Tuesday, November 11, 2008

Evaluate Three Dental Practices for Purchase Potential

Practice #1: Town of about 25,000
Asking price: $218,700
Practice Gross: $312,461
Hygiene: $56,300

Based on hygiene alone, typical doc production would be approximately $170k for gross of $226k, and doc refers out a lot. Will there be any real dentistry left for you to do?

Older dentist working 3.5 days a week/ Been at office for 10yrs- just wants to retire completely
5 hygiene days

Problem. Assume average hourly hygiene production is $100. $100 x 40 hours per week x 48 weeks is $192,000 in hygiene production, you say it's only $56k above and that number looks more realistic. It can’t be 5 days of hygiene. With $56k can’t be more than 1.5 days of hygiene.

Number of Active Patients (Seen in last 24months by this report): It list 3744 (I think this must be total pts), 1080 also listed (thinking active) (20 new per month)

If $56k is hygiene that's approximately 300 "active" patients at best, 1,080 MAY be patient visits for 1 year and are the different patients?

Dentist referring Pedo, Endo, Full dentures, 3rd Molar and difficult extractions18% Hygiene/ 5% Surgery/ 36% Restorative/ 41% Crown/Bridge

These numbers just aren't jiving, need to dig deeper.

Practice #2: Same town as #1
Asking price: $249,900
Practice Gross: $431,736
Hygiene: $120,886
Husband and Wife set up second office here (other office about 40minutes away) and now want out after 4 yrs
4 Dr days/ 4 hygiene days

Ok, these numbers look a little cleaner, still, if average hygiene production per hour is $100 I get approximate hygiene production of $150k. So either my average per hour is high for your area OR the hygiene days have some holes. Also, based on hygiene production, dentistry seems a little low.

Monthly Rent: $2500
4 operatories equipped
Practice was about 60% Medicaid- now trying to change to FFS and get rid of Medicaid
# of Pts seen in last 24 months: 3000 (28 new per month)

"Active" patients can't be much more than 600 plus or minus 100 or so.

Referring most endo, all ortho, impactions, implant placement
11% hygiene/ 12% Surgery/ 20% Pedo/ 19% Restorative/ 25% Crown Bridge/ 3% Perio/ 5% Endo/ 5% Denture

11% hygiene? That’s approximately $47,000 of the gross, 120k of 431k is 27%, which is more realistic. So some strange "facts" here as well, though closer to reality than the first practice.

Practice #3: Town of about 4000 (1 of 2 dentists there)
Asking Price: $367,000
Practice Gross: $539,600
Hygiene: $167,277
Older dentist retiring been at location over 30 yrs
4 Dr days (Older DMD working 3 days and associate 1 day)/ 5.5 hygiene days

Hmmm, my average hygiene production per hour of $100 must be high for your area, I get approximately $210k in hygiene for this one, still pretty close to $167k. Doc production also looks real low based on hygiene production, might be some nice untapped dentistry in this practice.

Monthly rent: $900/ Will sell building- price $125,000
4 Operatories
30% Cash/ 10% Medicaid/ 60% Insurance
# of Pts seen last 24 months: 1200 (20-30 new per month)

See, this makes sense. I’m guessing "active" is around 800 so 1,200 may very well be different patients seen as the others are listing patient visits which many are the same patients.

Referring some surgery and some endo
20% Hygiene/ 20% Oral Surgery/ 5% Pedo/ 35% Restorative/ 10% Crown Bridge/ 5% Denture

Makes me wonder if using 24 months of patients is too mislead potential buyers into thinking there's more patients there than there really are.Can’t assess asking price without knowing true profit, sorry.


Can you tell me what you think a decent practice numbers should run?

I’m not sure what you mean by "decent", can you narrow the question?

What should I be looking for in hygiene production: doctor production?

In an average general dentist practice, doctor production runs about 3 times hygiene production, OR doctor production is approximately 75% of gross production and hygiene is 25%, you might also here 2/3 doctor, 1/3 hygiene of gross production, the stats are close enough to be comparable.

Therefore, if you’re looking at a practice where confirmed hygiene is 15-20% and doctor production is 80-85% plus you have to find out why. Is the hygiene under producing, or doctor over producing? By the same token, if the hygiene is 40% plus and doctor is 60% less, chances are the doctor is under-producing which might make the practice under-valued, or said another way, a bargain.

On average, the typical 4-5 day per week "mature" practice will have approximately 1,000 patients which is approximately 4-5 days of hygiene per week. This should produce approximately $800k give or take of gross revenue each year, doctor doing $600k, hygiene doing $200k.

And what questions do you think I should be asking the broker?

That depends on what you find as you go through the due diligence process. That begins by gathering the pertinent information about the practice and analyzing it. Going through that initial process will generate many additional questions for the broker and each case generates the some of the same questions and many different questions. If you don't have a practice purchase checklist you can go to newdocs.com and find it in their download section for "new doctors" or email me and I can send it to you.


I do need to follow up with practice 1 to check on those hygiene numbers. It lists $56K in hygiene production but then the report I got says they have 5 hygiene days with 3 different hygienists working part time and the hygienist salaries add up to about $53K so something doesn't add up. Don't know if they are trying to cover up doctor's lack of production or if is a typo. Dentist has had the practice on the market for a while with no luck so maybe there's more to the story here.

Practice #1 has no computers/no digital so would need some working capital to make some upgrades.

See, it's this kind of info that might hint at a diamond in the rough. If hygiene wages were $53k and hygiene production usually averages about 3 times their compensation, then hygiene production is closer to $160k, which would put doctor production at approximately $160k as well, indicating a grossly under producing practice. If dentistry is usually a 3 to1 ratio of hygiene as well, doctor production should be closer to $450k for a practice grossing $600k and what's the asking price?

The only way you'll know for sure is to verify the production numbers than visit the office and pull 50-100 charts and see what's been going on with the treatment planning. It's very, very possible that the seller has been winding down without cutting back on the hygiene, hence the 50/50 split of production between doctor and hygiene when it should be 752/25.

This post first appeared on DentalTown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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2 comments:

mark said...

hi,

I read your post but i am understand that what you want to say. please tell me in brief. Can you tell me about How to Buy a Dental Practice.

Tim Lott, CPA, CVA said...

Hi Mark,

I don’t understand your question, or even if you even asked one. Looks like the purpose of your post was simply to post a link back to your website, not cool!

Tim