives 1099 income personally and they allocate the wages between the practice tax return and his IC income. Hmmm, ok, well let’s see the sellers’ personal return where this activity is being reported so we can review that and verify the allocation seems reasonable. Well, they resisted that of course & finally told the buyer they were no longer interested in selling the practice. Here’s the kicker, just about every overhead expense was on the low end of the normal range if not below the normal range and we suspect they were paying quite a bit of the practice overhead FROM the IC bank account (the personal bank account) and, therefore, making the profit look much more profitable then it appeared.
The fact is in the vast majority of the assessments we do the wages reconcile with the tax return and the adjustments made by the sellers advisors are accurate. Still, by having this info we’re able to provide so much more info to the prospective buyer about the wages statistics on the practice that goes beyond the price.
Written by Tim Lott, CPA, CVA. Send your questions to tlott@dentalcpas.com.
For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling 844-DENT CPA  or emailing info@dentalcpas.com

Thursday, November 12, 2015

Getting A 2nd Opinion On Your Tax Return

Our Dental CPA team recently reviewed the 2014 income tax returns for a prospective client and were shocked at some of our findings. Had we been engaged for a year-end tax planning meeting well in advance of 12/31/14, this doctor would have saved almost $35k in taxes and other areas. Here’s what we found:
–         Owner Wages Too High
The client paid themselves wages of $130k which created an S-corp loss of $30k!(Yikes). The problem is they did not have a basis in their S-corp so the $30k loss was NOT deductible. Instead, what they should have done is kept their wages at no more than $100k and the S-corp income would have been $0 which would have lowered their income tax bill by at least $10k.
–         Spouses Wages Too High
We learned that they also paid their spouse to help manage the practice, which is a good idea, however, instead of a wage of $60k they should have kept it around $30k and saved $4,500 in payroll taxes on $30k of wages. In addition, they had S-corp losses from prior years to use up so the additional S-corp income of $30k that would have resulted would NOT have been taxed, saving another $10k in income taxes.
–          Not Reporting All Expenses
There were expenses missing or almost non-existent on the client’s corporate return such as meals, entertainment, automobile expense, travel expense, etc. We were told that these expenses existed, however, their preparer told them they were too risky to take even though we knew they could be substantiated. By failing to report these expenses, the clients likely missed out on at least $5k of deductions costing them around $2k in taxes.
–         Owner Occupied Rental Activity Loss
The Corporation rents the space they practice out of which the doctor owns personally thru an LLC. The activity generated a loss of $2,500 on the individual tax return which was not deducted and as owner-occupied real estate and making the proper election they were entitled to that deduction costing them $800 in taxes.
–         Other Unaddressed Issues
There were a couple other issues with the returns resulting in an additional $1,500 in taxes that could have been avoided. They also had the wrong retirement plan that likely cost them around $5k in unnecessary employee contributions.
Do yourself a favor and contact our Dental CPA team. We are happy to provide 2ndopinions on tax returns as a courtesy. There may be something that you can do BEFORE the year ends to lower your tax liability for 2015. Our team is here to guide you through the necessary steps. Contact us at 844-DENTCPA (336-8272) or email info@dentalcpa.com.

Wednesday, October 28, 2015

Production by Procedure Report in Practice Acquisition.

Here is a guest blog post from Dr. Richard Wyne, DDS

The production by procedure report is a very simple report to review when doing your due diligence on a potential buying opportunity that offers a wealth of information. A quick scan allows you to gauge the size of the practice, search for fraud/malpractice and shows you how the previous dentist practiced. All of this information can tell you if this is the right practice for you, or if you should keep looking.

The first and most obvious is the fee schedule. From this report, you can either directly see the fee schedule or do some quick division to find out what the doctor is charging. If the doctor is charging appropriately for the area? You can contact the company Renaissance for a quick area fee assessment to see if the previous dentist’s fees are high, low, or just right. (They are never just right).

Super high fees will be tough to justify to patients as the new doctor. A longer transition may be needed.

Average fees require little to no change initially, but some minor tweaks can bring in more money.

Unusually, low fees can be good and bad. Good in that if you raise them the office will make more money. It is bad in that the previous doctor has most likely been attracting patients looking for the lowest fees. Any noticeable change will send some of these patients running. So the patient count is actually lower than it appears because you will be losing some.


On to codes.

Perio vs prophies. Are they doing 4910, and 4341/4342? A lot of old docs do not at all. Some don’t even own a perio probe. That means you are going to have a lot of patients with undiagnosed perio. It is a train wreck to convince them. So expect a lot of work maybe a few years to build up trust but an increase in profits. On the other hand, if they are doing more patients with quad scaling than prophies they are probably over diagnosing. To keep income up you would have to continue doing that (committing fraud/malpractice).

Prophies+perio vs x-rays. A lot of old docs have weird x-ray policies. Some never take FMX/PAN's, some take 2 BW's instead of 4, and some take them every 6 months some every 3 years. Some take PA's at every visit on every patient.

So do the math. They did 1000 prophies and took 250 sets of BW's. That means they are doing BW's approximately every 2 years. If you up it to once a year you'll double the income coming in from BW's. If they are doing 1000 prophies and 1000 BW’s that means every 6 months which is overkill for most patients. Your best case scenario is an office that takes x-rays less frequently than you are comfortable with. The office would make more money on day 1 after you took over. Worst case scenario is an office that takes x-rays more often than you are comfortable with. The office would lose money as soon as you took over.
If they only do 2 BW’s at a time which some older docs do, you could increase profits a little by doing 4 which is generally the standard of care.

Are they taking 1000 Pa's and doing 1000 prophies. That means they are taking a PA per patient so probably fraud there. Some insurance companies are going to begin requiring scripts for every PA. You can assume 100% of patients don’t need an individual PA taken on them and taking way too many single PA's is a way some offices try to increase profits. It’s also sometimes done instead of an FMX to increase billing. If you see unusual amounts of PA’s per cleaning apt ask why.

How often are FMX/PAn's are done? Insurance covers every 3-5 years so 1000 prophies and 166-100 would be right on that line. Fewer means they are taking less, more means they are taking more. What frequency are you comfortable with? Also more FMX/PANo’s than normal can come from other sources. Lots of new patients will mean more than typical amount of PAN/FMX so compare to NP count given by office and to code 0150. A new Pan machine will also greatly elevate the amount of Pan’s being taken. That number will die down with time but could give the practice a massive bump that you may not get to cash in on as it dies down.

Example: the previous dentist takes no FMX/PAN’s, buy’s a PANO one year before practice goes on the market. Every patient is due. Pan to prophy ratio can be massive 50% or more. Remember it will not stay massive it will die down once everyone has had their pan so be careful.

Comp exam count will give you NP count if they doing it right. So when the doc lies to you and says they get 30 NP's (they always overestimate) a month but do 30, 0150's a year you know they are way off.

Limited exam 00140 some docs charge some don't. See how many they are charging and make sure it is in line with your personal practice management philosophy or account for the difference in income. 09110 palliative exam same thing see if they are using this code.

Fl varnish. Are they doing it to adults? Look for the 1206, 1208, 1205. Various other assortments of codes are used for this. Sometimes it’s processed as an application of desensitization medication. Compare to the amount of kids in the practice. Do you want to do it on adults? Income could go up or down based on the answers and what the existing office does.

Pedo prophies 1120. How many did they do in a year and divide by 2. That's how many kids are in the practice roughly. Some doctors just don’t see kids. If you see very few pedo prophies either the doctor doesn’t see kids or there just aren’t any kids in that demographic. If they don’t see kids and you do, expect a small boost. If you hate kids and the office does more 1120’s than 1110’s. You are in trouble.

1351-1352 check sealants per prophy. If they are doing a bazillion then they are an office that seals every groove on every patient adult or child. Are you ok with that? Is that how you practice? If they never do any there's a chance to increase profits there.

Fixed
Crowns/exam Insurance companies say around 20% is average.
So for every 100 exams that's 20 crowns. Personally I do a lot less, more like 10% but if the office you are looking at is rocking 50% - they are crowning everything. If you are more conservative you could see a massive decrease in collections. If the office is far lower, doing just a couple %, they may be doing a ton of massive fillings. Check the big filling/core/big amalgam codes.


Look for inlays/onlays. Do they do them? Do you want to do them?

Are they doing amalgams or composites? Check that one out too. If they do nothing but amalgam that's what patients will expect you to do. You can change just expect some resistance and plan on still doing some amalgams.

Are the composites direct or indirect? Different codes that pop up for indirect composite inlays/onlays.


Specialty Procedures.
Look for endo/ortho/oral surgery/dentures/implants. Do they do them? Does it make up a large part of the practice?
If only oral surgery code he uses is 7140 then they are only doing the easy ones. It also gives you an idea of the patient base. If they are doing a butt load of dentures, you better like dentures because that's who's in your office. If the doctor does procedures you do not do, you will make less money. If there are procedures the doctor does not do, and you are proficient at them, you will make more money.


You can also get a total patient recall count from (prophies+perio maintenance per year)/2. That gives you a real ballpark of whether there is a good recall system in place or if the office is more of an emergency clinic. If the total patient count given to you by owner/broker, is similar to (prophies+perio maintenance per year)/2, then this is a hygiene driven practice with good systems for retaining patients. If the numbers very widely, then there are a lot of emergency patients, who don’t come in for regular care. Neither is bad it just helps to know what you are getting into. Also, it’s nice to separate out the count. Dr. says 1000 active patients in practice. Last year they did 500 prophies.

That means 250 recall patients and 750 patients who come in when something’s wrong. You can re-verify that data by comparing it to the 0140/9110 codes. It won’t be perfect because some patients only come in once a year for cleanings or every 8 months, but it gives you an idea.


Finally, look for fake codes. Non-ada codes they use to track things or upcharge. Figure out what they are and why they are used. How much money comes out of these codes?

Thanks for reading.

Written by Dr. R. Wyne, DDS

Dr. Richard Wyne is a 2011 graduate of
the University of Maryland. 
He practices in Rockville, MD.


Monday, August 10, 2015

Part V: What's Most Important To You When Looking To Purchase A Practice

This is part five and the final part of my five part blog on “What’s most important to YOU when looking to purchase a practice? In case you missed part I, there’s a great thread on www.dentaltown.com asking this question and it got a lot of great feedback from people with different perspectives. As a reminder, I won’t be telling what SHOULD be important to you, that’s for each doctor to decide and prioritize for themselves. I’m just giving you some food for thought as you contemplate purchasing a practice.

Part I and II revolved around the revenue and expense portion of the practices cash flow and assessing the asking price and practice performance while part III addressed the people issues related to a practice purchase. Part IV addressed the location and facilities aspect of a practice purchase.
Part V will include all the other aspects of what should be important in buying a practice that weren’t covered in the first four blogs.

Let’s talk about potential, I know certain brokers and advisers will use this as a selling point for some practices. Should that be important and if so, how do you quantify it? In terms of its importance, it depends on you, the buyer. You see, in my opinion, in general, the value of a practice should not be influenced by its “potential” since potential is basically based upon someone’s opinion, and we’ll all likely have a difference of opinion. Also, there’s no guarantee of potential. Can it be quantified? It can be, however, it’ll be based on projections, opinions, assumptions and therefore the weight you give it should be very low. That said, a buyer should certainly consider potential in certain situations. For example, one such situation may be where the practice has hygiene production that’s 40% of the total production instead of 25%. If these are the facts, then the dentistry could be twice as high as what it currently is and that is where one may be able to quantify potential.

Then there are situations where the hygiene production is less than 25%, maybe 10% or 15% of the total production. This begs the question what kind of dentistry is being produced and if the dentistry isn’t done on “regular” patients of the practice, where are these patients coming from? Even more important is can you, the buyer, attract the same kind of patients? I recall a practice purchase I was advising a buyer on where the dentistry was 90% of the total production when the norm is 75%. So what was being done to produce this much dentistry and where were the patients coming from? Turns out the owner was routinely giving seminars in the area on full mouth restorative type dentistry and they had made a name for themselves to other local GPs, specialists and other healthcare providers and that was feeding these very large restorative cases. Most buyers would NOT be able to step into the sellers shoes and replicate the kind of production this doctor was doing. You have to understand how the patients are finding the practice.

What about the transition strategy? Is it important to you to have the seller available after settlement for a period of time to help transfer the patient goodwill to you, the buyer? Or are you confident you won’t need them and ask the seller to leave immediately. This gets a lot of debate on Dentaltown. Sometimes the decision is driven by the size of the practice. If the practice is so small there simply won’t be enough work to keep the seller around whereas of the practice is large enough there may be a need to keep the seller around to help maintain the dentistry. So what about those practices where you may not “need” the seller stay, however, you can afford to have them stay for a limited number of hours per week for a limited number of weeks or months. How important is that to you for the retention of goodwill?

Maybe this next point should have been the very first point in part one, is the practice in an area you want to live and work? Or would you prefer to have a practice that’s comfortably far apart from where you live so you’re not running into your patients when you’re our socially with the family and friends? Again, I’ve seen strong arguments for both. On one hand, some believe to have a successful practice you should be integrated into the community, attending the local places of worship, joining local social clubs and having patients that are also friends and neighbors. On the other hand I recall a townie stating the last thing they want is to go grocery shopping and having to bump into a patient in every isle and chatting about stuff. They prefer to keep business separated from their personal lives. I bet most buyers don’t give this enough consideration.

The last issue that will be important is the advisers each party is using. I could have included this in part III when we discussed the “people” aspect of buying a practice, however, I wanted to stick with the staff and patient base for that part.

The fact is, advisers can make or break a deal so this is a VERY important piece of the puzzle. Having the wrong adviser on the sellers’ side may keep a seller from selling to qualified buyers or selling with terms that will not be favorable to the seller. The same could be said for the buyers, having bad advisers may keep you from acquiring a practice that may be perfect or one with lots of potential. Having the right advisers on either side can keep you from making a HUGE and costly mistake or enable you to work through the purchase transactions in an orderly, efficient manner so that both parties get what they want neither party feels like that get a raw deal.

As the buyer, make sure you’re working with knowledgeable advisers and make it a point to find out who the seller is using as their advisers. Find out who the broker is if one’s involved, who their CPA and attorney is. Be prepared to share this information with your advisers in case they know something about the sellers’ advisers you need to know.

This ends my five part series on “What’s most important to you when looking to purchase a practice?” Hopefully I’ve given you some good information to consider when you’re looking to purchase a practice and I would encourage any potential buyer to make sure they sign up with Dentaltown, do a search for this specific thread I’ve mentioned and peruse all the practice transition forums to gain some great information on practice transactions, what traps to avoid and what steps to take.

Written by Tim Lott, CPA, CVA. Send your requests to tlott@dentalcpas.com.

For more information on our services, please fee free to contact one of the members of the Dental CPA team by calling 844.DENT CPA (336-8272) or emailing info@dentalcpas.com


Wednesday, July 8, 2015

What’s Most Important To You When Looking To Purchase A Practice ? Part IV


This is part four of my five part blog on “What’s most important to YOU when looking to purchase a practice ? In case you missed part I-III, there’s a great thread on www.dentaltown.com asking this question and it got a lot of great feedback from people with different perspectives. As a reminder, I won’t be telling what SHOULD be important to you, that’s for each doctor do decide and prioritize for themselves. I’m just giving you some food for thought as you contemplate purchasing a practice.

Part I and II revolved around the revenue and expense portion of the practices cash flow and assessing the asking price and practice performance while part III addressed the people issues related to a practice purchase.

In part IV we’ll address the location and facilities aspect of a practice you’re looking to purchase.
Likely the most important part of the “location and facilities” aspect of the purchase is the demographics of the area followed by the actual location of the space. So what does that mean ?
When we talk about the demographics of the area of the practice we’re wondering if the area is a good area to maintain a dental practice. What’s the competition like ? Is it saturated with other dentists ? Is it a growing area for the foreseeable future ? Or is it a declining area where people (potential patients) are leaving & moving away ? What about the patient demographics ? Is it mainly white or blue collar ? What about the average annual household income ? What about the age demographics ? Is it primarily a retirement type community ? Or an area with younger families ? Is it an area you’re going to live in ? Do you want to practice in the same area you live in ? These are some of the demographics questions you need to learn about when you’re looking at a practice purchase and there are companies that specialize in compiling demographic reports for prospective buyers.

Then we move to the specific location of the practice. Is it right on the street, maybe a main street with a ton of vehicle traffic ? Or maybe in or next to a popular strip mall or shopping center with a ton of foot traffic ? Or, is it “off” the road, maybe tucked back behind several buildings with no vehicle or foot traffic visibility ? Is it in a medical\dental complex with other medical\dental professionals ? These are issues that will likely determine how accessible you are or how easy you are to find. Signage also comes into play here. The actual space itself may not be as visible as you’d like, however, maybe you have great signage that fronts a heavily traveled road OR maybe you’re on a heavily travelled road among a lot of other businesses but due to signage restrictions the space isn’t easily identifiable as a dental office ? These are issues that a prospective buyer needs to consider when they are looking at a practice and during the office visit.

What about the specific space? Has it been kept in great condition or is it run down?  Is it an older building that may require a lot of repairs and maintenance or a newer building that may not be high maintenance? How’s the square footage ? Does it fit your needs ? If not, will the space allow for expansion if the practice grows ? Do you see yourself in this space for at least 15+ years ?
You also need to know if the space is leased or owned. If the space is leased you’ll want to get a copy of the lease agreement and have your attorney and\or lease negotiator review it to see if it’ll be a roadblock to buying the practice. If it’s owned by the seller you’ll want to know if the real estate is for sale & if not, when would it be available. If it is owned by the seller and they’re not ready to sell you’ll need to address the lease issues as well AND make sure you’re fully protected under the lease since the landlord is also the owner of the dental practice. The last thing you want are lease default provisions that make it easy for the landlord to throw you out and regain the dental practice. If the space is for sale you’ll have to decide IF you want to buy it at the same time as you buy the practice. If not, you’ll want provisions in the agreements that give you certain rights so you can own the property if & when you want.

Now we move inside the space. We talked about the “building” but what about what’s inside? How many operatories are there? Are there enough ? How’s the actual space, is it large enough? What about the layout ? Does it have\allow good patient flow throughout the space? How’s the technology? Is it current or outdated? What about the dental equipment? Is it brand new, almost new, mostly old, or so old it needs immediate replacement? What about the furniture and décor? Is it “fresh” or is it from the 1970s with old, dark wood paneling?

You may need more than one office visit to know all you need to know about the space as one of those office visits will likely be to do a chart review\audit which can take some time. One thing we recommend is when you do visit the office and if you do visit it more than once, you should take to opportunity to video tape\record your office tour and replay it several times to make sure you know all there is to know about the space, furniture, equipment and décor.

Lastly, you’ll want to understand the office hours that are currently in use and whether or not you can increase office hours based upon the community. For example, if you’re in the middle of a city where most of the “population” is there only from 9-5, Monday thru Fridays, then expanding into evening or weekend hours may not be beneficial. However, if you’re in a more rural area, maybe around schools, early morning, evening and weekend hours may be more valuable to you than the middle of the day hours. You’ll have to decide what you want now and in the future.

Many prospective buyers initially overlook the importance of the space, location and area and start out focusing on the financials of the practice. Instead, it may make sense to understand the area first, then when you’ve identified practices for sale in the area, do a drive by of the specific location and get some firsthand knowledge of where it is and what it looks like form the outside. If that all checks out then it may make sense to gather specific practice information to continue your pursuit of possible ownership.

Part V of this series, the last part will focus on some of the other issues that prospective buyers may find important about buying a dental practice.
 Written by Tim Lott, CPA, CVA

Send your questions to tlott@dentalcpas.com
For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling or emailing info@dentalcpas.com.