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.




Thursday, June 18, 2015

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

This is part three 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. This blog, part III will address the people issues related to a practice you want to purchase, not only the staff of the practice, the patient base as well.
In part I we addressed the insurers and ppos that these patients may be covered by and how that impacts revenue, however, what about the who, what, where, and how many in terms of the patient base. Lets drill down into these issues and why it may be important for a prospective buyer to consider the details about the patient base.
One statistic that many people feel is important when looking at a practice is what the new patient (NP) count is. Instead, sometimes its actually more important to know what the NP count can be. The problem is with some practices the seller has already slowed down and reduced their work schedule and even their production pace. This means they likely won’t be aggressively looking for NPs and really don’t have the need for them. Therefore the NP count that the seller has may seem terribly low, too low to even consider the practice. What you should be considering if these are the facts is what the NP count can be and do to get an idea of this you’ll need to do some form of demographic analysis of the area. This can be way more enlightening and important in certain situations than what the NP count was.
Another issue involving the patient base is the “active” patient count and there’s a lot of importance placed on it, rightly so. However, there’s really no set definition of an “active” patient that the dental industry can agree on and many times the seller and their selling advisor will exaggerate what the “active” patient count is. When assessing a practice here’s my suggestion on determining what the “active” patient count is, JUST for purchasing a practice. Look at the hygiene schedule ! To me, an “active” patient is one that comes in regularly for their hygiene recall appointments. So take a look at the past six or twelve months and count the number of unique patients that have come in for their recall appointments and identify any that are first timers. The rest are likely your “active” patients. That doesn’t mean there aren’t many more patients of the practice, those that still view the practice as their dental home, however, these patients only come in when they have an issue or need something, I don’t consider them an “active” patient….they’re just a patient of the practice. The other benefit of identifying the “active” patients is to understand the size of the patient base which becomes important as it impacts the buyers ability to thrive within the practice after the purchase.
You should also look at other demographic aspects of the patient base- A. Where are they coming from (zip code analysis), B. What are their ages (an age analysis), C. Their social economic background , D. Ethnicity, and E. Education and income analysis. A and B can be assessed thru the practice management software whereas C, D and E will likely come from a demographic analysis of the area.
Of course there’s other “people” related to the purchase of the practice, there’s the seller, their advisors and the staff. We’ll address the advisors in a later blog so we’ll end this blog on the team of the practice, the seller and their staff.
With respect to the seller, you should learn as much about them as possible. Why are they selling, what kind of personality do they have, what is their practice philosophy and does it match yours, after the sale what are their plans, so they need to continue to work – do you want then to continue to work, are your personalities similar and lastly, how did they approach treatment planning and how does that compare to your approach. This becomes very important as you begin to meet the patients. If you have a very passive seller who took a “wait and see” approach to treatment planning you might offend a lot of patients if you’re completely opposite and try to push a lot of treatment immediately onto the patient. If your personalities are vastly different you may also find it difficult working with the staff as they’ve become use to working for the seller.
Speaking of the staff, while we addressed their wages and expenses in part II of this blog series lets talk about some of the other staff issues you need to know about.
You want to learn as much as you can about each staff member as well. Who are they, how long have they worked at the practice, how many hours they work, what’s their pay rate, what benefits to they receive, etc. You also need to know if they’re related to the seller or have any other type of relationship with them. Generally you want to provide them a ninety day probationary period after settlement to see if they’ll be able to work with you. While it’s generally advisable not to make any drastic changes to the staff after you settle, if you find you have a very toxic person that’s one of the exceptions to the rule….you have to let them go.

The people surrounding a transition can go a long way to make or break a practice so you need to make sure you have an understanding of the people that can impact the practice and the people you will impact when you take over the practice. Part IV will cover the facilities aspect of the practice purchase transaction, not only the physical space, but where it is and the demographics of the area.

 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.

Friday, May 15, 2015

What’s Most Important to You When Looking to Purchase a Practice? Part II

This as part two of my five part blog on “What’s most important to YOU when looking to purchase a practice ? In case you missed Part1, 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 revolved around the revenue portion of the practices cash flow and assessing the asking price and practice performance. We will discuss the expense or overhead portion of the practices cash flow in this blog.

You’ll want to assess the cash flow that you will have available for the practice in which you’re considering, not necessarily what the seller had. While there are expenses you’ll have very little control or will have very little impact on YOUR cash flow, like rent, utilities, malpractice insurance, merchant services, etc., there are other expenses you’ll have the ability to control. Some of these are non-discretionary expenses like advertising, dental supplies, lab and the like and others are more discretionary ,for instance, retirement plans, computer expenses and support, office expenses and supplies, some continuing education and dues and maybe wages (I’ll elaborate more on practice wages below). There are also other purely discretionary expenses or owners perks that we don’t consider as required to operate a dental practice like the owners automobile expenses, meals and entertainment, some travel and maybe some family wages. Some of these purely discretionary expenses are easy to identify, others maybe be buried in categories like office expense and support, advertising, telephone, insurance, etc. . As a buyer, part of your due diligence is your ability to dig deeper and drill down into certain categories to make sure you understand which expenses are truly needed to operate the practice and which may not be necessary.

You need to verify exactly what YOUR overhead is going to be since it has a direct impact on the practice cash flow, which you’ll need to service the debt on the purchase price. Of course it also affects the practice price and it will help you assess the practice performance issues related to overhead. Some of the expenses are directly impacted by the procedures the seller was doing and the procedures you will be doing, they may be the same, maybe not. This is why you need to understand how the revenue is generated and how those procedures may impact your overhead.

So we spoke about the fact that there are some expenses you have very little control over and others you’ll have a lot of control over. While some believe a buyer has the ability to easily control labor costs, it’s an area where a buyer needs to tread lightly. There are many reasons a buyer may not want to hire an existing staff or let them go in short order. Maybe they think the practice is overstaffed or the employees aren’t needed for as many hours anymore. Maybe the employees’ hourly rate is too high (very common with long term employees) and\or maybe their benefits are too rich. Whatever the case is, we believe part of any goodwill of a practice relates to the staff and the buyer needs to examine every staff member currently employed with the practice and how much impact they may have on the stability of the goodwill. For example, in a very rural area, where everyone knows everyone, you may have a front desk person who’s been employed with the practice for a VERY long time, knows every patient in and outside of the practice and may be a real detriment to the retention of goodwill if a buyer were to NOT agree to hire them when they purchase the practice. On the other hand, there may be an assistant that’s only been at the practice for a month, chances are if they don’t return the patients won’t even notice. Then there are the hygienists and once again, the buyer really needs to assess each hygienist and whether or not they’ll have a significant impact on the goodwill if they aren’t hired for any reason.

The other area of labor costs that a buyer needs to tread lightly is employee benefits. We see practices where the seller has been able to afford to be VERY generous to their staff. They might be paying 100% of their family’s health insurance, providing them with four to five weeks paid time off for sick leave and vacations in addition to paid holidays and offering a very generous pension benefit. A buyer would be foolish to think they can simply go in and begin slashing these benefits without any repercussions from the staff. That’s NOT to say a buyer can’t control these benefits overtime, again, each practice and each employee is different.

There are many other areas of overhead that a buyer needs to examine as part of their due diligence, we’ve just touched upon a couple of them to get you thinking. Part three of our five part blog will talk about “people” side of a practice and the purchase transaction from a brief discussion again on the staff, to the patients and the advisors surrounding the transaction.

 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@dentalcpa.com.



Monday, May 4, 2015

What’s Most Important to You When Looking to Purchase a Practice? Part 1


My good friend and fellow townie (that’s what we call members of dentaltown.com, the forums board) Dr. Tom Bonsack posted a great thread on dentaltown with that question, “What’s most important to YOU when looking to purchase a practice?” It got a lot of great feedback from people with different perspectives so I thought I’d blog about it. Keep in mind, I won’t be telling what SHOULD be important to you, just giving you some food for thought as you contemplate purchasing a practice.

Since I am a CPA/CVA that represents buyers across our great nation I thought I’d start with some of the financial aspects that you, the buyer, may find important. This is part one in a series of five.
SO what’s the first thing you think a buyer considers when it comes to a practice they may want to purchase? Price, right? What’s the price? While this is very important, I will tell you that many times it’s NOT the most important financial piece you should be looking at. In fact, I gave a presentation at the 2014 townie meeting in Vegas on this very issue and you can actually still view that presentation here.

So what could be more important than price when it comes to the financial aspects of buying a practice? What about cash flow? Sometimes both buyers and sellers get so focused on price that they overlook cash flow, after all, that’s what’s going to service the debt to pay the purchase price isn’t it? What makes up cash flow? Collections and expenses. So to understand the cash flow that YOU will have, you have to dig a little deeper and drill down into the collections and expenses.

For collections, you need to understand how they’re generated…collections can only be generated from the production of the providers. For this blog I’m going to focus on a GP practice. You have to look at the production by providers, the doctor and the hygienists and analyze who’s doing what and understand their relationship to each other. As the doctor buying the practice you need to ascertain what procedures the seller is doing, what procedures you do, are they the same? Does the seller perform procedures that you don’t & vice versa? Can you increase production by adding procedure the seller doesn't offer?  Is the hygiene department performing the same procedures that you want them to? What about the frequency of those procedures? What about their recall system? All of these impact the collections.

What about the payors? Is it a fee-for-service (FFS) practice? Is it a PPO practice? Maybe a 60/40 mix of PPO & FFS? Do they accept Medicaid patients? Which PPOs do they participate with? Are you familiar with the delta premier issue? Again, all these things impact collections.

What about their fee schedule? How do the procedure fees stack up to the other practices in the area? When was the last time they raised fees? Even if their fees seem to be where you’d want them for the area, what about the fees for procedures they rarely or never offer and you do, where to they stand?
These are all the issues a buyer needs to consider when evaluating the revenue aspect of a practice and decide what’s most important to him/her with regard to these revenue issues. Part II will talk about the overhead aspect of the cash flow-financial aspects of the practice you’re looking to purchase.

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@dentalcpa.com