Monday, June 27, 2011

Why is Dental Buyer Representation So Important?

When it comes to engaging a CPA to assist you in buying a dental practice you should NOT be looking for just any CPA, you need to work with a Dental CPA that has years of experience with not only dental practices, but dental practice transitions as well.

Whether it’s the outright sale of 100% of a dental practice, a 50% buy-in to an existing dental practice or becoming the 5th partner of a multi-doctor, multi-specialty dental practice, an experienced Dental CPA will know how to guide you through the process. They will know (and have hopefully vetted) the other professionals that you need: the dental attorney, dental lender, dental practice management consultant and/or the dental space lease negotiator.

When it comes to the Dental CPA, here’s a list of some issues that will need to be addressed:

1. Is the asking price within a “reasonable” range? If not, where is it and why?

2. How should the transaction be structured? What’s best for the buyer and why?

3. How should the price be allocated among the various assets?

4. What are the tax implications to the buyer? To the Seller? In addition to income tax, there are also sales and property tax concerns.

5. What should be included in the letter of intent (LOI)?

6. What’s the timing of getting the other advisors involved?

7. How has the practice been performing? How do the key performance indicators compare to the industry benchmarks?

8. What are the specific issues with a specific practice? Are there weaknesses that require caution? Are there hidden strengths that call for a premium?

9. Should an entity be created for the transaction? If so, what type of entity and why?

10. How will the transaction impact my income tax return in that year?

11. Will it support the debt service? What are the current lending rates? How much working capital will be needed?

12. What do I need to be concerned with when doing an on-site visit and chart review?

13. When do I need a demographic analysis?

14. Should I buy the accounts receivables? If so, how are they valued?

15. Should the seller remain after the sale? If so, for how long? What should I pay them?

Each transaction is different so there will be other issues that arise and a Dental CPA with experience will know how to handle the unusual issues when they develop.

Many times when a buyer calls me they’ll ask if we can prepare a valuation and my response is “yes we can, however, most of the time it’s not necessary”. Sure, it’s great revenue for the professional who does valuations to earn $4,000-$8,000 for a formal valuation, however, in 99% of the situations I’ve been involved with it’s just not needed, its overkill. More times than not a valuation has already been done and therefore, all they really need is a second opinion. We’ll gather all the same information that was used to develop that valuation (if not more since part of our task is the financial due diligence of the practice and to provide feedback on the practice performance). In fact, assessing the price is sometimes secondary to the aspect of analyzing the practice performance and providing feedback to the potential buyer on the practice issues we’ve discovered while assessing the asking price.

Here’s the general description for the phases of most buyer representation engagements we participate in:

The 1st phase is where we assess the asking price and the performance of the practice. That is, does the asking price fall within a reasonable range of value in our opinion and how is the practice performing compared to industry norms? With any valuation the professional has to make certain assumptions and estimates to arrive at their value. We also want to make sure there weren’t any mistakes made in arriving at the value on the sellers’ behalf. This phase also enables us to dig into the performance of the practice to let the buyer know if anything jumps out at us like excess labor costs, low dentistry production, higher than usual expenses, etc... It’s a thorough analysis of the practice that allows us to provide the valuable feedback to the buyer about the performance of the practice (which is a completely different than the value) and many times much more important.

The 2nd phase gets into the structure of the transaction and allows us to continue our financial due diligence. We look at transaction structure, timing, price allocation, seller’s compensation if they stay, how to handle A/R, redos, etc... We may ask for additional information such as the space lease agreement, accounts receivable aging (if it wasn’t discussed in phase 1), associate legal agreements, details on certain expense items and explanations on other unusual issues we discover. This is the phase where the LOI is usually created and\or discussed, negotiated and signed before going to the attorneys for legal agreement drafting. We’re also available during this phase while the legal agreements are being drafted and negotiated by the attorneys in case other issues develop that require our input. We’ll also begin to discuss entity selection and how it might impact your income tax situation.

The 3rd and final phase really encompasses a couple of minor tasks, that is, choosing an entity and getting it created, apply for the entities ID#’s and preparing individual income tax projections. We don’t create the entity, we advise you to have the attorneys to that, however, in some situations, we will create the entity and bill you accordingly for it and suggest that you have an attorney review it after you settle.

Lastly, we can assist the buyer in the set up of their initial accounting software with a dental specific chart of accounts and the initial balance sheet based upon the settlement documents. This allows the buyer to get off the ground running so they can focus on the clinical side of the practice along with getting to know the staff, patients and any other nuances for the practice.

When you’re going to invest a half million dollars plus on a business it just makes sense to be prudent and hire appropriate professionals to ensure you go about the process in the right way and you don’t get burned and put your investment at any undue risk.

If you’re looking to purchase a practice or buy-in to a practice begin assembling your team today. Begin your research to find out which professionals are out there to assist buyers, know their names, call them and interview them, ask for references. If you know anyone who has recently purchased a practice talk to them and find out what their experience was like. Ask them how the process went. Ask them about their first year in the new practice, and ask them who they used and if they were happy with the results.

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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Tuesday, June 14, 2011

What are typical percentages for dental production and collections?

I've been practicing for one year, what should I expect?


I've heard some are getting as high as 40% of prodcution and others as low as 25%.


I've been offered 30% production where I pay half the lab bill, x-rays and exams are not included as production. It seems fairly reasonable any thoughts?


The "typical" ranges I see are:


25-30% of PRODUCTION


30-40% of COLLECTIONS

Without or without lab fees? How do you see that getting handled?
that varies. if the owner wants the assoc to be responsible for lab fees or a portion thereof, then the %'s noted above will be at the higher end of the ranges. if the owner is NOT concerned about making the assoc responsible for lab fees, the %'s used are closer to the lower end of the ranges noted above.more & more i'm suggesting that owners keep it simple & pay 100% of the lab and simply offer a % of revenue to their assoc w/o a lab cost charge . the owner should monitor the associates lab use to make sure the usage is kept in line with their "standards" and if need be, add some language that enables the owner to adjust assoc comp in the future IF lab gets outside specified norms.for example, if the practice history shows that lab costs as a % of doctors prod runs 12%, the owner can "charge" the assoc for lab costs that exceed say 15% of their production. i think you need to allow some cushion. if this is written into the associates employment agreement than both are completely aware of the need to control the lab & more importantly, it keeps the math simple to avoid the math errors the result in the associates believing they were cheated.

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

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Dental Practice Buyer Representation - Introduction Video

We frequently receive phone calls from dentists seeking assistance in purchasing their dental practices. We have put together the follow series of videos to outline the process.



video
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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Monday, June 13, 2011

Should Dentist Buy This Dental Practice?

My background: I have been out of school for two years and it has always been a dream of mine to own my own practice. I am married with two kids and for the past two years I have been working for a corporate chain. I have learned a ton and consider myself ready. Hope I am right.

The practice I am looking at buying:

Practice is in a blue collar town with a population of 25,000. The population make up looks good to me as well as the average income (15% at 2k, 15% at 25k, and 20% at 25-50k). There are 13 dentists in town, 3 of which work in the same building as the seller (more to come about this). The practice has been there for the past 40 years but the building practically looks new.

Practice overview:

2007: 500K with 46% OH

2008: 430k with 45% OH

2009: 530k with 50% OH

Have you verified OH? With seller owning a portion of the R/E, you have to wonder how they've factored in FM rent and other potential R/E pass-throughs that tenants might usually pay.

Asking price: 345K

Real estate: 158K

The practice has 3 ops for the doctor. It is all equipped with digital x ray and cam, NO2 in all ops, TV monitors for patients in all ops.

The seller has 2 ops for hygieine which he shares with one other doctor in the building.

Issue #1:Are you going to be happy with that sharing arrangement? The hours you get them? What if you need more time in the chairs, how is that handled?

The building is 5500 ft and shared by 4 dentists altogether. The building was appraised at 630k and the seller wants 158K for the 1/4 (his part of the building) of the total building.

Issue #2: If you buy the real estate you now have 3 partners. You don't know them and they don't know you. Is there a partnership agreement? If issues regarding the building come up you're the "new kid on the block" with 3 votes against you.

The only thing the seller shares is the waiting room and the laundry room with all doctors.

Issue #3: Again, you're sharing with people you don't even know. Are your decorating tastes the same as theirs? If you want to add things to the waiting room that they don't what happens?

The 2 hygienists and the two hygiene ops but shares with only one other doctor.

So you also share the hygienists? Issue #4 Sharing staff is always difficult, especially when you're the "new" boss.

The seller space comes to be about 1500 ft. All four practices are separate other than what I mentioned above. The seller has two DA’s and one receptionist/manager. The practice is mostly FFS and few PPO insurances. The doctor works 3 days per week. The seller refers out molar endo, implant restorations, perio (SRP), ortho. The RDH only do prophies (2 per hour) but they are booked solid for 2 months.

Ok, 30 minute prophys - is that you're style? What if you want to move to 50 minute prophys, will that be a difficult change for them? Is that going to be different then the other doctor they work for? On the upside it sounds like a busy practice with a nice stable hygiene base. Of the gross revenue, what's the breakdown between doctor and hygiene production?

I like the practice a lot in that I think there is a lot of potential. I plan on doing the perio and not referring them out. What worries me is the fact that I would share the two hygiene rooms and the two hygienists. What would happen down the road if I want to get rid of one etc?

It's good to "worry" about that now.

I would love to get your opinion on this. What would be the fair price for this practice? When do I start negotiating?

No way to even guess at a figure without so much more info and without doing the due diligence. I'm assuming the doctors also covered for one another while they vacationed and since they're in the same space ever consider what a patient might do if they don't want to see you? Maybe see the other doctors in the space? That's another issue you need to consider.

It’s a very complicated set of facts that you'll have to weigh for this practice. Good luck.

Thanks Tim appreciate your input. I know this is a unique and different kind of opportunity. I am still not 100% sold on it and that’s why I am here. I will find out about what kind of agreements there are between the 4 owners regarding real estate. I have brought up some issues to the seller you pointed out and I was assured that I will be the boss in my practice and whatever I choose to do is what will happen. The way they utilize the two hygienists is that for every 3 minutes of prophy the doctor pays $23 to the hygienist and I am told this $23 includes the prophy supplies and the hygienist wages. If I choose to do one hour prophies then I will have to allocate $46 to go towards hygiene wage and supplies. What I find very weird is that all 4 doctors refer SRP. There is no way in hell I would do that. I plan on utilizing the hygiene to do 2 quads of SRP per hour which means it would cost me $46.

As for the hygiene total production the two hygienists produced $80k which comes to be 15% of the total production.

Well that appears to be a problem. They’re booked out 2 months because they're being shared by another doctor so how much can you grow in patient count? Is there chair time to add hygiene hours? $80k in hygiene with 30 minute appointments seems very low and 15% of total production doesn't indicate a healthy practice profile either.

Just seems like too many downsides with not much in upside....

This first appeared on Dentaltown.
 
Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Friday, June 3, 2011

Should Dentist Reduce Hours to Save Taxes?

Just looking for confirmation that I am thinking right here... I have a couple associates that work for me out of 2 offices, and I work 5 days a week. 2010 Tax bracket made over the 33% bracket and will likely increase this year. Associates make 30%. I am thinking cutting back a day and let an associate work it. This way I would be substituting an income tax payment over the 212k threshold at 33% for a before tax payment to the associate at 30%. This is assuming production stays the same. In other words, if production for that day/ month is $10,000, and all the overhead is covered, then this is straight profit over the threshold. I could pay the associate 3000 and take the day off, or work the day and pay Uncle Sam 33%, and still take home about the same disposable income. Am I right in this thinking? Anything else that I am not thinking about?

Let’s do the math on your example:

$10,000 x 33% in tax = $3,300 so you net $6,700 to spend after tax, or

$10,000 x 30% to assoc = $3,000, $7,000 x 33% = 2,310, so you net $4,690 to spend after tax.

So those 8 hours cost you $2,010. Does that work for you?

Trying to keep it simple, you could get into a lot of details...let’s just assume the 30% covers Compensation + Expenses of associate.

This 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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