Delaying a Dental Practice Purchase Can Be a Big Mistake

Below is an article from our friend Dr. Thomas Snyder, the Director of Practice Transitions for the Snyder Group.

Most recent grads have in excess of $200,000 in dental education debt. Many of them may feel that they have to work as an associate for many years before even considering purchasing a practice. We have found, however, that the cost of delay can be significant. Oftentimes, the sooner you buy a practice the better your long term financial outcome will be.

Let's look at a hypothetical situation of two classmates who bought a dental practice, but did so at different points in time after their graduation. We'll make the practice's financial picture identical so the comparison will be consistent.

Dr. A has decided to buy a dental practice three years after graduating from dental school. Let's assume that the practice Dr. A will purchase has revenue of $800,000 with a 60% overhead, so the practice's Net Profit is $320,000. Let's assume the practice sells for $504,000. Dr. A will also need $100,000 in working capital so he will require a practice acquisition loan of $604,000. Dr. A's loan terms are for ten years at 7% interest, with annual principal and interest payments of approximately $84,000. Let's also assume the practice will grow 5% a year and that overhead remains at 60% excluding any debt service. Dr. A's projected net income before taxes, but after debt service, will be $236,000 in the first year of ownership.

Dr. B does not feel as confident in purchasing a practice as soon as Dr. A did. Dr. B decides to work as an associate for three more years. Let's assume Dr. B earns an income of $120,000 a year over that three year period with 6% annual increments in associate compensation. Dr. B also decides to buy a practice grossing $800,000 with overhead of 60% and Net Profit of $320,000. We'll assume that the purchase price will be identical at $504,000 with the same working capital needs of $100,000.

However, let's also assume that interest rates will have increased to 9% (up 2% from three years ago) with the same loan term of ten years. The annual practice acquisition payments will now be $92,000. Dr. B's net income after loan payments, but before taxes, will be $228,000 in the first year of ownership. Next, if we were to compare the total income earned by Dr. A over a ten year period from the time he purchased his practice, and comparing that to Dr. B's earnings over the comparable period, the difference amounts to over $826,000! So, when considering a purchase opportunity from a timing perspective, it can make a significant financial difference.

Imagine if Dr. B would have purchased a practice at the same time as Dr. A. The additional $826,000 in income could have retired his dental school debt earlier, putting him in a much stronger financial position. The old adage "timing is everything" is quite applicable to purchasing a dental practice.

NET INCOME COMPARISON

Timeline             Dr. A (Owner Year 1)               Dr. B (Owner Year 4)

Year 1                   $236,000                              $120,000

Year 2                   $252,000                              $127,200

Year 3                   $268,800                              $134,832

Year 4                   $286,440                              $228,000

Year 5                   $304,962                              $248,800

Year 6                   $324,410                              $270,832

Year 7                   $344,831                              $278,440

Year 8                   $366,272                              $296,962

Year 9                   $388,786                              $316,410

Year 10                 $412,425                              $336,831

TOTAL                 $3,184,926                           $2,358,307

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Compare Two Dental Practices for Sale

I am about to finish a GPR and was hoping you could give me a little input on whether either of these options sound good.

Option 1 is a brand new, state of the art practice in a growing rural area. The practice grossed around 800k last year and has about 45 NP a month. The senior doctor wants me to work as an associate for 6 months to a year and then go into a buy in phase. He has been hesitant to establish the buy in price up front, but did give me a ball park price that seemed pretty fair. There is also a 15 mile non -compete radius.

How many days is the owner working now? How many days do they want you to work? How many days will they work once you are there? With a base of $800k that's about a 4-5 day per week practice (i.e. 32-40 doctor hours) so make sure you're not looking at a situation where you'll go in and sit around.

As others have said, nail a price down now. If he gave you a "range" asks that you agree to a number so you can move forward with the other issues.

You’ll need to see the financials (or returns) to make sure you're not getting sucked into something that SOUNDS great and winds up looking like crap.

The associate agreement is for 35% of collections and I would have to pay my whole lab bill.

35% of collections is good, again, agree with others, you should only pay at most 35% of lab, OR ask to keep it simple, 33% of collections period.

What about malpractice insurance, heath insurance, dues, licenses, CE? Who’s paying those?

There is a 5k minimum salary but I would have to pay the difference back to the doctor for months I under produced once I am making enough on my commission. For example, if I only made 3k the first month, I would get paid the 5k. But, if I made 8k on my commission the second month, I would have to pay the doctor 2k back for the first month and I'd take home 6k. Hope that makes sense.

You have no minimum then, you're working on straight percentage. If it's truly a minimum you wouldn't "owe" any shortfall back or have it offset future excess. Straight percentage isn't necessarily bad, just understand there is no minimum. Ask what happens if he pays you $5k for 3 months and you decide to split ways after producing only $30k. If it's a true minimum you'll owe nothing to him, just make sure you're talking apples and apples.

A percentage might be an issue if the practice doesn't grow fast enough to support both of you OR the owner doesn't reduce their days.

There is also a 15 mile non- compete radius.

NOT for the first 6 months to a year....

Option 2 would be a very small practice that is only open 2-2.5 days a week, 3 ops and is a little dated on equipment. The gross last year was about 250k and overhead just over 50%. I am still waiting on some more details, but will post more once I get them. This practice is also in a growing rural community and I suppose I could open it up 5 days a week and take Medicaid or more insurance plans to bring the production up.

Do either of these situations sound like good deals? How do the numbers in option 1 stack up to what the rest of you have been offered, and what aspects need to be negotiated before proceeding?


Depends on the price, many more specifics and what you're looking to do....

and what aspects need to be negotiated before proceeding?

On option #1, all aspects of your employment and buy-in.

On option #2, the purchase details....


Thanks for the reply. Here's the deal, doctor is not that old and is not planning on cutting his hours at all (4 days). I would probably be working 5 days a wk.

Can the practice support 2 full time doctors? Does it have 2 full time doctors now? If not, how is it that a one doctor practice can jump to two full time doctors immediately?

You suggest looking at the financials but what specifically should I ask him for? The transition company has done a full run down on this practice but I haven't seen any of it.

Ask for that, it may already have the practice financial information in it.

As far as benefits, I'll be responsible for everything in the 3 month probationary period and if we continue beyond that, I'll be reimbursed for malpractice and my license fees. No health insurance benefits though and I don't like that.

Then ask for it! Just because it's not offered doesn't mean you can't ask for it and maybe even get it.

You mentioned that the non-compete won't hold until after a 6 months to a year period.

What I meant is make sure that ANY non-compete they want you to agree to doesn't kick in until 6 months or a year. It can kick in immediately if you agree to it, however, the last thing you'd want to do is agree to NOT compete and leave an area you'd like to stay after 3 months because you agreed to do so.

Is this true everywhere because the contract doesn't make any distinctions on time period? I wish I could give more specifics about where I am and who the company is but I don't want to violate my confidentiality agreement.

Most if not all confidentiality agreements allow you to share the info with your advisors...so that means you'd have to hire me to tell me...

On option 2- I met the doctor yesterday and got some more specifics. Practice has grossed an average of 220k for the last 3 years and doctor has worked 3 days a week and taken an average of 2 months of vacation a year. Extremely low overhead and the doctor has netted a little over 50% of that. He is entirely fee-for-service and has pretty high fees for the area (8-900 per crown). He refers out all endo, extractions, implants, dentures, partials, perio other than scaling, and ortho. Basically, he only does fillings and crown/bridge. He is willing to stay on for 6 months to a year but no longer. The building is shared between him and another dentist and they have a common waiting room and lab/sterilization. It's 3 ops, 2 hygiene and 1 doctor. I would have the option of buying half ownership in the building or renting from him. Should also mention that the town has 12 dentists and only 2 are under 50 years old.

The buy out price is still in the process of being set but from what the rep said, they generally place practices at about 70% of gross which would be about 154k. I am sure I can’t do a startup for that and at least this would give me a little bit of a patient base. It would seem that if most of them stuck around, and I did all the procedures that he's referring out, that this could be a good deal.

Any advice on this one?

I don't like the office sharing arrangement and even if you wanted to own it's 50% at best. What was their relationship with the other doctor in the space? Did they cover for each other? Do the patients know the other doctor? I know it's a small amount to pay, still at $150k I just don't like the setting....

I'll continue to update as I get more info.

This first appeared on Dentaltown.

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

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Dental Practice Purchase Evaluation

Hi,

I’m new to this and have no clue as to which way to go. I’m currently interested in this practice and spoke with the owner of the practice. Some guidance with this would be appreciated!

Collection for 2008 will be about 400k, 2007 was 410k, 2006 was 390k. Production is about 600-700k per year but not FFS practice, only collecting what HMO insurance pays.Accounts Receivable and collection averages around 30-40k per month.

Owner works 3.5 days a week. 1 day a week goes to anesthesiologist for consults (does not contribute to collections, also was previous owner of practice 4 years ago). Periodontist comes in when implant are scheduled to be placed (collects 50%).

Patient lists - 2500. About 200-300 pts not active either moved, scheduled but didn’t show, or not seen for 2 years. Anesthesiologist about 200 active patients, 500 nonactive (but does not contribute to practice). Existing dentist grew practice from 500-600 pts 4 years ago to 2500 pts. No advertising only word of mouth. 20-25 new patients schedule per month. 120-150 recalls completed per month. 15 patient no shows or cancellations a month. Implants, 3rd molar ext, S/RP, Ortho referred out.

6 years left on lease with annual increase 4%. Owner of lease is previous owner of practice whom also plans to sell building (currently out on market).

Owner of practice 2-4 year ago upgraded office. Gendex 765, kept sieman xray, 3 ops (really just uses 1 op majority of time), electric handpiece, intraoral cam, fiber optic handpiece, nitrous, networked.

Overhead is 12000 per month. Owner will pick up existing matsco and patterson loan.

Asking price 400k.What do you think?? What’s the next step?? Walk away or talk?? Thanks for your input!!

Can’t get my hands around those numbers. $650k gross producing office with only $144k in overhead ??? That’s 22% and certainly an award winning practice manager keeping overhead that low.

Lab and supplies alone on $650k gross production is at least $60k, if not $75k, which is nearly half the $144k. One full time employee at an average of $17/hr is approximately $25k-$30k BEFORE payroll taxes, now we're up to $85k-$105k in overhead. What’s the monthly rent? See where I’m going with this? $12k month in overhead just doesn't seem right.

$650k gross production is less than 1,000 active patients, based on comment about 120-150 recalls/month it's about 800 active patients.

Write off 40% for insurance.

How many ops, what’s the square footage, what is the rent per month, what is rent per square foot? What does rent include? Do they have a hygienist, assistant or a front desk person?

Seller ALWAYS assumes debt, that's not unusual.

So many questions......

Sorry, it was PPO. Actually looking at the papers he gave me, it's a mix of PPO and some HMO. I want to get away from insurance all together, but I think it’s very difficult being in NYC. Maybe I should move out??!!

There's actually only one dentist working there about 25 hours a week. There is a dental anesthesiologist who does consults to take patients to the operating room. He's there only 1 day a week but does not contribute at all to the practice. There's 1 front desk/office manager and 1 assistant. No hygienist.

The owner knows he’s asking for too much, but he said that’s b/c he recently upgraded the equipment. It was not professionally appraised.

I thought of acquiring the building, but being a new grad with no income, I can’t afford it. Additionally, the asking price for the building, IMO is not worth it at all.

Square Footage is 2508. 3 Operatory.

List of OH: Rent 2340

Wow, that's approximately $10/square foot in NYC, isn't that really LOW? Here north of Baltimore city we pay $24 plus per square foot.

Electric/Gas/RE Tax 350, Phone and Internet 150, Dental and Office Supplies 400,

Dental supplies generally run 4-7% of gross production, so even at 4% of $650k production that's at least $25k and it's only $4,800? WOW, this doctor must really know how to stretch their supplies.

Workers Comp and Small Business Ins 150, Lab Fee 1500,

Labs usually run 5-8%, so even at 5% that's at least $30k and only $18k spent? Is this basically a hygiene only with an occasional crown practice?

Malpractice Ins 380, DEA and NYS License Fee 20, Acct 320, Stamps 100, Credit Card Merchant Fee 50, ADP Payroll 70, Waste Management 50, Staff including Bonuses 5500,

So that's $66k per year, approx. 2 to 2.5 employees, are they assistants or front desk helpers? $66k is about 10% of production, about 15% of collections, again, WOW.

IRA Employee 120, Health Ins 440.

After the excitement phase... I agree, a lot of things doesn't make sense!!

Very unusual practice indeed.....

This post 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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