2015 Tax Extenders Passed!

On December 18th, Congress and the President signed into law the “Consolidated Appropriations Act, 2016” and “Protecting Americans from Tax Hikes (PATH) Act of 2015”, both of which provide a number of significant tax changes. The Protecting Americans from Tax Hikes Act will grow our economy and help American taxpayers keep more of their hard-earned dollars. This Act extends a number of important tax breaks and makes many of them permanent.

Keys Facts You Should Know 

According to Accounting today, here are some of the over 20 permanent provisions:

• Increased expensing limitations and treatment of certain real property as Section 179 property;
• The exclusion of 100% of gain on certain small business stock;
• Reduction in S corporation recognition period for built-in gains tax;
• The enhanced Child Tax Credit;
• The enhanced American Opportunity Tax Credit;
• The enhanced Earned Income Tax Credit;
• The deduction for certain expenses of elementary and secondary school teachers;
• The deduction of state and local general sales taxes;
• Basis adjustment to stock of S corporations making charitable contributions of property.

For the full list of permanent tax provisions, click here. 

Provisions extended and modified through 2019

• Bonus depreciation (50% for 2015-17, 40% in 2018, 30% in 2019);
• Delay on high-cost heath insurance plans (so-called “Cadillac” tax) from 2018 to 2020;
• The New Markets Tax Credit  providing $3.5-billion allocation each year through 2019, the carryover period for the credit has also been extended to 2024;
• The Work Opportunity Tax Credit modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) to 40 percent of the first $6,000 of wages.

Provisions revived and extended through 2016

• Modification of the exclusion of mortgage debt discharge;
• Mortgage insurance premiums treated as qualified residence interest;
• The above-the-line deduction for qualified tuition and related expenses;
• Over a dozen incentives for energy production and conservation.

For more information on these tax provisions and how they may impact your business or personal tax situation, please contact your Dental CPA tax representative directly.  You can also contact our office at 410-453-5500, and one of our staff members will be happy to assist you.

Why You Need Certain Information for Your Due Diligence – Part II

I decided to write this blog series mainly because of the pushback we get from sellers’ advisors on some of the information we request when representing the buyer. The second items I’ll discuss are the practice management reports for production by provider by ADA code and production by payor.

What’s interesting about the pushback we get on these reports is that we want these reports when we’re representing the seller and assisting them in coming up with an asking price or a value for their practice. We believe we can do a more thorough job for the buyer if we have this information.

Of course, we’ll get the standard response of “it’s in the information we already sent to you. Unfortunately, that’s not correct. Many times what they’ve provided is a summary of the production by category like diagnostic, preventive, restorative, etc. and it’s usually for the entire practice, not by provider. While this might be good information for practice management consultants to get an overview of the practice for their consulting engagements, it’s never enough information for a buyer who needs to understand how the collections are being generated and who’s generating them. We may also get a fee schedule and/or a practice production by ADA code. Again, good information, we just need more.

You see, the buyer is in a different position than the seller. The seller knows what they do; they know what their hygienists do, but guess what, the buyer has no idea. The seller could be performing procedures that the buyer doesn’t perform which could mean the buyer can’t replicate the seller’s collections. Or, maybe the buyer does procedures that the seller doesn’t so there may be some upside potential for the buyer. You can’t determine that without seeing the procedures, ADA code no matter what the practice questionnaire might state.

The other problem we often see is that many practices put the doctors’ exams under hygiene production. So we’re told the hygiene production makes up 40% of the total revenue of the practice when it’s more like 25%, which is closer to normal. Without seeing the detail and taking the seller’s word, the buyer might draw an incorrect conclusion that there’s a lot more dentistry to be done.

The two other aspects of knowing the true production by provider is A) we can evaluate the hygiene production to their wages to see if it falls within industry norms and B) we can better assess “reasonable” compensation for a dentist when performing our price assessment. We see valuation reports that have used incorrect assumptions based on bad PM reporting where practice prices have been overstated because “reasonable” doctor’s compensation has been understated based on dentistry of only 60% of total practice revenue instead of 75%.

The other PM report we ask for, production by payor, shows the total number of PPOs in the patient base. This also becomes important when trying to assess the collections generated by PPOs in which the seller is IN network with and the percentage of patients in PPOs where the seller is OUT of network.

Many of you already know about the Delta Premier issue, where buyers may not be able to retain the Delta Premier fee schedule w/o also participating with the regular PPO and therefore, a buyer won’t be able to replicate the seller’s collections in many cases. However, what many buyers of FFS practices fail to understand is the percentage of patients in a FFS practice that belong to PPOs. The buyer runs the risk of having those patients leave the practice to look for an IN network provider when the seller leaves the practice. The attrition rate is generally known to be higher in a FFS practice for a buyer anyway; if the buyer also knows that 40% of the patients have a PPO, then they need to appreciate that the risk of attrition could be worse.

This report will also be helpful to a buyer who is buying a FFS practice with the intent of potentially joining PPOs in the future, or a buyer of a PPO/FFS mix practice who has the intent of potentially dropping out of some PPOs in the future. It’s very useful information for the buyer and, unfortunately, we get pushback from sellers and their advisors when asking for these reports.

So here are some real life examples of why these reports can be very enlightening for a buyer:

1. I’m in the middle of an assessment right now on an FFS practice where the top ten PPO payors represent about 35% of the practices total production. For the buyer, if they remain FFS, they run the risk of higher than normal attrition as patients may take the opportunity to go to an IN network provider. The buyer is also contemplating joining some PPOs as the practice revenue isn’t very high so they now know what the potential impact could be to the existing patient base and revenue by getting into certain PPOs.
2. As mentioned above, we’ve seen valuation reports calculating reasonable doctor’s compensation for dentistry using a lower doctor collection figure because the doctor’s exams were under the hygiene production column. This has the effect of creating a higher value than would otherwise have created with proper information.
3. We’ve seen other dentistry codes thrown under the hygiene column like crowns, extractions, etc., almost always by mistake. However, with production by provider by ADA code reports we can make the proper adjustments and provide a more accurate picture of practice price and performance for the buyer.
4. We’ve seen situations where practices were labeled FFS when in fact they were a mix FFS/PPO practice and the PPO portion was significant enough that the buyer chose to walk away. We determined this when comparing collections to gross productions were less than 85% of gross production. In FFS practices, collections are generally greater than 90% of gross production.
5. Lastly, we’ve seen production by provider reports that show other doctor providers in the past, like specialists where their revenue wasn’t removed from prior year collections even though their compensation was removed. Needless to say, prior year collections were overstated so that the asking price was way overstated. We would have NEVER known this if we only relied on a tax return and/or P&L collections.

The fact is most practices have the PM software that can generate these reports easily, even if the office has to contact the software company to find out how to generate these reports. There isn’t any reason why sellers and their advisors can’t provide these reports and in our opinion, there isn’t any reason every buyer shouldn’t be asking for these reports.

Written by Tim Lott, CPA, CVA. For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling 844-DENT CPA or emailing info@dentalcpas.com.

Why You Need Certain Information for Your Due Diligence – Part I

I decided to write this blog series mainly because of the pushback we get from sellers advisors on some of the information we ask for when representing the buyer. The first item I’ll discuss are W-2s by year along with an employee roster for that year noting positions, average hours worked per week, hourly rate and any other benefits received.

Naturally one of the first responses we get is “why do you need to see the W-2s, all that information is either on the tax return or in the practice profile under the staffing section”.

Unfortunately, while the advisors mean well, they’re incorrect. The tax returns don’t list each employee, their wages, the department they work in, the hours they work, their hourly rate or the benefits like paid vacation and sick time. The tax return does show total wages; maybe an expense category called employee benefits and/or group insurance, however, it won’t tell you how much is for the staff and how much for the owner.

The practice profile may list this info in more detail, usually ONLY for the current year though and we all know employees come and go and sometimes the practice changes on the number of staff, etc.

Another reason we want to see the details is to help the buyer assess the performance of the practice. We want to be able to tell the buyer what percentage of revenue is assistant wages, hygiene wages, front desk wages and admin wages. We also want to be able to verify any adjustments the seller’s advisors made to wages for owner family members who may get paid, but their compensation may not be market value. While we’d like to accept their adjustments as accurate, you’ll see below it’s not always the case.

So here’s a list of real life experiences we’ve encountered by having the W-2 and employee roster information:

1. I’m in the middle of an assessment right now where the owners’ wages per the tax return were shown as $210,000 while the W-2 showed $260,000. Why the difference? The owner took a $50,000 bonus in December and when the internal p&ls were prepared they were coded to office wages (front desk/admin) and the tax preparer used the p&ls to prepare the tax returns. Needless to say, after normalization adjustments to overhead it was still overstated by $50,000.
   
2. We’ve seen on numerous occasions where the seller’s advisors who prepared the work to establish an asking price made reductions to overhead for family wages based upon what the seller told them about how much their family was getting paid. Unfortunately, that information was for the current year and not necessarily the same for the prior years, and the advisor assumed the same reduction in prior years for the family wages. In one case, the reduction was $35,000 for three family members where the owner JUST put them on payroll for the first time. So the $35,000 reduction in prior years was incorrect.
   
3. We had a case where the advisor reduced owners wages to normalize overhead by the tax return wages noted on line one for “officers” which most of the time is JUST the owner. They also reduced the staff wages by the spouses’ wages of $75,000. That would have been fine EXCEPT the owners wages were $75,000 lower than what was stated on the tax return because the tax preparer added the spouse wages to that line since she was listed as an officer. So they reduced overhead by the spouses’ wages TWICE.
   
4. We’ve seen on numerous occasions where potential buyers will back off their pursuit of a practice because the total wages are very high as a percentage of revenue compared to the norm. However, when we break it down by department and realize the hygienist and front desk wages as a percent of revenue is fine and it’s the assistant wages that are out of whack, the potential buyer reconsiders because they know they can likely improve upon that issue fairly easily.
   
5. We’ve seen advisor worksheets that reduce overhead by the amount the associate was paid in wages for all years, again, based on current year information. However, when we get the W-2s for prior years, we see that the reduction for prior years isn’t accurate. The advisor simply assumed the associate made about the same.
   
6. And lastly, my personal favorite…..we’re assessing a practice and when we ask for the W-2s we get a LOT of pushback….the seller and their advisors kept insisting we didn’t need them, the wages on the tax return were accurate and they could give us the breakdown by department. We insisted and the buyer was willing to walk away if we didn’t get this info. When they finally decide to give us the info they then proceed to tell us the W-2 totals will be greater than the tax returns because the doctor also works as an IC about 30 minutes away and receives 1099 income personally and they allocate the wages between the practice tax return and his IC income. Hmmm, ok, well let’s see the sellers’ personal return where this activity is being reported so we can review that and verify the allocation seems reasonable. Well, they resisted that of course & finally told the buyer they were no longer interested in selling the practice. Here’s the kicker, just about every overhead expense was on the low end of the normal range if not below the normal range and we suspect they were paying quite a bit of the practice overhead FROM the IC bank account (the personal bank account) and, therefore, making the profit look much more profitable then it appeared.
   

The fact is in the vast majority of the assessments we do the wages reconcile with the tax return and the adjustments made by the sellers advisors are accurate. Still, by having this info we’re able to provide so much more info to the prospective buyer about the wages statistics on the practice that goes beyond the price.

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

For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling 844-DENT CPA  or emailing info@dentalcpas.com

Getting A 2nd Opinion On Your Tax Return

Our Dental CPA team recently reviewed the 2014 income tax returns for a prospective client and were shocked at some of our findings. Had we been engaged for a year-end tax planning meeting well in advance of 12/31/14, this doctor would have saved almost $35k in taxes and other areas. Here’s what we found:

–         Owner Wages Too High
The client paid themselves wages of $130k which created an S-corp loss of $30k!(Yikes). The problem is they did not have a basis in their S-corp so the $30k loss was NOT deductible. Instead, what they should have done is kept their wages at no more than $100k and the S-corp income would have been $0 which would have lowered their income tax bill by at least $10k.

–         Spouses Wages Too High
We learned that they also paid their spouse to help manage the practice, which is a good idea, however, instead of a wage of $60k they should have kept it around $30k and saved $4,500 in payroll taxes on $30k of wages. In addition, they had S-corp losses from prior years to use up so the additional S-corp income of $30k that would have resulted would NOT have been taxed, saving another $10k in income taxes.

–          Not Reporting All Expenses
There were expenses missing or almost non-existent on the client’s corporate return such as meals, entertainment, automobile expense, travel expense, etc. We were told that these expenses existed, however, their preparer told them they were too risky to take even though we knew they could be substantiated. By failing to report these expenses, the clients likely missed out on at least $5k of deductions costing them around $2k in taxes.

–         Owner Occupied Rental Activity Loss
The Corporation rents the space they practice out of which the doctor owns personally thru an LLC. The activity generated a loss of $2,500 on the individual tax return which was not deducted and as owner-occupied real estate and making the proper election they were entitled to that deduction costing them $800 in taxes.

–         Other Unaddressed Issues
There were a couple other issues with the returns resulting in an additional $1,500 in taxes that could have been avoided. They also had the wrong retirement plan that likely cost them around $5k in unnecessary employee contributions.

Do yourself a favor and contact our Dental CPA team. We are happy to provide 2ndopinions on tax returns as a courtesy. There may be something that you can do BEFORE the year ends to lower your tax liability for 2015. Our team is here to guide you through the necessary steps. Contact us at 844-DENTCPA (336-8272) or email info@dentalcpa.com.

Production by Procedure Report in Practice Acquisition.

Here is a guest blog post from Dr. Richard Wyne, DDS

The production by procedure report is a very simple report to review when doing your due diligence on a potential buying opportunity that offers a wealth of information. A quick scan allows you to gauge the size of the practice, search for fraud/malpractice and shows you how the previous dentist practiced. All of this information can tell you if this is the right practice for you, or if you should keep looking.

The first and most obvious is the fee schedule. From this report, you can either directly see the fee schedule or do some quick division to find out what the doctor is charging. If the doctor is charging appropriately for the area? You can contact the company Renaissance for a quick area fee assessment to see if the previous dentist’s fees are high, low, or just right. (They are never just right).

Super high fees will be tough to justify to patients as the new doctor. A longer transition may be needed.

Average fees require little to no change initially, but some minor tweaks can bring in more money.

Unusually, low fees can be good and bad. Good in that if you raise them the office will make more money. It is bad in that the previous doctor has most likely been attracting patients looking for the lowest fees. Any noticeable change will send some of these patients running. So the patient count is actually lower than it appears because you will be losing some.

On to codes.

Perio vs prophies. Are they doing 4910, and 4341/4342? A lot of old docs do not at all. Some don’t even own a perio probe. That means you are going to have a lot of patients with undiagnosed perio. It is a train wreck to convince them. So expect a lot of work maybe a few years to build up trust but an increase in profits. On the other hand, if they are doing more patients with quad scaling than prophies they are probably over diagnosing. To keep income up you would have to continue doing that (committing fraud/malpractice).

Prophies+perio vs x-rays. A lot of old docs have weird x-ray policies. Some never take FMX/PAN's, some take 2 BW's instead of 4, and some take them every 6 months some every 3 years. Some take PA's at every visit on every patient.

So do the math. They did 1000 prophies and took 250 sets of BW's. That means they are doing BW's approximately every 2 years. If you up it to once a year you'll double the income coming in from BW's. If they are doing 1000 prophies and 1000 BW’s that means every 6 months which is overkill for most patients. Your best case scenario is an office that takes x-rays less frequently than you are comfortable with. The office would make more money on day 1 after you took over. Worst case scenario is an office that takes x-rays more often than you are comfortable with. The office would lose money as soon as you took over.
If they only do 2 BW’s at a time which some older docs do, you could increase profits a little by doing 4 which is generally the standard of care.

Are they taking 1000 Pa's and doing 1000 prophies. That means they are taking a PA per patient so probably fraud there. Some insurance companies are going to begin requiring scripts for every PA. You can assume 100% of patients don’t need an individual PA taken on them and taking way too many single PA's is a way some offices try to increase profits. It’s also sometimes done instead of an FMX to increase billing. If you see unusual amounts of PA’s per cleaning apt ask why.

How often are FMX/PAn's are done? Insurance covers every 3-5 years so 1000 prophies and 166-100 would be right on that line. Fewer means they are taking less, more means they are taking more. What frequency are you comfortable with? Also more FMX/PANo’s than normal can come from other sources. Lots of new patients will mean more than typical amount of PAN/FMX so compare to NP count given by office and to code 0150. A new Pan machine will also greatly elevate the amount of Pan’s being taken. That number will die down with time but could give the practice a massive bump that you may not get to cash in on as it dies down.

Example: the previous dentist takes no FMX/PAN’s, buy’s a PANO one year before practice goes on the market. Every patient is due. Pan to prophy ratio can be massive 50% or more. Remember it will not stay massive it will die down once everyone has had their pan so be careful.

Comp exam count will give you NP count if they doing it right. So when the doc lies to you and says they get 30 NP's (they always overestimate) a month but do 30, 0150's a year you know they are way off.

Limited exam 00140 some docs charge some don't. See how many they are charging and make sure it is in line with your personal practice management philosophy or account for the difference in income. 09110 palliative exam same thing see if they are using this code.

Fl varnish. Are they doing it to adults? Look for the 1206, 1208, 1205. Various other assortments of codes are used for this. Sometimes it’s processed as an application of desensitization medication. Compare to the amount of kids in the practice. Do you want to do it on adults? Income could go up or down based on the answers and what the existing office does.

Pedo prophies 1120. How many did they do in a year and divide by 2. That's how many kids are in the practice roughly. Some doctors just don’t see kids. If you see very few pedo prophies either the doctor doesn’t see kids or there just aren’t any kids in that demographic. If they don’t see kids and you do, expect a small boost. If you hate kids and the office does more 1120’s than 1110’s. You are in trouble.

1351-1352 check sealants per prophy. If they are doing a bazillion then they are an office that seals every groove on every patient adult or child. Are you ok with that? Is that how you practice? If they never do any there's a chance to increase profits there.

Fixed
Crowns/exam Insurance companies say around 20% is average.
So for every 100 exams that's 20 crowns. Personally I do a lot less, more like 10% but if the office you are looking at is rocking 50% - they are crowning everything. If you are more conservative you could see a massive decrease in collections. If the office is far lower, doing just a couple %, they may be doing a ton of massive fillings. Check the big filling/core/big amalgam codes.

Look for inlays/onlays. Do they do them? Do you want to do them?

Are they doing amalgams or composites? Check that one out too. If they do nothing but amalgam that's what patients will expect you to do. You can change just expect some resistance and plan on still doing some amalgams.

Are the composites direct or indirect? Different codes that pop up for indirect composite inlays/onlays.

Specialty Procedures.
Look for endo/ortho/oral surgery/dentures/implants. Do they do them? Does it make up a large part of the practice?
If only oral surgery code he uses is 7140 then they are only doing the easy ones. It also gives you an idea of the patient base. If they are doing a butt load of dentures, you better like dentures because that's who's in your office. If the doctor does procedures you do not do, you will make less money. If there are procedures the doctor does not do, and you are proficient at them, you will make more money.

You can also get a total patient recall count from (prophies+perio maintenance per year)/2. That gives you a real ballpark of whether there is a good recall system in place or if the office is more of an emergency clinic. If the total patient count given to you by owner/broker, is similar to (prophies+perio maintenance per year)/2, then this is a hygiene driven practice with good systems for retaining patients. If the numbers very widely, then there are a lot of emergency patients, who don’t come in for regular care. Neither is bad it just helps to know what you are getting into. Also, it’s nice to separate out the count. Dr. says 1000 active patients in practice. Last year they did 500 prophies.

That means 250 recall patients and 750 patients who come in when something’s wrong. You can re-verify that data by comparing it to the 0140/9110 codes. It won’t be perfect because some patients only come in once a year for cleanings or every 8 months, but it gives you an idea.

Finally, look for fake codes. Non-ada codes they use to track things or upcharge. Figure out what they are and why they are used. How much money comes out of these codes?

Thanks for reading.

Written by Dr. R. Wyne, DDS

About Dr. Wyne

Dr. Richard Wyne is a 2011 graduate of
the University of Maryland. 

He practices in Rockville, MD.

Part V: What's Most Important To You When Looking To Purchase A Practice

This is part five and the final part of my five part blog on “What’s most important to YOU when looking to purchase a practice? In case you missed part I, there’s a great thread on www.dentaltown.com asking this question and it got a lot of great feedback from people with different perspectives. As a reminder, I won’t be telling what SHOULD be important to you, that’s for each doctor to decide and prioritize for themselves. I’m just giving you some food for thought as you contemplate purchasing a practice.

Part I and II revolved around the revenue and expense portion of the practices cash flow and assessing the asking price and practice performance while part III addressed the people issues related to a practice purchase. Part IV addressed the location and facilities aspect of a practice purchase.

Part V will include all the other aspects of what should be important in buying a practice that weren’t covered in the first four blogs.

Let’s talk about potential, I know certain brokers and advisers will use this as a selling point for some practices. Should that be important and if so, how do you quantify it? In terms of its importance, it depends on you, the buyer. You see, in my opinion, in general, the value of a practice should not be influenced by its “potential” since potential is basically based upon someone’s opinion, and we’ll all likely have a difference of opinion. Also, there’s no guarantee of potential. Can it be quantified? It can be, however, it’ll be based on projections, opinions, assumptions and therefore the weight you give it should be very low. That said, a buyer should certainly consider potential in certain situations. For example, one such situation may be where the practice has hygiene production that’s 40% of the total production instead of 25%. If these are the facts, then the dentistry could be twice as high as what it currently is and that is where one may be able to quantify potential.

Then there are situations where the hygiene production is less than 25%, maybe 10% or 15% of the total production. This begs the question what kind of dentistry is being produced and if the dentistry isn’t done on “regular” patients of the practice, where are these patients coming from? Even more important is can you, the buyer, attract the same kind of patients? I recall a practice purchase I was advising a buyer on where the dentistry was 90% of the total production when the norm is 75%. So what was being done to produce this much dentistry and where were the patients coming from? Turns out the owner was routinely giving seminars in the area on full mouth restorative type dentistry and they had made a name for themselves to other local GPs, specialists and other healthcare providers and that was feeding these very large restorative cases. Most buyers would NOT be able to step into the sellers shoes and replicate the kind of production this doctor was doing. You have to understand how the patients are finding the practice.

What about the transition strategy? Is it important to you to have the seller available after settlement for a period of time to help transfer the patient goodwill to you, the buyer? Or are you confident you won’t need them and ask the seller to leave immediately. This gets a lot of debate on Dentaltown. Sometimes the decision is driven by the size of the practice. If the practice is so small there simply won’t be enough work to keep the seller around whereas of the practice is large enough there may be a need to keep the seller around to help maintain the dentistry. So what about those practices where you may not “need” the seller stay, however, you can afford to have them stay for a limited number of hours per week for a limited number of weeks or months. How important is that to you for the retention of goodwill?

Maybe this next point should have been the very first point in part one, is the practice in an area you want to live and work? Or would you prefer to have a practice that’s comfortably far apart from where you live so you’re not running into your patients when you’re our socially with the family and friends? Again, I’ve seen strong arguments for both. On one hand, some believe to have a successful practice you should be integrated into the community, attending the local places of worship, joining local social clubs and having patients that are also friends and neighbors. On the other hand I recall a townie stating the last thing they want is to go grocery shopping and having to bump into a patient in every isle and chatting about stuff. They prefer to keep business separated from their personal lives. I bet most buyers don’t give this enough consideration.

The last issue that will be important is the advisers each party is using. I could have included this in part III when we discussed the “people” aspect of buying a practice, however, I wanted to stick with the staff and patient base for that part.

The fact is, advisers can make or break a deal so this is a VERY important piece of the puzzle. Having the wrong adviser on the sellers’ side may keep a seller from selling to qualified buyers or selling with terms that will not be favorable to the seller. The same could be said for the buyers, having bad advisers may keep you from acquiring a practice that may be perfect or one with lots of potential. Having the right advisers on either side can keep you from making a HUGE and costly mistake or enable you to work through the purchase transactions in an orderly, efficient manner so that both parties get what they want neither party feels like that get a raw deal.

As the buyer, make sure you’re working with knowledgeable advisers and make it a point to find out who the seller is using as their advisers. Find out who the broker is if one’s involved, who their CPA and attorney is. Be prepared to share this information with your advisers in case they know something about the sellers’ advisers you need to know.

This ends my five part series on “What’s most important to you when looking to purchase a practice?” Hopefully I’ve given you some good information to consider when you’re looking to purchase a practice and I would encourage any potential buyer to make sure they sign up with Dentaltown, do a search for this specific thread I’ve mentioned and peruse all the practice transition forums to gain some great information on practice transactions, what traps to avoid and what steps to take.

Written by Tim Lott, CPA, CVA. Send your requests to tlott@dentalcpas.com.

For more information on our services, please fee free to contact one of the members of the Dental CPA team by calling 844.DENT CPA (336-8272) or emailing info@dentalcpas.com

What’s Most Important To You When Looking To Purchase A Practice ? Part IV

This is part four of my five part blog on “What’s most important to YOU when looking to purchase a practice ? In case you missed part I-III, there’s a great thread on www.dentaltown.com asking this question and it got a lot of great feedback from people with different perspectives. As a reminder, I won’t be telling what SHOULD be important to you, that’s for each doctor do decide and prioritize for themselves. I’m just giving you some food for thought as you contemplate purchasing a practice.

Part I and II revolved around the revenue and expense portion of the practices cash flow and assessing the asking price and practice performance while part III addressed the people issues related to a practice purchase.

In part IV we’ll address the location and facilities aspect of a practice you’re looking to purchase.

Likely the most important part of the “location and facilities” aspect of the purchase is the demographics of the area followed by the actual location of the space. So what does that mean ?

When we talk about the demographics of the area of the practice we’re wondering if the area is a good area to maintain a dental practice. What’s the competition like ? Is it saturated with other dentists ? Is it a growing area for the foreseeable future ? Or is it a declining area where people (potential patients) are leaving & moving away ? What about the patient demographics ? Is it mainly white or blue collar ? What about the average annual household income ? What about the age demographics ? Is it primarily a retirement type community ? Or an area with younger families ? Is it an area you’re going to live in ? Do you want to practice in the same area you live in ? These are some of the demographics questions you need to learn about when you’re looking at a practice purchase and there are companies that specialize in compiling demographic reports for prospective buyers.

Then we move to the specific location of the practice. Is it right on the street, maybe a main street with a ton of vehicle traffic ? Or maybe in or next to a popular strip mall or shopping center with a ton of foot traffic ? Or, is it “off” the road, maybe tucked back behind several buildings with no vehicle or foot traffic visibility ? Is it in a medical\dental complex with other medical\dental professionals ? These are issues that will likely determine how accessible you are or how easy you are to find. Signage also comes into play here. The actual space itself may not be as visible as you’d like, however, maybe you have great signage that fronts a heavily traveled road OR maybe you’re on a heavily travelled road among a lot of other businesses but due to signage restrictions the space isn’t easily identifiable as a dental office ? These are issues that a prospective buyer needs to consider when they are looking at a practice and during the office visit.

What about the specific space? Has it been kept in great condition or is it run down?  Is it an older building that may require a lot of repairs and maintenance or a newer building that may not be high maintenance? How’s the square footage ? Does it fit your needs ? If not, will the space allow for expansion if the practice grows ? Do you see yourself in this space for at least 15+ years ?

You also need to know if the space is leased or owned. If the space is leased you’ll want to get a copy of the lease agreement and have your attorney and\or lease negotiator review it to see if it’ll be a roadblock to buying the practice. If it’s owned by the seller you’ll want to know if the real estate is for sale & if not, when would it be available. If it is owned by the seller and they’re not ready to sell you’ll need to address the lease issues as well AND make sure you’re fully protected under the lease since the landlord is also the owner of the dental practice. The last thing you want are lease default provisions that make it easy for the landlord to throw you out and regain the dental practice. If the space is for sale you’ll have to decide IF you want to buy it at the same time as you buy the practice. If not, you’ll want provisions in the agreements that give you certain rights so you can own the property if & when you want.

Now we move inside the space. We talked about the “building” but what about what’s inside? How many operatories are there? Are there enough ? How’s the actual space, is it large enough? What about the layout ? Does it have\allow good patient flow throughout the space? How’s the technology? Is it current or outdated? What about the dental equipment? Is it brand new, almost new, mostly old, or so old it needs immediate replacement? What about the furniture and décor? Is it “fresh” or is it from the 1970s with old, dark wood paneling?

You may need more than one office visit to know all you need to know about the space as one of those office visits will likely be to do a chart review\audit which can take some time. One thing we recommend is when you do visit the office and if you do visit it more than once, you should take to opportunity to video tape\record your office tour and replay it several times to make sure you know all there is to know about the space, furniture, equipment and décor.

Lastly, you’ll want to understand the office hours that are currently in use and whether or not you can increase office hours based upon the community. For example, if you’re in the middle of a city where most of the “population” is there only from 9-5, Monday thru Fridays, then expanding into evening or weekend hours may not be beneficial. However, if you’re in a more rural area, maybe around schools, early morning, evening and weekend hours may be more valuable to you than the middle of the day hours. You’ll have to decide what you want now and in the future.

Many prospective buyers initially overlook the importance of the space, location and area and start out focusing on the financials of the practice. Instead, it may make sense to understand the area first, then when you’ve identified practices for sale in the area, do a drive by of the specific location and get some firsthand knowledge of where it is and what it looks like form the outside. If that all checks out then it may make sense to gather specific practice information to continue your pursuit of possible ownership.

Part V of this series, the last part will focus on some of the other issues that prospective buyers may find important about buying a dental practice.

 Written by Tim Lott, CPA, CVA

Send your questions to tlott@dentalcpas.com

For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling or emailing info@dentalcpas.com.

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What’s Most Important To You When Looking To Purchase A Practice ? Part III

This is part three of my five part blog on “What’s most important to YOU when looking to purchase a practice ? In case you missed part I, there’s a great thread on www.dentaltown.com asking this question and it got a lot of great feedback from people with different perspectives. As a reminder, I won’t be telling what SHOULD be important to you, that’s for each doctor to decide and prioritize for themselves. I’m just giving you some food for thought as you contemplate purchasing a practice.

Part I and II revolved around the revenue and expense portion of the practices cash flow and assessing the asking price and practice performance. This blog, part III will address the people issues related to a practice you want to purchase, not only the staff of the practice, the patient base as well.

In part I we addressed the insurers and ppos that these patients may be covered by and how that impacts revenue, however, what about the who, what, where, and how many in terms of the patient base. Lets drill down into these issues and why it may be important for a prospective buyer to consider the details about the patient base.

One statistic that many people feel is important when looking at a practice is what the new patient (NP) count is. Instead, sometimes its actually more important to know what the NP count can be. The problem is with some practices the seller has already slowed down and reduced their work schedule and even their production pace. This means they likely won’t be aggressively looking for NPs and really don’t have the need for them. Therefore the NP count that the seller has may seem terribly low, too low to even consider the practice. What you should be considering if these are the facts is what the NP count can be and do to get an idea of this you’ll need to do some form of demographic analysis of the area. This can be way more enlightening and important in certain situations than what the NP count was.

Another issue involving the patient base is the “active” patient count and there’s a lot of importance placed on it, rightly so. However, there’s really no set definition of an “active” patient that the dental industry can agree on and many times the seller and their selling advisor will exaggerate what the “active” patient count is. When assessing a practice here’s my suggestion on determining what the “active” patient count is, JUST for purchasing a practice. Look at the hygiene schedule ! To me, an “active” patient is one that comes in regularly for their hygiene recall appointments. So take a look at the past six or twelve months and count the number of unique patients that have come in for their recall appointments and identify any that are first timers. The rest are likely your “active” patients. That doesn’t mean there aren’t many more patients of the practice, those that still view the practice as their dental home, however, these patients only come in when they have an issue or need something, I don’t consider them an “active” patient….they’re just a patient of the practice. The other benefit of identifying the “active” patients is to understand the size of the patient base which becomes important as it impacts the buyers ability to thrive within the practice after the purchase.

You should also look at other demographic aspects of the patient base- A. Where are they coming from (zip code analysis), B. What are their ages (an age analysis), C. Their social economic background , D. Ethnicity, and E. Education and income analysis. A and B can be assessed thru the practice management software whereas C, D and E will likely come from a demographic analysis of the area.

Of course there’s other “people” related to the purchase of the practice, there’s the seller, their advisors and the staff. We’ll address the advisors in a later blog so we’ll end this blog on the team of the practice, the seller and their staff.

With respect to the seller, you should learn as much about them as possible. Why are they selling, what kind of personality do they have, what is their practice philosophy and does it match yours, after the sale what are their plans, so they need to continue to work – do you want then to continue to work, are your personalities similar and lastly, how did they approach treatment planning and how does that compare to your approach. This becomes very important as you begin to meet the patients. If you have a very passive seller who took a “wait and see” approach to treatment planning you might offend a lot of patients if you’re completely opposite and try to push a lot of treatment immediately onto the patient. If your personalities are vastly different you may also find it difficult working with the staff as they’ve become use to working for the seller.

Speaking of the staff, while we addressed their wages and expenses in part II of this blog series lets talk about some of the other staff issues you need to know about.

You want to learn as much as you can about each staff member as well. Who are they, how long have they worked at the practice, how many hours they work, what’s their pay rate, what benefits to they receive, etc. You also need to know if they’re related to the seller or have any other type of relationship with them. Generally you want to provide them a ninety day probationary period after settlement to see if they’ll be able to work with you. While it’s generally advisable not to make any drastic changes to the staff after you settle, if you find you have a very toxic person that’s one of the exceptions to the rule….you have to let them go.

The people surrounding a transition can go a long way to make or break a practice so you need to make sure you have an understanding of the people that can impact the practice and the people you will impact when you take over the practice. Part IV will cover the facilities aspect of the practice purchase transaction, not only the physical space, but where it is and the demographics of the area.

 Written by Tim Lott, CPA, CVA

Send your questions to tlott@dentalcpas.com

For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling or emailing info@dentalcpas.com.

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What’s Most Important to You When Looking to Purchase a Practice? Part II

This as part two of my five part blog on “What’s most important to YOU when looking to purchase a practice ? In case you missed Part1, there’s a great thread on www.dentaltown.com asking this question and it got a lot of great feedback from people with different perspectives. As a reminder, I won’t be telling what SHOULD be important to you, that’s for each doctor to decide and prioritize for themselves. I’m just giving you some food for thought as you contemplate purchasing a practice.

Part I revolved around the revenue portion of the practices cash flow and assessing the asking price and practice performance. We will discuss the expense or overhead portion of the practices cash flow in this blog.

You’ll want to assess the cash flow that you will have available for the practice in which you’re considering, not necessarily what the seller had. While there are expenses you’ll have very little control or will have very little impact on YOUR cash flow, like rent, utilities, malpractice insurance, merchant services, etc., there are other expenses you’ll have the ability to control. Some of these are non-discretionary expenses like advertising, dental supplies, lab and the like and others are more discretionary ,for instance, retirement plans, computer expenses and support, office expenses and supplies, some continuing education and dues and maybe wages (I’ll elaborate more on practice wages below). There are also other purely discretionary expenses or owners perks that we don’t consider as required to operate a dental practice like the owners automobile expenses, meals and entertainment, some travel and maybe some family wages. Some of these purely discretionary expenses are easy to identify, others maybe be buried in categories like office expense and support, advertising, telephone, insurance, etc. . As a buyer, part of your due diligence is your ability to dig deeper and drill down into certain categories to make sure you understand which expenses are truly needed to operate the practice and which may not be necessary.

You need to verify exactly what YOUR overhead is going to be since it has a direct impact on the practice cash flow, which you’ll need to service the debt on the purchase price. Of course it also affects the practice price and it will help you assess the practice performance issues related to overhead. Some of the expenses are directly impacted by the procedures the seller was doing and the procedures you will be doing, they may be the same, maybe not. This is why you need to understand how the revenue is generated and how those procedures may impact your overhead.

So we spoke about the fact that there are some expenses you have very little control over and others you’ll have a lot of control over. While some believe a buyer has the ability to easily control labor costs, it’s an area where a buyer needs to tread lightly. There are many reasons a buyer may not want to hire an existing staff or let them go in short order. Maybe they think the practice is overstaffed or the employees aren’t needed for as many hours anymore. Maybe the employees’ hourly rate is too high (very common with long term employees) and\or maybe their benefits are too rich. Whatever the case is, we believe part of any goodwill of a practice relates to the staff and the buyer needs to examine every staff member currently employed with the practice and how much impact they may have on the stability of the goodwill. For example, in a very rural area, where everyone knows everyone, you may have a front desk person who’s been employed with the practice for a VERY long time, knows every patient in and outside of the practice and may be a real detriment to the retention of goodwill if a buyer were to NOT agree to hire them when they purchase the practice. On the other hand, there may be an assistant that’s only been at the practice for a month, chances are if they don’t return the patients won’t even notice. Then there are the hygienists and once again, the buyer really needs to assess each hygienist and whether or not they’ll have a significant impact on the goodwill if they aren’t hired for any reason.

The other area of labor costs that a buyer needs to tread lightly is employee benefits. We see practices where the seller has been able to afford to be VERY generous to their staff. They might be paying 100% of their family’s health insurance, providing them with four to five weeks paid time off for sick leave and vacations in addition to paid holidays and offering a very generous pension benefit. A buyer would be foolish to think they can simply go in and begin slashing these benefits without any repercussions from the staff. That’s NOT to say a buyer can’t control these benefits overtime, again, each practice and each employee is different.

There are many other areas of overhead that a buyer needs to examine as part of their due diligence, we’ve just touched upon a couple of them to get you thinking. Part three of our five part blog will talk about “people” side of a practice and the purchase transaction from a brief discussion again on the staff, to the patients and the advisors surrounding the transaction.

 Written by Tim Lott, CPA, CVA

Send your questions to tlott@dentalcpas.com

For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling or emailing info@dentalcpa.com.

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What’s Most Important to You When Looking to Purchase a Practice? Part 1

My good friend and fellow townie (that’s what we call members of dentaltown.com, the forums board) Dr. Tom Bonsack posted a great thread on dentaltown with that question, “What’s most important to YOU when looking to purchase a practice?” It got a lot of great feedback from people with different perspectives so I thought I’d blog about it. Keep in mind, I won’t be telling what SHOULD be important to you, just giving you some food for thought as you contemplate purchasing a practice.

Since I am a CPA/CVA that represents buyers across our great nation I thought I’d start with some of the financial aspects that you, the buyer, may find important. This is part one in a series of five.

SO what’s the first thing you think a buyer considers when it comes to a practice they may want to purchase? Price, right? What’s the price? While this is very important, I will tell you that many times it’s NOT the most important financial piece you should be looking at. In fact, I gave a presentation at the 2014 townie meeting in Vegas on this very issue and you can actually still view that presentation here.

So what could be more important than price when it comes to the financial aspects of buying a practice? What about cash flow? Sometimes both buyers and sellers get so focused on price that they overlook cash flow, after all, that’s what’s going to service the debt to pay the purchase price isn’t it? What makes up cash flow? Collections and expenses. So to understand the cash flow that YOU will have, you have to dig a little deeper and drill down into the collections and expenses.

For collections, you need to understand how they’re generated…collections can only be generated from the production of the providers. For this blog I’m going to focus on a GP practice. You have to look at the production by providers, the doctor and the hygienists and analyze who’s doing what and understand their relationship to each other. As the doctor buying the practice you need to ascertain what procedures the seller is doing, what procedures you do, are they the same? Does the seller perform procedures that you don’t & vice versa? Can you increase production by adding procedure the seller doesn't offer?  Is the hygiene department performing the same procedures that you want them to? What about the frequency of those procedures? What about their recall system? All of these impact the collections.

What about the payors? Is it a fee-for-service (FFS) practice? Is it a PPO practice? Maybe a 60/40 mix of PPO & FFS? Do they accept Medicaid patients? Which PPOs do they participate with? Are you familiar with the delta premier issue? Again, all these things impact collections.

What about their fee schedule? How do the procedure fees stack up to the other practices in the area? When was the last time they raised fees? Even if their fees seem to be where you’d want them for the area, what about the fees for procedures they rarely or never offer and you do, where to they stand?

These are all the issues a buyer needs to consider when evaluating the revenue aspect of a practice and decide what’s most important to him/her with regard to these revenue issues. Part II will talk about the overhead aspect of the cash flow-financial aspects of the practice you’re looking to purchase.

Written by Tim Lott, CPA, CVA

Send your questions to tlott@dentalcpas.com

For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling or emailing info@dentalcpa.com

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QuickBooks Tips Reloaded- Part 2

Here is Part 2 of Deana’s QuickBooks Best Practices Tips:

4. Data Input

One of the major challenges about maintaining accurate QuickBooks records is keeping the information organized.  When you have been in practice for a while and have a long list of clients, it’s easy to get busy and backed up with correctly organizing your records. Over time, renaming and adding accounts to your chart of accounts may become a problem when your balance sheets and profit-loss statements become difficult to read. As the balance sheet shows the practice’s financial position.

• Importance of balance sheets
•  Balance sheets shows your practice’s financial position at a single moment in time and also show a lifetime of results. It should always be accurate. Here is a helpful article on some QuickBooks balance sheet basics.  

As far as keeping your records organize, always enter as much detail as possible- its saves time later on if there is ever a discrepancy. It’s always best to choose a quiet time or designate an hour or two without any distractions to prevent any errors. Be sure to identify and correct any code errors you catch in the system as this can affect your practice’s income. Simple awareness of your funds can really have a positive impact on your bottom line.

• QuickBooks Tip
• With QuickBooks, regularly recurring transactions are saved and can be automatically entered at your regularly scheduled times. This reduces the amounts of mistakes, saves time and increases the accuracy of your bottom line. 

5. Bank Feeds

A newer option for QuickBooks is the ability to download the transactions right from the bank or credit-card company. This has become a huge timesaver. Once the transaction has been coded it will be memorized for future transaction download. Here are some instructions on how to use the QuickBooks bank feeds in versions 2014 or later. 

• Options Available
• Downloading by Most recent transaction or by statement
• Banks now offers the option to download information into QuickBook

6. Lock Down
A common issue we see with our clients is entering or editing a transaction in prior periods. Whether intentionally or unintentionally, changing prior-period data can cause a huge mess with the books. Known to have driven many accountants crazy over the years, posting into prior periods can actually be controlled by using the closing date feature within QuickBooks. It’s easy to set up a unique username and password for each user's preferences to prohibit them from changing items once past the closing date. You can also lock down the prior-period date as the year progresses.  

• Here is a screen shot:

Read the full instructions here.

7. Reporting

Another option for organizing information in QuickBooks is through the applications’ memorized reporting function. This will save you the trouble of having to re-create the reports every time you need to access them, it will also make it easy for you to access these reports quickly. QuickBooks also provides a feature called Process Multiple Reports, which enables users to group together dozens of reports and print them in a single step.

• Take a look at these 11 tips to optimize Quickbooks reporting.

With QuickBooks, and a trusted Dental CPA on your side, being organized and ensuring that your practice’s finances are accurately managed is simple. Regardless of the size of your Dental practice, you want to ensure that you are running your business efficiently by having good bookkeeping and accounting practices. 

Stay tuned for our 3^rd and final portion of this series on Ten Tips to Stay Organized and Efficient. You can also check out Deana’s original Dentaltown article here. 

For information on questions specific to your practice’s accounting needs, contact Deana or reach out to any of our Dental CPAs by emailing info@dentalcpas.com