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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
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.
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
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.