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
