I am a new graduate, who originally thought I would just work in private practice as an associate, but recently I was approached about purchasing a practice. The practice is in a rural area, about 15 miles from the small town where I grew up. It is the only dental practice in the area; the nearest dentist (who's next available appointment is almost 3 months out) is about 40 miles away. The owner says that about 18-20% of his income is from Medicaid patients. He also treats patients at a local prison and hospital.
The owner had his practice appraised in December 2005 for $500k; the real estate appraised at $110k. His production has increased since then, and he is currently asking $400k for practice and $100k for real estate.
Production over the last 3 years:
2006 - $1.05 million
2007 - $1.04 million
2008 - $1.26 million
Hygiene production (last 12 months): $406k
Total of staff salaries: $228,600
He said he expects to produce $1.3 million this year.
$406k in hygiene, if accurate, is a 2 doctor practice capable of $1.2 million in dentistry for a $1.6 million practice. Again, if accurate you'll need the seller to stay AND you'll likely want a plan to get their replacement in there within a couple of years, otherwise your days are eaten up with hygiene exams which eats into your production doing other dentistry.
Are you ready for a 2 doc practice? All for the great price of $500k?
My concerns:
- The dentist is older and seems to have allowed patients to dictate what treatment they need, i.e. "I only want a cleaning. I don't need x-rays." Or patients will decline perio treatment, and only a prophy is completed. So, I do not know how they will react to a young dentist coming in and going "by the book". I was told by the owner, if I go in and change much, the patients will not trust me.
First, that's just common sense, never come into a situation guns blazing changing everything. Nearly every advisor that works with buyers will suggest small changes initially, start with facility updating then move to practice updating. Over time (maybe 12-36 months) if you exude self confidence, patients will come to trust you and allow you to guide their treatment plans.
- The owner has stated that he will work with me as long as I need him to stay; however, on his rough draft contract I noticed he stated he would stay "no longer than 2 months".
First let’s get this out of the way, this "rough draft" is just that, a rough draft. Seller may have been jotting down wishful thinking. You can to the same and it's the final draft that is meaningful since the final draft will be a combination (and likely compromise) of both of your wishes.
- I have asked several times about the income from working at the prison and hospital, and I only get estimates. I am not sure if he is hiding something, or if the office manager does not know how to separate this. The owner initially said he would continue to do the prison work, as it is not part of the practice. He said that the hospital work would stay with the practice, and I could hire him to complete those cases for a flat daily fee. Now, in his rough draft, he states that he reserves the right to complete the hospital cases on the waiting list, as the parents have already agreed to let the owner doctor treat their children.
Due diligence and worry about the final draft.
- The equipment is very old, and is sold 'as is'. He said everything works, and if I have someone come in and inspect the equipment they are just going to try to get me to buy new equipment.
Get an equipment vendor to inspect the equipment. You’ll likely already know what you want to buy anyway and the equipment vendor will just be telling you what you already know anyway.
- The owner says that the building may be inspected for termites, plumbing, and wiring at my expense. There is some leaking I noticed in the ceiling, the A/C unit blows cold in some operatories, but not in others. I have heard some patients complaining that it is hot in the building. I have also heard that there has been some plumbing problems with the building also. It is a small town, and I have know people who work there.
Yep, inspection is at your expense, get it done.
- The rough draft also states that any outstanding bills for dental supplies, office supplies, etc. become my responsibility upon the date of transfer to the new owner.
Due diligence and worry about the final draft. If you do assume debt it becomes part of the purchase proceeds, meaning a $500k price could mean $400k in cash and $100k of assumed debt.
- Also, the owner is able to collect any money due to him for treatment started before the sale or not completed until after the purchase. He also reserves the right to collect any money due to him for up to 2 months after the purchase of the practice.
Worry about the final draft.
- The owner is asking for 35% of collections for treatment provided by him. Also any credit balances become my property, i.e. I am responsible to repay that credit to the patient.
Worry about the final draft and see above about assumed debt.
- Hygiene is given only 40 min for adult appointments, whether is a new patient or 6 month recall. Patients are often rescheduled to take an FMS since there is not enough time to complete everything in this amount of time. There is no pano, so it is not possible to just take a pano and BWs. If I take over the practice, I plan on giving hygiene more time for new patients, so this would decrease the hygiene production.
Why? It should increase hygiene expense.
- Since I'm a new graduate, it may be near impossible to complete this deal even with some owner financing. Owner does not seem to want me to work as an associate and then buy-in. He seems to want to retire and get out ASAP.
If seller wants out ASAP and you can't get conventional financing owner may HAVE to be the bank.
I do not want to worry about problems with equipment, building, etc. after paying $500k for a practice. Is it normal to purchase a practice at the asking price, and then have to go in right away and replace equipment, fix plumbing and A/C problems? I want to make this a win-win situation; however, I am not sure how much the owner is willing to compromise.
In some cases absolutely, in the end the buyer needs to prepare a business plan based upon practice purchase price AND re-investment into the facilities and equipment to see if the deal is doable. Again, IF this is a $1.6 million practice in which the final price is $500k, you'll have plenty of profits to afford the upgrades.
The real question is as a new graduate can you handle a $1.2 million practice and turn it into a $1.6 million practice?
Sorry about the long post; I am new to this and wanted to give as much info as possible to help avoid pitfalls and to see if this sounds like a deal worth pursuing.
You really need someone to assist you in evaluating the practice financial issues and talk through the potential purchase of this practice. My fear is that this practice may be too big for you at this stage of your career.
This first appeared on Dentaltown.
