Monday, March 23, 2009

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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2 comments:

Steve said...

Matsco's 12-month noprepayment penalty is misleading. Make sure you read the contract carefully.

Tim Lott, CPA, CVA said...

Steve,

Thanks for the comment. Just another reason to have a dental specific expert at your side.

Tim