Dental Hygiene Revenue Question

I am looking to buy into a practice that I have been associating at and want to review some of the financials myself before meeting with an accountant, but I don't know exactly where to look or possibly interpret. The obvious, to me, are overhead, production, collections, etc. but what about hygiene? Is there a rough percentage of how efficient the hygiene department is (payroll, supplies, versus collection?). Is there information available in book form? Any help would be appreciated. Thanks.

Here are two "statistics" to consider:

1. The hygiene department usually generates 25% of the total practice revenue.

2. Hygiene revenue should be approximately 3 times what you're paying the hygienists.

Does that help?

This post originally appeared on Dentaltown.

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Dental Fraud - In Tough Times, These Things Happen

Here is an interesting story about embezzlement in the dental office. Thanks to Teresa Duncan for first posting this on her excellent dental blog.

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Dental Practice Purchase Concerns

OK, here is the short story. Wife and I are endo. Wife has worked for about two years now in a FFS endo practice, I am finishing endo residency. We want to buy this practice together. It is located in a wealthy town (2007 data) average family income $164,486., average home value 780K. High level of education, dental education. Practice is located near major highways, train station, etc. The town can support high, quality centered endodontics and dentistry.

Gross/net profit based upon previous tax returns:

05: 648/414
06: 597/391
07: 740/499
08: 776/529

Practice was valued between 495-512K, we negotiated to 485K

Lease is a renewable, transferable 5 year renewal. This issue has been taken care of. There are no liens nor judgments.

Now the catch. Seller wants closing to occur at the end of August, 5 months from now. He wants 50K in escrow, non-refundable. I made provisions to the contract to protect the escrow in the event of catastrophe, death, lack of financing etc. The escrow makes me uncomfortable but I can understand it.

I have contacted Matsco, Bank of America to get competing rates. Both are similar. I have yet to contact MBNA and PPC. We are pretty sure we are going to go with a private loan as opposed to a SBA loan. I have not decided on a lender yet and want to sign the contracts first, and then get the lender in line since we have five months till closing and they will need to extend a promissory note for an extended period of time. In addition they are likely going to review a profit/loss from January to June as well as a cash flow analysis. Both of us have very high credit ratings. Financing should not be a problem. We are aiming for 100% financing to mitigate risk of our personal assets. All lenders have assured us this should not be a problem.

Questions and anxious thoughts:1. Any advantages to the different financing companies out there?

BofA, Matsco, ProMed will usually finance 100%, local banks may not.

2. We are planning on purchasing the practice as two S corps.

Why? What are the advantages of two? If you finance 100% and don't put any of your money into the corporation and the corporation has a loss, be prepared NOT to deduct that loss.

3. Business is down, significantly this quarter. It is not just this practice, it is every practice. This makes me very, very, very anxious. I am wondering if I should offer less.

I’m seeing this quite a bit in transitions, buyers who have entered into negotiations are seeing lower revenues and wondering if the price they agreed to should\could be lowered? It’s certainly a dilemma. If your seller needs\wants to sell and there aren't any other buyers waiting in line, at least you have the upper hand if you DON'T have to buy.

4. Loan amount would be 535K for working capital we have an option of 6 or 10 year repayment with no prepayment penalty after 3 years.

Hmmm, I’m seeing no pre-payment after 12 months. I haven't seen a 3 year wait in....probably 3 years. I’d go for a 10 year term, you can always pay it off in 5 if you wish. Also make sure about what "pre-payment" means, there's a good thread on here where George from ProMed explains the difference in language in loan agreements and you have to be VERY careful NOT to assume you THINK you know what the language means.

5. Accountants records are not included.

6. Goodwill is valued at 387K and amortized over 15 yrs.

I am not sure this is good for me tax wise, it is a compromise between buyer/seller.That’s the reality though, goodwill is generally the bulk of the price in any sale and especially with endo where so much revenue can be generated with less numbers of rooms and profits are high (due to low OH). You might consider trying to negotiate a consulting agreement with the seller, deductible when you pay it, not over 5,7 or 15 years.

7. Owner wants to stay for six months two days/week. Wife is there 3 days, I will be there 1 day/ week. I am not happy about this but fortunately both my wife and I work at other endo. offices or for other doctors. Our plan of failure is that we can likely live off of our outside income from our other work if our practice did not do well. We do not own a house, have a modest new car, and live a very frugal and simple lifestyle, no kids yet...

I would think that one of you would want to be there at least the same days the seller is so you can meet the patients along side the seller and get a chance to talk to the referrals. Lets face it, endo is all about your referral sources. So even if you aren't doing dentistry the days you're there you need to be out meeting with your referrals sources and it's preferable that the seller go along with you to those introductory lunches, etc. After the 6 months, ask the seller to make himself available for another 6 months, 2 days per week to attend these lunches with you.

How many other endos are there in the area that the GD's would refer to? How long have they been there?

Quite frankly the price of $485k might be somewhat high considering the risks associated with retaining the goodwill of a referral based business are so much higher compared to a business where something like location comes into play a lot more, like a general dentistry practice.

Good luck !

This post first appeared on Dentaltown.

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

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Dental Charts - How Much Should Dentist Pay?

A DDS 4 miles away from my office wants to sell his patients and transition them to me over a few months. These are the terms:

-Sale price=$77,000.00
-$50,000 down
-balance paid on contingency at 59% of production on his patient base as they come in to see us. This 59% will be paid over 14 months or until balance paid off whichever comes first.
-He will be in my office seeing his patients according to a schedule we set up over a 6 month period. In that time I pay him 30% of his production and I will provide him an assistant.

Does his compensation as an "associate" seem reasonable??

So where should I negotiate; on the outright price or the percentage paid to him when he works out of my office to transition patients or both??

I’m not sure I would waste time with patient chart counts at this point, that's assuming you can work the deal that you simply pay for what you get. What do you care if there are really 2,000 patients and you only get 1,000 of them as long as you've only paid for the 1,000? Do you care about the other 1,000 you didn't get when you didn't pay for them?

Here’s how the deal should work:

$5,000 down, that's it! Rest is paid based upon what you get.

He wants 60% spread over 2 years, offer 50% OF COLLECTIONS spread over 4 years but calculated based upon the time he's there.

For example, if he's there, in your office 1 year, offer 50% OF COLLECTIONS payable over 4 years. If he's there for 2 years, offer 50% of the average 2 year COLLECTIONS payable over 4 years. That’s basically a payout of 12.5% each year for 4 years.

If he works for you and the compensation deal is 30%, great. That’s separate from the asset purchase and don't commingle the two.

Good luck.

Great Timothy. Now as to his time in my office, he is willing to keep his two days a week for one month and then taper to one day a week for two months, then two days a month for two months etc. until six months are over. He is willing to come into town after that if need be. Is that kind of arrangement satisfactory for the percentages you sited???

Yes, again, you're only paying for what you get, in my opinion, the longer he's "seen" in your office, the better the chance more will come. You also want to work in the agreement that you can use his name for at least a year for marketing if you want, i.e. sending letters to his patients and surrounding community that you're now seeing his patients, or something like that. Maybe include his name on your deal for a short period of time (a year or two).

Oh, and did you mean pay him these percentages up to his asking price plus interest?? So if we pay him off sooner than the payout period we are done?

Yes, up to his maximum asking price. Interest is negotiable and it's certainly reasonable for him to ask for it on any unpaid balance.

Thank you so much Timothy! Well me, my accountant and broker met yesterday and when I proposed a lesser upfront payment with more contingent on collections I thought the broker was going to stroke!!! Well I told him my reservations and asked him to be creative and give me more assurances. Of course he made me feel like a hysterical female but I stuck to my guns.

You’re welcome...remember...it's a negotiation!

If they could, they'd get ALL their money up front and if you could you'd pay ALL the money at the end, so you meet somewhere in the middle.....hopefully.

Thank you very much for your advice. Well I argued so much about the legitimacy of the active patient numbers and demanded three months of day sheets so that we now have a more realistic head count!!!!!!!!!!!!!!!!!

-It is, just as you guessed, 716(three year count) 80 of which are PPOs and do me no good.
-problem with going through charts is that they mostly got wet during hurricane Ike recently and going through the few they had with mold all over was not worth it.
-I love the idea of 40,000 down and 100$ a patient after the first X number?? Any ideas on that number? And for how long do I pay him after that X amount of patients?

I still wouldn't give more than 25% of their asking price upfront, $20k at most, that'll pay the brokers fee and save them the stroke.

Maximum payment for charts is $20k per year for years 2, 3, 4 whether you use $100/chart or a percentage of collections generated in the first year.

If the patients generate $154k for you within 12 months they can get their $77k, again, spread over 4 years. Keep it simple and if you think money per chart is easier go with it.

By the way, 600 charts winds up being about $128 per chart for $77k. 716 charts is $107.54/chart at $77k. If per chart price is easier for you, offer $75 per chart you get within a 24 month period.

Good luck

This post first appeared on Dentaltown.

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

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Six Steps to Starting a Practice

Here is an interesting blog we found from one of our Institute of Dental CPAs partners.

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

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Dental Practice Merger Question

I am thinking of a looking for a local dentist to merge his/her practice with… I don't really know much about this legally, contractually, etc. but I need some advice on how to start my search?

What to do?

Well, first things first, why? This will drive your decision on where to start and how to proceed. It’ll drive the type of legal agreements you need and the structure of the arrangement.

For example, if you're looking to "beef" up your existing practice with additional patients and you don't need another doctor, you'll look for a retiring doctor or near retirement and buy their practice. Whereas if you're looking to reduce overhead and you can't handle more patients (excess space, etc,) where you need a doctor to continue to work in the space, you want someone who is probably going to be around awhile where you're space sharing or forming a partnership.

If it's the former, you could send a letter out to all the doctors asking if anyone is looking to retire now or soon and see if they want to transition their practice into yours. If it's the latter, send a letter out asking if anyone’s looking to reduce their overhead by "merging" their practice into yours in either a space sharing arrangement or a partnership.

So, first things first, why?

Why?...

To more efficiently use an existing space by combining patients and some staff plus having more patients being better able to have a profitable hygiene department.

OR.......

In the instance of a partner, to be able to have an infusion of money that would make the practice debt free, free up some time for me while better using the facility....we would effectively have to add one more employee and we would be set.

Ok, so it's the latter of my previous post, looking to have another more "long term" doctor using your facilities with you to help reduce overhead (i.e. "more efficient", "more profitable, "more time off", "better using the facility").

So you need to decide if you're ready and willing to do either one, Have a partner or two, share office space, or three, be the sole owner with the associate doctor slot coming and going (assuming most associates look for a place of their own so they will come and go). Numbers one and two seem like your best bet.

Anyway, either you, or your adviser can send a letter out to all the doctors in a specific area asking for someone that may be looking to share facilities and\or partner up with another successful doctor. Maybe include some of the specific hi-points about your facilities, location (not specific, just whether or not you believe it's a great location), technology, size, staff, ops, etc., how long you've been there, how long you've been practicing, maybe even some specific procedures you do and don't do, enough information to help someone determine if there's a fit.

In terms of contracts, legal structure, you might want to sit down with a dental specific adviser who has done many different types of transactions to get some ideas of approaches. That could be an attorney, CPA, transition consultant, etc., someone that will help guide you to a specific approach that seems to be what YOU want to do.

If number three above suits you better you could also check with a broker in your area for someone looking to sell and begin looking to hire an associate, or, send out the letter asking for those ready to retire.

Good luck.

This post first appeared on Dentaltown.

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

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Dental Associate Agreements - Trust But Verify

I've been reading quite a few threads recently, NewDocs and on DT about folks trusting in their new bosses and believing that what's been told to them in an interview is what's actually written in their agreement, only to find out later that it's not what they thought.

Don't take it for granted that what you've been told verbally will make it into an agreement. Here are some reasons why it may not:

1. Employer simply forgets what you talked about

2. Employer's attorney already has a template employment agreement and simply forgets to inject specifics the employer mentioned & employer forgets to verify before giving to associate.

3. Employer's attorney simply tells employer NOT to write it into the agreement for whatever reason. Employer either forgets to tell associate OR simply hopes the associate doesn't remember or will simply won't speak up.

4. Employer has 2nd thoughts about what was discussed.

5. Worst case, employer had no intentions of writing it into the agreement.

And there are many more reasons.

You, as the interviewee, should take detailed notes during your interview & near the end of the interview, recap with the prospective employer what was disucussed to make sure what was said was actually meant. If it's a job you like, you should follow up after a day or two with a note to the employer thanking them for the opportunity to interview & how impressed you were with the facilities, etc. & summarizing the details AGAIN of what was disucssed.

After receiving the initial draft of the employment or independant contractors agreement (whatever was discussed) make sure YOU review it & send your notes & thank you letter to your attorney to make sure the agreement includes everything that was discussed AND that it is presented accurately in the agreement.

This is where many associates fail to realize that this is BUSINESS. No matter how cordial the employer was or seemed to be, it's now BUSINESS and YOU need to make sure YOU take care of business. Get that agreement reviewed, hopefully by an attorney with tons of dental experience, to make sure it's written as you expected.

Yes, you'll have to pay hundreds, if not a few thousand dollars to make sure it's accurate, however, if you're entering this arrangement for even a year, that attorney will be able to make sure that your investment is well protected with an agreement that is fair & represents what was disucssed.

Remember, you could stand to make over $100k in a full-time associateship in the first year and a poorly written agreement could easily cost you 5-10% PLUS of total compensation PER YEAR if you're not diligent in your approach.

Don't take it for granted, get ALL your agreements reviewed by an attorney before you sign & accept, it is SMART business.

The post first appeared on New Docs.

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

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Should Dentist Buy This Dental Practice?

Older dentist has had practice on the market:

Here's some info:

Free standing building in great location, wants to lease his office $1500 per month.

Currently works 3 1/2 days per week with 5 hygiene days.

4 operatories. Older equipment, no computers in office.

Referring all endo, pedo, complete dentures, implant restorations, most oral surgery.

Heard from other local dentists who have seen his patients, there is a lot of work out there- crown and bridge especially.

Been in location for 10 yrs. All FFS, no PPO's/medicaid

Recall schedule full- looks like half the production is hygiene

2006: Gross receipts $316K Net profit 121K
2007: Business done $352K Prof Receipts $357K Income before taxes $109K
2008: Business done $373K Prof Receipts $366K Income before taxes $91K

Asking price: $220K

How many hygiene hours per week? If 5 days at 8 hours, that’s 40 hours, however, sometimes a day does not equal 8 hours. Find out HOURS.

Even if between 32 – 40 hours of hygiene that should be approximately $175k-$200k in hygiene production alone, therefore doctor is only producing $150-$175k!!!

Under producing is an UNDERSTATEMENT. Verify of course.

If the hygiene production above is fairly accurate, dentistry should be at least $500k, making this a $650kplus grossing office and $220k is a great steal in my opinion. Again, do due diligence.

Checking the fee schedule is a great idea. Hopefully you know the fees for the area and can evaluate that potential as well.

This post first appeared on Dentaltown.

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

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Dental Business Ovehead Insurance and Dental Disability Insurance - Are Both Needed?

I got a quote from my agent for Union Central for disability. The agent suggested business overhead insurance of 30K/month for another $313/month, 60 day waiting period, good for 24 months.

Good idea or bad idea in general for business overhead tied to disability?

BOE (business overhead expense) insurance is a great idea for solo and maybe two owner practices. The more owners you have, the less likely the need is.

BOE is deductible and proceeds are taxable. Think about it, it's business overhead expense insurance to cover your business expense, like rent, if you become disabled. It allows you to maintain your office, by covering your overhead during a short-term disability. This is NOT personal disability insurance which is needed to cover your PERSONAL expenses during a disability.

The cost you mention (3,600/yr) sounds reasonable for $30k/month, 24 month coverage? As with any insurance make sure the insurance company is solid with an outstanding LONG history.

This post first appeared on Dentaltown.

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

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

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