Tips for Entering Your First Practice

You are out of school, and it’s time to begin your dental career. Where will you start? Have you found a place to work? As multiple questions run through your head, let’s discuss some tips that will help you navigate through the “what’s next” phase so you can start in the right direction.

Gain Experience

Working for an existing practice will help you gain the experience you need to develop your skill sets as well as well help to build relationships with patients without the concerns or challenges of a business owner.

Do Your Research

When researching the best place to practice your associateship, it’s important that you take your time so you can find a practice that is a good fit.  Don’t rush into an agreement if there are any uncertainties. Here are a few examples (not comprehensive) of what you should be discussing during the interview process:

• Clearly communicate your income goals
• If you’re interested in purchasing the practice down the line, share your intentions
• Be honest about your skill sets and comfort level
• Inquire about the mentoring dentist’s clinical philosophy. Will you be expected to follow his or her guidelines fully?

In order to find a good fit, open communication is essential. After covering your key areas, the mentoring dentist should also clearly communicate his or her expectations. Such as production goals, required schedule, transition plans, compensation, as well as the role you are expected to play in relation to the staff. Again, these are only a few examples; you should seek as much clarification as you need to confidently make a decision.

Begin Your Journey with an End Goal in Mind

Do you plan to own your own practice someday? Speak with your potential employer about the possibility of buying into or purchasing the practice in the future. Negotiate a guaranteed salary when you begin work at the practice.  After nine months discuss basing your salary on the amount of business you bring to the practice.

Take Time to Consider Location

Pay attention to the location of the practice in which you are considering for your associateship. Ultimately, of you plan on owning the practice, its location will determine your future patient base, and how your revenue stream will look.

Develop Your Team

Begin relationships with bankers, CPAS, investment broker, attorney, and insurance agent as well as dental brokers. It’s never too early to establish a strategy with a team of advisors that can help you elevate to the next stage of your career. Also, building relationships with other employed team members can be beneficial later on in your career.

Have a Plan

The key to successfully transitioning out of dental school is to have clear vision of the direction in which you want your career to go. With any professional journey, obstacles are inevitable. By having clear goals and a long term plan in place, you will remain on track for a successful future.

For more information, contact our office at 844-DENT CPA (336-8272) or info@dentalcpas.com 

Note: The content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Practice Sellers - How to Maintain Practice Value Before a Sale

During my many buyer representation engagements I tend to see some common issues when it comes to practice valuations that sellers could have avoided to help maintain their practice values. Here are some of those areas. 

1.     Clean Record Keeping: 

Remember, buyers and their advisors will be picking over your information, it’s like inviting someone into your home, and you want it to be clean. Your practice books and records should be the same way, clean, easy to read, and at your finger tips. For example, your Quickbooks file should match the tax return numbers and if not to the dollar, pretty darn close and easy to match up. 

2.     Complete and Accurate Practice Management (PM) Reporting: 

Make sure your PM software is current and accurate. You should be recording production, adjustments and collections by provider. Clean up your accounts receivables WELL before you plan on selling.  

3.     Don’t Coast: 

This is one of the worst things a seller can do prior to selling their practice. It decreases dentistry production and therefore, decreases practice revenue which buyers AND bankers do NOT like. 

4.     Don’t Reduce Your Hygiene Hours: 

Let me correct myself, THIS is the worst thing you can do. Not only are you reducing your practice revenue, you’re potentially losing patients as well. 

5.     Update Office Appearance and Equipment:  

Again, just like a house, an outdated décor with old equipment will generally create less excitement with a buyer and less excitement means a reduced offer. Create excitement with your buyers with current décor, updated equipment and a fresh appearance. 

6.     Overpaid Staff: 

Be aware of your staff compensation and make an effort to make sure it stays within “market” for your area. There’s nothing wrong with showing appreciation to your staff with discretionary bonuses, fancy trips, paying for CE travel, etc., however, make sure they’re aware that these are not customary fringes so they don’t come to expect it from their new boss. 

7.     Inflated Overhead: 

Well before you sell, I’m talking 2-3 years ahead of time, begin to evaluate your practice overhead expenses and make sure you’re ONLY spending on things you NEED. I’m not talking about skimping on updated equipment; I’m talking about wasting money on unnecessary supplies, small toys, unnecessary services, etc. Become a good CFO! Profits will drive value most of the time and wasted overhead eats into your profit and will usually drive down the value of the practice. 

8.     Office Policies and Systems: 

Well before you sell, make sure you have excellent operating systems and policies. If you’re not collecting a patient’s portion of the fee at the time of visit, make that change now. If you don’t take credit cards, start taking them. If you’re not running daily, weekly and monthly management reports, start doing so.  

9.     Track Your Referrals: 

At least one year prior to a sale, begin tracking the procedures you refer out every day and be prepared to provide your broker with some really good, accurate information for the prospective buyers. 

10. Dont’t Change or Eliminate any PPOs Prior to a Sale: 

This can backfire if you begin to see fewer patients even if the revenue stays about the same. In most cases when a practice decides to eliminate PPOs, there’s a transition period where you’ll have holes in the schedule.  Those PPO patients that opt NOT to come back for their scheduled recare appointment or follow-up work will in turn cause revenues to be lower for a period of time.  

Tim Lott, CPA, CVA has decades of experiences working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a partner at Naden/Lean, of which the Dental CPAs is a division. You can reach Tim at tlott@dentalcpas.comor (800) 772-1065.  

Buyer Beware – Practice Prices Based on Rules of Thumb

We’ve recently seen an uptick in practice purchase/sale transactions involving specialists such as endo, oral surgery, perio, and prostho. Obviously, the vast majority of practice purchase sales we see are general dentistry because the vast majority of practices out there are general dentistry.

A common problem we’re seeing when reading through reports prepared by brokers for these specialty practices to determine selling price is using general dentistry rules of thumb to determine that price.

Here’s what I mean:

One very common rule of thumb as it relates to the selling price for a general dentistry practice is that statistically, the “typical” general dentistry practice will sell for between 60-75% of the practice collections. I know, some will use 80-85% as the top end of the range and even bump the bottom number to 65-70% when using this as a valuation method, at the end of the day it’s still a statistic, a rule of thumb, NOT a valuation method.

The problem we see in some of the reports used to establish the price for these specialty practices is that they’re using the general dentistry statistics of 60-75% to determine the asking price for these practices, and these are NOT general dentistry practices.

You see, most specialty practices are uniquely different than general dentistry practices in that their revenue is derived AND dependent on referral sources from other professionals. Rarely will a specialty practice’s location, name, signage, telephone number or website be the driving force behind their revenue like you’ll see in many general dentistry practices.

Practices, where revenues are driven by referral sources, present a higher degree of risk to any buyer of these practices since these referrals rely mainly on personal relationships with the selling doctor, especially when the practice has only ONE doctor/owner or a part time associate. IF it’s a group practice where the buyer is buying in to an interest of less than 100%, some of that risk is mitigated since there are other doctors/owners who are still working and can retain those referrals and assist in transitioning those referrals to the buyer.

Because there is a higher risk with retaining these referrals and transitioning the personal relationships from seller to buyer, the capitalization rates used to value profits are generally higher than you’ll see for general dentistry practices. Or said another way, the multiples of profits are generally lower for specialty practices compared to general dentistry practices.

Therefore, using general dentistry statistics or rules of thumb to determine the asking price of a specialty practice that depends on referrals will almost certainly provide a false or misleading number in terms of the value of the practice.

So for those specialist buyers out there looking to purchase a practice, just beware of this and make sure you do your own assessment of the practice financials to determine if the asking price is reasonable.

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

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.

Sign up for our newsletter!

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.

Sign up for our newsletter!

Dental Practice Purchase Checklist

We've been getting inquires asking if there is a checklist a dentist can refer to when buying a dental practice.

And when asked, we deliver.

Dental Practice Purchase Checklist

Thinking about Buying a Dental Practice in 2013?

In case you haven’t heard, there were some significant income tax law changes effective January 1, 2013 and for the most part, income taxes went up. Why is this important for buyers?

You see, some folks who place prices on practices will use the profit and loss reports from the most recent year. Now sometimes this isn't an issue if the practice has been fairly consistent with revenue and expenses, however, sometimes it is an issue and this year, 2013, I’m betting you might see some over-priced practices if the person generating the price is ONLY using 2012 financials.

As Certified Public Accountants (CPA) specializing in dental accounting, which means we work with a lot of dentists and their practices for CPA services like bookkeeping, accounting, tax planning, tax preparation, business management advice, etc... and 2012 was a pretty unique year.

As part of the planning process for our ongoing CPA service clients, we have to consider what the income tax rules are in the current year, the following year and sometimes even a couple years ahead as best we can. So in 2012 we had to consider that some of our clients might have the ability to pay tax on their income on tax rates that would be lower than the tax rates they might be in for 2013. In addition, some of our clients have certain types of income that might be subject to additional taxes in 2013 compared to 2012. Why should this impact a practice?

Well consider that the main source of taxable income for most of our dental clients is their practices and with some, the real estate where their practices are located. Also consider that most actually have the ability to “control” what their taxable income will be for a particular year by deferring income and accelerating expenses OR accelerating income and deferring expenses. The most common income tax strategy is to defer income and accelerate expenses, putting off the tax hit as long as possible. However, as I noted above, 2013 was one of those unique years where many were actually doing the opposite, accelerating income and deferring expenses, or,  said an easier way, taking as much income as possible in 2012 at potentially lower income tax rates compared to allowing the income to get taxed at higher rates in 2013.

So why should buyers care? If the person generating the asking price is ONLY using 2012 as their basis for practice performance, the practice income for 2012 could be substantially inflated and therefore, the practice purchase price could be substantially inflated.

Therefore, if you’re in the market to buy a dental practice in 2013 make sure you do your homework on the purchase price so you’re not paying an inflated price based on inflated practice profits.

For more information, please contact info@dentalcpas.com

Follow us on Twitter, Facebook and Pinterest – sign up for our newsletter

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

Follow us on Twitter, Facebook and Pinterest

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.

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

Follow us on Twitter, Facebook and Pinterest

Should Dentist Let Seller Carry Loan or Get a Bank Loan?

I am thinking about taking over a practice and the senior dentist said he would owner carry. Do you guys think that this is a good way to go rather than getting a loan through the bank? What would be a fair average interest rate should I be looking at? I'm guessing 6%. I would appreciate any input. Thanks

Jason Patrick Wood

There is a lot more risk to the Seller when there is an "owner carry back" and it is very atypical for a seller to carry the whole thing. Anything atypical is a red flag unless the owner can explain this with a reasonable answer. Typically when an owner will offer to "carry" it is because:

1. The practice is grossly overpriced.

2. There is something about the practice that dental lenders do not feel comfortable about.

3. The Seller has been trying to sell the practice forever and can't find a buyer.

Tim Lott, CPA

Jason, I’ll give the seller the benefit of the doubt? Maybe…

1. They really want to make it easy on the buyer by not having to jump through the third party lender process.

2. The seller wants to earn more on his money than the <1% they're currently earning on their savings account.

3. The owner doesn't want to pay the large commission on an annuity and wants to create their own, or

4. Maybe the seller wants to spread the tax bite out over many, many years.

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

Follow us on Twitter, Facebook and Pinterest

How to Buy a Dental Practice, Part 4 - Record Keeping and Post Sale Questions

As Dental CPAs, we often receive calls from dentists looking to purchase a dental practice. We have put together a series of videos to help dentists answer the question, "How Do I Buy a Dental Practice?".

In this video we discuss how to wrap up the transition process, chart of accounts set-up, record keeping, and post sale questions. For more information visit our website: http://www.dentalcpas.com/

View the How to Buy a Dental Practice, Part 4 - Record Keeping and Post Sale Questions video.

Tim Lott, CPA, CVA


tlott@dentalcpas.com

www.twitter.com/dentalcpas

http://bit.ly/DentalCPAsonFacebook

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

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Follow us Twitter and like us on Facebook

How to Buy a Dental Practice - Entity Selection

As dental CPAs, we often receive calls from dentists looking to purchase a dental practice. We have put together a series of videos to help dentists answer the question, "How Do I Buy a Dental Practice?". This video deals with entity selection. For more information visit our website: http://www.dentalcpas.com/  or email us at info@dentalcpas.com

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

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Follow us Twitter and like us on Facebook

How to Buy a Dental Practice - Due Diligence

As dental CPAs, we often receive calls from dentists looking to purchase a dental practice. We have put together a series of videos to help dentists answer the question, "How Do I Buy a Dental Practice?". In this video we discuss structure, tax implications, financial due diligence, space/lease issues, financing proposals, letter of intent and seller compensation amongst other things. For more information visit our website: http://www.dentalcpas.com/  or email us at info@dentalcpas.com

How to Buy a Dental Practice - Due Diligence

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

If you'd like to be added to our Dental CPA newsletter, email arose@dentalcpas.com

Follow us Twitter and like us on Facebook

Acquiring a Dental Practice and Merging it into an Existing Practice

I have an opportunity to purchase an existing dental office that is 3 miles away. The doctor is in her 60's and is willing to sell and work in my office 2 days a week. Time frame for her to exit the office will have to be evaluated. It is a FFS office with no PPO, similar to mine with an exception that I am a provider to Delta Premier and United Concordia. She is willing to share her numbers before meeting with the broker to see if it is feasible for us to pursue. Any advice what to ask and look for?

You should have her run reports of patients that have those providers to see if any of them will be able to use them in your office. Then get a breakdown of production by provider to see how much additional hygiene hours you'll need. Once you do that, get a list of her employees and their hourly rates and find out what benefits she may pay to compare with yours. You'll also have to compare vacation days given, etc, and compare with yours. If you hire any of her employees, the compensation packages, benefits and PTO days will have to match. You will need to evaluate the fee schedules and find out if you do any procedures she doesn't and vice versa.

These are just a few things off the top of my head.

Thanks Tim for your responses. She wants to practice with us 2 days a week. Will the purchase price be lower or higher than a typical practice acquisition without the dr staying on?

The price should be less than the typical acquisition where you're also buying tangible assets and the space.

I can't say I've noticed differences in prices with or without the doctor staying. That's up to the parties and I just haven't seen it used as a negotiation point in the majority of the deals I'm involved with.

All that said, you certainly stand to retain much more of the patients with the seller staying on board and assisting with her GW transfer as opposed to having her out immediately.

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

Follow us on Twitter, Facebook and Pinterest

Dental Practice Purchase Price Allocation: Is Goodwill the Devil?

Sometimes we come across uninformed buyers that want the majority of their purchase price allocated to equipment because they can get an immediate tax write-off under Internal Revenue Code Section 179 of up to $125k and $250k in very recent years. However, part of our job is to understand and educate ourselves about the state/locality that the transaction will occur in and educate our buyer/client on ALL the tax considerations of price allocation, not just income tax.

Many, many years ago goodwill was the devil in the eyes of every buyer. Why?

There was a time when goodwill was NOT deductible under the tax code, therefore from a buyer’s perspective, any allocation to goodwill was NOT providing them with any income tax savings. However, goodwill was always treated as a capital asset and subject to capital gains to sellers, therefore, sellers wanted most (and in some cases ALL) of the price allocated to goodwill. I remember when this one issue, the allocation between goodwill and tangible assets, was the most stressful part of most transitions. Not anymore though.

Now, buyers can write off goodwill over 15 years, so in my mind, that was a decent compromise from an income tax perspective between buyers/sellers when negotiating the allocation.

Enter the Sec. 179 write-off issue where the IRS increased the write-off election from $25,000 to over $100,000 and in recent years $250,000. All of a sudden, buyers were reverting back to the "old ways" of trying to minimize goodwill while trying to maximize equipment/furniture/computers and other areas that would generate a faster tax deduction, let alone ANY deduction. STILL, sellers wanted their capital gains so this issue of price allocation was once again a hurdle, though a low one that could usually be jumped fairly quickly.

Then the long term capital gains rates were lowered to 15%, down from 20% and at one time 28% so sellers once again began pushing firmly for more goodwill allocation while the buyers wanted more equipment due to the ability to write off $100,000 under Sec. 179 immediately. When the IRS recently increased the Sec. 179 write-off to $250,000, those that were purchasing large practices where the value of equipment could easily reach that level, began pushing for the higher equipment allocation and price allocation once again became a struggle.

These days, states & local governments are finding other ways to tax businesses aside from income tax, which usually means higher sales tax, personal property tax, transactional tax, etc. Therefore, buyers need to be educated on how the allocation of the purchase price can affect them from EVERY tax perspective, not just income tax.

Take Maryland for example. We have a 6% sales tax (was 5% a couple of years ago) on the allocation to equipment/furniture/computers and supplies, so on an allocation of $100,000 to those items you just cost yourself $6,000 DUE AT SETTLEMENT. Then our counties also assess a personal property tax on business assets, and on $100,000 over 10 years, that's easily another $10k-$15k. So the buyer’s allocation to tangible assets/supplies might cost them more than $20,000 in other taxes compared to $100,000 allocated to goodwill where there is no sales or personal property tax in most jurisdictions....YET.

Keep in mind the income tax savings on $100,000 will likely be nearly the same over 15 years whether it's goodwill OR equipment, with the only difference coming from the income tax brackets the deductions are taken in. The income tax benefit with equipment and supplies is the ability to get those tax savings sooner rather than later. However, if you run the numbers out over 15 years (the life of goodwill under the tax code), the allocation to equipment/supplies will almost always cost you more due to the other taxes you incur, at least here in Maryland and other jurisdictions we've seen.

This is just one reason why buyers should consider seeking advice from an advisor that has many years of experience with practice transactions & transitions, this one area can keep a buyer from making a mistake AND save them money.

This first appeared on NewDocs.

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

Follow us on Twitter, Facebook and Pinterest

Dental Office Purchase Questions - 100% Medicaid

I am planning to acquire a dental office which is a 100% medicaid practice. I have been handed over a copy of the P&S by the broker. I took some time of to go through the contents of the P&S and had a few questions to put forth before you.

What is a fair compensation to be paid to the seller, if he would work with me during transition?

35-40% of their collections or 25-30% of their prod (since it's medicaid), depending on how many days they work you'll have to decide on their professional expenses like malpractices, dues, licenses, ce, etc. basically treat them like you would want to be treated as an assoc + a little premium on the %.

What are key points to be considered before we sign a non-compete?

One key point = consult a dental attorney! See the recent post by Jason Wood.

What are key points to be considered before we sign a Restrictive covenant?

One key point = consult a dental attorney! See the recent post by Jason Wood.

What are key points to be considered before we set a formula for AR collection?

Not sure what you mean, however, one key point = consult a dental attorney! See the recent post by Jason Wood.

What happens to employee benefits like vacation, sick leave, CE etc after I take them over for the current year?

Depends on what you negotiate, generally the seller is responsible for resolving those liabilities and you as the buyer will have to decide what you'll want to offer them when you hire them. That said I bet Jason Wood has some GREAT advice.

Your valuable inputs will be of great help since I am going through P&S. I am also hiring an attorney for the same, but I feel personal experiences makes the difference.

Thanks in advance.

In my opinion your questions are very specific and need specific advice, NOT opinions based on what others have experienced.....unless those experiences come from a dental attorney! All these are legal issues as they involve a legal agreement.

Good luck.

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

Follow us on Twitter, Facebook and Pinterest

The Ikea Way: The Wrong Way To Buy Or Sell Your Dental Practice

I came across this article about buying/selling dental practices from our friends at Wood and Delgado (dental attorneys) and thought it to be valuable.

“Come to IKEA where you can afford brand new furniture at discount prices.” Your jaw hangs loose as you see the price pop up next to that new dining room table. You think to yourself, “I can actually afford that.” You find yourself running out the door to purchase the table. You find the table and only quickly stop to think, “This box doesn’t look like a table to me”, as you hand over your credit card to the cashier. However, the thrill of being able to eat on an actual table quickly pushes the thought out of your mind as you race home to open up the box to see your table. As you tear open the impossibly-taped-together box the choir singing in your head quickly stops as you stare at pieces of wood with a book the size of an encyclopedia that reads, “Assembling your new dining room table!” Undaunted, you turn to page one. Of course, three hours later when you are staring at a 3-legged “thing” and frantically turning to Appendix “C” to see where you went wrong it hits you that this might not have been the best idea. At the end of the weekend with your project finally completed you realize you were able to get a new dining room table for under $200 but it took you six hours to assemble, your weekend was ruined and you still have 3 screws left over.

Let’s be honest, we’ve all suffered through the IKEA phase of life. Symptoms include: pulling up the couch cushions to look for loose change, ordering off of the “value” menu at a fast food place, using milk crates as a “perfect” coffee table in the apartment you somehow manage to just pay the rent on every month. However, by now you have probably moved on to delivered and pre-assembled furniture. You are past the do-it-yourself phase of your life. So why are you still trying to buy and sell your most important business asset by yourself?

When our law firm receives a call from a dentist who is either trying to buy or sell a dental practice, our first question is, “Who is on your team?” Quite often the reply is, “Team? What team?” While it may seem strange, this is how you should approach buying or selling a dental practice, with a team mentality. Purchasing or selling a dental practice has too many unique areas that are instrumental to the life of your practice or to your retirement, which an untrained eye will not be able to see or even understand. Brokers, CPA’s, attorneys and other professionals are people who you want on your team, and not all teams are equal. While any broker, CPA or attorney can help you with your purchase or sale, a unique subset of these professionals have crafted their professional practices around helping dentists. These professionals would be your All-Stars, the ones who know the industry inside-and-out, who don’t have to “learn on the job” and can quickly help you realize your dream. Below are some of the reasons why having these professionals on your team can help you realize your dream.

DENTAL BROKERS

There is no better person to have on your team than a dental practice broker. These professionals have often spent years (if not decades) in the dental industry, they know everyone and have a long list of buyers and sellers to help you purchase or sell your dental practice to just the right person. Think of them as your team captain. For sellers, they can appraise the value of your practice quickly, market your practice to a wide array of potential buyers, give you expert advice on how to get the most money out of your dental practice and help facilitate the transaction. Although expensive, most dental practice brokers are worth their weight in gold and can help you close on your transaction. Our law firm has seen far too many do-it-yourselfers fail, time after time, when trying to sell their dental practice without utilizing a dental broker. For buyers, calling a dental practice broker will put you in touch with a long list of sellers along with an inventory to fit every budget. As a buyer, you can be assured that the dental broker will be working for you as well, because most of the dental practice brokers have a dual agency to both the buyer and the seller. One note of caution in finding a broker to sell your dental practice: make sure it is a broker who specializes in selling dental practices and not a general business broker. Unfortunately, general business brokers do not have the expertise required to sell a dental practice and will provide you with a standard business purchase agreement which will not take into account the unique nature of a dental practice, i.e. uncompleted dental work, restrictive covenants, appropriate representations and warranties, redo work, etc. Using a general business broker will always be far less satisfactory than using a dental broker.

DENTAL CPAs

Although you may already have a CPA who works for you, if you are looking at purchasing or selling a dental practice, you may want to enlist a CPA who specializes in helping dentists. As a seller, they can save you thousands of dollars in taxes by using the proper ratios for purchase price allocations, thus making them worth almost any fee you may pay them. As a buyer, a dental CPA can also save you thousands of dollars in taxes by using the proper ratios for purchase price allocations because of the heavy use of equipment within dental practices and changes within the tax code that many general CPAs are unfamiliar with. Having your dental CPA review the books and records of the dental practice, the tax returns for the last 2 years and profit and loss statements will further protect you from an unscrupulous seller. Furthermore, when purchasing a dental practice you may want to enlist the services of a dental CPA to help you with all of your business needs since owning and running a dental practice is much different than running a general business. Dental CPAs have spent years helping dentists with day-to-day business needs and they know how to best run your payroll department or to help you receive a deduction for that new piece of equipment that you have been eyeing for the past six months. Out of all your advisors, your dental CPA will be the one who is around the longest, helping you on a yearly basis with taxes and other business issues.

DENTAL ATTORNEYS

Although there are thousands of attorneys to choose from, very few have tailored their practice on a full-time basis around helping dentists in their business needs. Think of your attorney as your catcher or goalie: they take everything in but they stop the bad things from happening. As a seller, enlisting an attorney to review your purchase agreement is a way to protect you in your retirement or at your new dental practice which you are acquiring. There are many areas within a purchase agreement which can hurt your chances of continuing to practice dentistry or can leave you “on the hook” for years to come due to issues like the past treatment of patients, etc. You should also have the attorney review your lease and draft an assignment of the lease to give to your landlord. Generally, you will remain liable under your lease for the life of your lease, which could be another 10-15 years! However, a dental attorney will try to remove this liability by speaking with the landlord and inserting a provision into the assignment of the lease relieving you of liability after a specified period of time. As a buyer, a dental attorney helps you primarily on two fronts, the purchase agreement and the lease. In a purchase agreement, the dental attorney will try to protect your new investment as much as possible, making sure the seller isn’t hiding any problems in the dental practice and insuring that the seller won’t compete with you after the sale of the practice. With the lease, the dental attorney will try to protect your goodwill and your leasehold interest (your lease) as much as possible since these are the most valuable assets you have in your dental practice. Unfortunately, many landlords don’t understand what they have in their lease and many of these provisions can have a significant effect on the value of your dental practice when you go to resell it!

Although this brief article only mentions three types of professionals that can help you realize your dream, there are other professionals within the dental community that can help you just as much. Lenders who specialize in providing loans to dentists will generally provide a better rate then regular banks or other lending institutions, practice consultants can show you areas within your practice which you are not using to their full potential which can help you to make more money, as well as other professionals who have spent years with dentists helping to perfect the ownership or sale of a dental practice. The most important thing to understand when thinking of buying or selling a dental practice is that you are not alone. Unfortunately, our law firm receives too many calls from frantic dentists who have seen their dreams go up in smoke simply because they were trying to accomplish their dream on their own. Using advisors to help you in this stage of your professional life will be worth the extra cost to you, especially if you use professionals who are specialists in the dental community. Remember, the do-it-yourself mentality usually ends with a headache and an unrealized dream. Besides, who really wants to know what a slug nut is anyway, and if you already do I have a three piece “thing” sitting in my dining room I need you to fix for me.

Jason P. Wood, B.A., J.D. and Patrick J. Wood, B.A., J.D.Jason is an associate attorney in the law firm of Wood & Delgado, and Patrick is the founder and senior partner of Wood & Delgado, a law firm which specializes in representing dentists for their business transaction needs. Wood & Delgado represents dentists in California, Nevada and Colorado and can be reached at (800) 499-1474 or by email at jason@dentalattorneys.com or pat@dentalattorneys.com.

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

Follow us on Twitter, Facebook and Pinterest