Buyer of A/R Beware

About a year ago we were engaged to represent a buyer in their efforts to purchase a dental practice. The transaction went fairly smooth and it was one of those engagements where the client wanted to try & handle much of the transaction themselves…or at least as much as they felt comfortable with.

As the settlement day approached, the seller of the practice suggested that the buyer purchase the A/R (unbeknownst to us) and they even agreed on what seemed to be a generous allocation, 0-30, 90%, 30-60, 75%, 60-90, 60%, 0% older than 90 days. On the day of settlement the seller did what they normally do, generate a current A/R report, less patient credits so the parties could do the math and make that part of their settlement.

Things seemed to be going ok for the first 30 days or so, then the buyer started to notice a couple of things. EOBs were arriving with amounts MUCH lower than what the A/R balances were showing and in some cases the EOBs showed services dates much older than what was reported in the various aged buckets.

Here’s what the buyer learned over a period of time -  A) the seller was posting the charges WITHOUT posting the appropriate PPO/Insurance adjustments or at least an estimate of what the PPO/Insurance should have been and B) the software they were using retained any insurance A/R as a 0-30 balance even after 30 days.

So not only did the buyer pay 90% of inflated 0-30 balances because the PPO/insurance adjustments weren’t made, if there were any rejected claims that weren’t handled within 30 days those balances remained in the 0-30 bucket and the buyer overpaid for those balances as well. In the latter case they got hit twice as hard because not only would they have paid less than 90% on those older insurance balances, they also WAY overpaid on those balances because the adjustments weren’t made as well.

As a buyer if you’re going to purchase A/R, make sure you do your due diligence. Make sure all credits are removed, make sure the buckets are aged by date of service, make sure balances have been adjusted for actual or estimated PPO/insurance adjustments.

We’ve seen situations where a software will take a 6-month-old balance and included it in the 0-30 day bucket because the software starts the aging at 0 days whenever an invoice is issued, even when the date of service is 6 months old !

-The DentalCPAs Team

For additional information and/or questions specific to your practice,contact one of our Dental CPA team members at 844-DENT CPA or info@dentalcpas.com.

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

Not Enough Information to Provide Range of Value for Dental Practice

I would appreciate it if you can help me with this.

I'm planning to place an offer on a practice, main highlights:

• Blue collar area, mainly seeing all kinds of insurance

• Overhead 60%

• Collection : 2010: 434k, 2009 :300k, 2008 :300k, main reason new owner came on board in 2010, 2011 year to 8/31 289k

• Net in 8 months 120k

• 3 employees 23/h, 23/h, 14/h

• Working 4.5 days/week
• Equipment in decent condition

What is the range for a reasonable offer?

Jason Wood:

Not enough information to help.

1. Need state-locality as this is a big driver of "value".

2. Is there Medicaid? Are you currently a provider?

Tim Lott:

As Jason said, not enough info:

Of the past 3 years revenue can you tell us what the production was? Can you break it down between dentistry and hygiene? How many hygiene hours per week? Why the substantial increase in 2010 other than the new doc? More days? More upper end procedures? You say 4.5 days per week, which would equate to 36 hours per week usually generates well above $400k. Does the seller own the real estate? Of the 3 employees you've listed hours for what are their positions?

Answer these questions and you should get better answers, just not enough info yet to offer a range without having it be more of a guess.

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

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Should Dentist Buy This Dental Practice?

My background: I have been out of school for two years and it has always been a dream of mine to own my own practice. I am married with two kids and for the past two years I have been working for a corporate chain. I have learned a ton and consider myself ready. Hope I am right.

The practice I am looking at buying:

Practice is in a blue collar town with a population of 25,000. The population make up looks good to me as well as the average income (15% at 2k, 15% at 25k, and 20% at 25-50k). There are 13 dentists in town, 3 of which work in the same building as the seller (more to come about this). The practice has been there for the past 40 years but the building practically looks new.

Practice overview:

2007: 500K with 46% OH

2008: 430k with 45% OH

2009: 530k with 50% OH

Have you verified OH? With seller owning a portion of the R/E, you have to wonder how they've factored in FM rent and other potential R/E pass-throughs that tenants might usually pay.

Asking price: 345K

Real estate: 158K

The practice has 3 ops for the doctor. It is all equipped with digital x ray and cam, NO2 in all ops, TV monitors for patients in all ops.

The seller has 2 ops for hygieine which he shares with one other doctor in the building.

Issue #1:Are you going to be happy with that sharing arrangement? The hours you get them? What if you need more time in the chairs, how is that handled?

The building is 5500 ft and shared by 4 dentists altogether. The building was appraised at 630k and the seller wants 158K for the 1/4 (his part of the building) of the total building.

Issue #2: If you buy the real estate you now have 3 partners. You don't know them and they don't know you. Is there a partnership agreement? If issues regarding the building come up you're the "new kid on the block" with 3 votes against you.

The only thing the seller shares is the waiting room and the laundry room with all doctors.

Issue #3: Again, you're sharing with people you don't even know. Are your decorating tastes the same as theirs? If you want to add things to the waiting room that they don't what happens?

The 2 hygienists and the two hygiene ops but shares with only one other doctor.

So you also share the hygienists? Issue #4 Sharing staff is always difficult, especially when you're the "new" boss.

The seller space comes to be about 1500 ft. All four practices are separate other than what I mentioned above. The seller has two DA’s and one receptionist/manager. The practice is mostly FFS and few PPO insurances. The doctor works 3 days per week. The seller refers out molar endo, implant restorations, perio (SRP), ortho. The RDH only do prophies (2 per hour) but they are booked solid for 2 months.

Ok, 30 minute prophys - is that you're style? What if you want to move to 50 minute prophys, will that be a difficult change for them? Is that going to be different then the other doctor they work for? On the upside it sounds like a busy practice with a nice stable hygiene base. Of the gross revenue, what's the breakdown between doctor and hygiene production?

I like the practice a lot in that I think there is a lot of potential. I plan on doing the perio and not referring them out. What worries me is the fact that I would share the two hygiene rooms and the two hygienists. What would happen down the road if I want to get rid of one etc?

It's good to "worry" about that now.

I would love to get your opinion on this. What would be the fair price for this practice? When do I start negotiating?

No way to even guess at a figure without so much more info and without doing the due diligence. I'm assuming the doctors also covered for one another while they vacationed and since they're in the same space ever consider what a patient might do if they don't want to see you? Maybe see the other doctors in the space? That's another issue you need to consider.

It’s a very complicated set of facts that you'll have to weigh for this practice. Good luck.

Thanks Tim appreciate your input. I know this is a unique and different kind of opportunity. I am still not 100% sold on it and that’s why I am here. I will find out about what kind of agreements there are between the 4 owners regarding real estate. I have brought up some issues to the seller you pointed out and I was assured that I will be the boss in my practice and whatever I choose to do is what will happen. The way they utilize the two hygienists is that for every 3 minutes of prophy the doctor pays $23 to the hygienist and I am told this $23 includes the prophy supplies and the hygienist wages. If I choose to do one hour prophies then I will have to allocate $46 to go towards hygiene wage and supplies. What I find very weird is that all 4 doctors refer SRP. There is no way in hell I would do that. I plan on utilizing the hygiene to do 2 quads of SRP per hour which means it would cost me $46.

As for the hygiene total production the two hygienists produced $80k which comes to be 15% of the total production.

Well that appears to be a problem. They’re booked out 2 months because they're being shared by another doctor so how much can you grow in patient count? Is there chair time to add hygiene hours? $80k in hygiene with 30 minute appointments seems very low and 15% of total production doesn't indicate a healthy practice profile either.

Just seems like too many downsides with not much in upside....

This first appeared on Dentaltown.
 
Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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Retiring Dentist - To Buy or Not to Buy....

Office info:
- Upcoming bedroom community
-Office on 2nd floor(above ground) and corner unit in small plaza, with good signage on the road (We can put another sign in window or on the building as well). About 10k cars traffic per day. Clinic has been at this place for 32 years. No advertisement done. Clinic is behind grocery store. Other anchor stores in area are shopping mall, Staples, Toys R Us, Starbucks, McDonalds, Burger King etc.
- Practice gross $674k(2008), $652k(2007) and $634k(2006)
- Hygiene production $220k(2008), $203k(2007) and $193k(2006)
-Net Cash Flow $264k(2008), $253k(2007) and $233k(2006)
- Market value $556k - as appraised by the listing company
- $372k goodwill
- $40k equipment
-Supplies-$15k
-Leasehold improvement $112k
-Furniture - $15k

The price may be reasonable based on the numbers given. You should dump the allocation to LHI. You'd be better off lumping on top of GW or carve a piece out for consulting. Hygienists been very consistent, which may be why growth has been limited. Dentistry has also been consistently low at $450k, when it could be closer to $600k for an $800k practice.

Have you done a demographic analysis of the area?

- Dentist is working 4 days/ week
- Leasing the office, rent would be $21k/ yr
- Office has no pan
- Office has 5 ops and is outdated, including very outdated equipment
- one fulltime hygienist(4days/week), another part-time hygienist(2days/week), one front desk (with dentist for 35 years), two assistant(daughters), and his wife(office manager) works there.

Whole family of retiring dentist is working in clinic. Dentist and his wife (office manager) are willing to stay for transition (3 to 6months) and 2 Daughters (who work as dental assistants) are willing to stay longer. Daughters (DA's) are paid $32/hr which I think is high and I won’t need two dental assistants. But if I fire one dental assistant (daughter) then I think rest of family will also leave and this will poison the transition. Daughters are being paid probably to save money on tax and cutting their salary to normal level or firing them will have a big impact on cash flow as they are being paid $53K/year each, $106K. I don’t like the idea of firing anybody especially in or after transition, but I don’t think daughters will accept less compensation.

This part of the analysis needs CAREFUL attention. As you've already noted family MAY be paid too high and I wonder if wife and FD BOTH are needed. Find out what the going rates are for assistants, etc. and have a heart to heart with the seller to see if he thinks the daughters will concede some of their compensation if it's too high. As you've noted a VERY delicate situation that could absolutely affect value and overall GW transfer.

Patient info:
- 1900 patients seen within past 24 months
- about 8 new patients/ month
- no HMO

There’s likely about 1,000 INDIVIDUAL patients going through the hygienist’s department IF the majority are seen twice per year. You'd need to do more due diligence to verify. Do a zip code analysis to see where the active patients are coming from.

Myself:
5 years of experience, can do endo, oral surgeries etc., can handle what retiring dentist is doing. I can bring in orthodontist for a day each month or get ortho training myself, and also work 5 days/week to improve gross revenue.

Is the seller currently doing endo and oral surgeries? Are there any procedures you do that the seller does not and vice versa?

Are 8 new patients per month good enough?

I don't think so. You need that demographic analysis.

If not for the family employees I think this practice could have a lot of potential at the right price. The family\employees issue could kill any deal on this practice unless it can be resolved with them.

Thanks for the help. I think deal killers are whole family involved, low new patients, and old equipment. I may be able to advertise and bring new patients in. I could also stipulate in the contract that dentist family stays for 6 months.

Is this information regarding the practice you've detailed? It's not clear since you mentioned another clinic, but I’m assuming it is.

1. Talked to the owner dentist today and found that there is 2.5 years lease remaining, with two more 5 year options. BUT the second option has a 6 month demolition clause. Considering that it is an old building with new construction all around the area, there is good chance that building would be demolished. Then we'll have to find another place and start a clinic in 6 months.

Hmmm, that does seem to present another wrench. Certainly, it would be nice to work a deal where if the demolition clause is triggered after 2.5 years the seller would have to rebate say $150k to help fund the move or have the landlord kick in something. Though, I can't imagine why the landlord would do that.

2. Other factor is clinic is on 2nd floor, above ground floor and there is no elevator. How many old patients would I lose because of that?

What do you mean "lose"? If the clinic is already on the 2nd floor, hasn't the owner already "lost" those older patients he would have had? If those older patients are seeing the seller now without the elevator, why would they stop coming now?

3. There is no Pano

What do you think? The asking price is more than $550,000.

$556k to be exact, correct?

Even with the number’s potential, this just seems like too many potholes to maneuver around....

This first appeared on Dentaltown.

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

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Fair Price for Dental Practice?

I've been working at this practice for 2½ years; since it first opened. My boss built it with plans for someone else to work in it, but that fell through, so I've been the sole dentist there. I am talking to him about buying it but can't decide if it is worth it. He wants all the money out of it that he put in, but based on production numbers, I don't see how this can work out for me.



Here's a little background…


We are the only office in a small town. I have built a good reputation in the town and it would be very nice to take over this practice and keep the patient base and the goodwill that I have earned there. I could probably build my own practice there (based on contractual issues that I won't get into here) but I really don't want to screw over my boss since we are friends. The balance on the practice loan is 489k and he says he put in 50k of his own and that he can't sell it for less than that.


Here are some (very basic) collection figures:


2007: 195k, based on 7 ½ months, mostly part time


2008: 515k


2009: should end up around 600k


I know that I haven't given much information, but that's all I have on hand right now. I just don't know where to go at this point. I'd rather not have to start another new practice from scratch since I've basically done that with this one. Any suggestions for what I should be doing next?


Thanks in advance for any help. I'm at my wits end.

The practice may or may not be worth what he's asking; there's not enough information to make that judgment.

If it's a 3-4 operation practice which should have only taken approximately $300k-$400k to open, I wonder where the other debt came from? Was it from supporting you and the practice for 2 ½ years maybe? If so, he's gotten some pretty nice tax breaks for his increased debt and I agree, that's not your problem and it may be overpriced.

One can't assess a practice like this on revenue alone though; that's very dangerous for both buyer and seller. If this were a 20-year-old practice with older equipment and older technology then I would agree, the price seems out of line. This is a 2 ½-year-old practice, maybe with new technology with revenue of $600k and growing, the price may be reasonable.

On the other hand, if it took over $600k in debt to open this 6 op practice with all the bells and whistles and it has the potential to be a $1 million practice within a year his price may be a bargain.

If this practice is only capable of doing about $600k, you don't want to buy it for that price for sure.

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

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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

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Dental Graduate Looking at Buying a Dental Practice

I am a new graduate, who originally thought I would just work in private practice as an associate, but recently I was approached about purchasing a practice. The practice is in a rural area, about 15 miles from the small town where I grew up. It is the only dental practice in the area; the nearest dentist (who's next available appointment is almost 3 months out) is about 40 miles away. The owner says that about 18-20% of his income is from Medicaid patients. He also treats patients at a local prison and hospital.

The owner had his practice appraised in December 2005 for $500k; the real estate appraised at $110k. His production has increased since then, and he is currently asking $400k for practice and $100k for real estate.

Production over the last 3 years:
2006 - $1.05 million
2007 - $1.04 million
2008 - $1.26 million

Hygiene production (last 12 months): $406k
Total of staff salaries: $228,600
He said he expects to produce $1.3 million this year.

$406k in hygiene, if accurate, is a 2 doctor practice capable of $1.2 million in dentistry for a $1.6 million practice. Again, if accurate you'll need the seller to stay AND you'll likely want a plan to get their replacement in there within a couple of years, otherwise your days are eaten up with hygiene exams which eats into your production doing other dentistry.

Are you ready for a 2 doc practice? All for the great price of $500k?

My concerns:

- The dentist is older and seems to have allowed patients to dictate what treatment they need, i.e. "I only want a cleaning. I don't need x-rays." Or patients will decline perio treatment, and only a prophy is completed. So, I do not know how they will react to a young dentist coming in and going "by the book". I was told by the owner, if I go in and change much, the patients will not trust me.

First, that's just common sense, never come into a situation guns blazing changing everything. Nearly every advisor that works with buyers will suggest small changes initially, start with facility updating then move to practice updating. Over time (maybe 12-36 months) if you exude self confidence, patients will come to trust you and allow you to guide their treatment plans.

- The owner has stated that he will work with me as long as I need him to stay; however, on his rough draft contract I noticed he stated he would stay "no longer than 2 months".

First let’s get this out of the way, this "rough draft" is just that, a rough draft. Seller may have been jotting down wishful thinking. You can to the same and it's the final draft that is meaningful since the final draft will be a combination (and likely compromise) of both of your wishes.

- I have asked several times about the income from working at the prison and hospital, and I only get estimates. I am not sure if he is hiding something, or if the office manager does not know how to separate this. The owner initially said he would continue to do the prison work, as it is not part of the practice. He said that the hospital work would stay with the practice, and I could hire him to complete those cases for a flat daily fee. Now, in his rough draft, he states that he reserves the right to complete the hospital cases on the waiting list, as the parents have already agreed to let the owner doctor treat their children.

Due diligence and worry about the final draft.

- The equipment is very old, and is sold 'as is'. He said everything works, and if I have someone come in and inspect the equipment they are just going to try to get me to buy new equipment.

Get an equipment vendor to inspect the equipment. You’ll likely already know what you want to buy anyway and the equipment vendor will just be telling you what you already know anyway.

- The owner says that the building may be inspected for termites, plumbing, and wiring at my expense. There is some leaking I noticed in the ceiling, the A/C unit blows cold in some operatories, but not in others. I have heard some patients complaining that it is hot in the building. I have also heard that there has been some plumbing problems with the building also. It is a small town, and I have know people who work there.

Yep, inspection is at your expense, get it done.

- The rough draft also states that any outstanding bills for dental supplies, office supplies, etc. become my responsibility upon the date of transfer to the new owner.

Due diligence and worry about the final draft. If you do assume debt it becomes part of the purchase proceeds, meaning a $500k price could mean $400k in cash and $100k of assumed debt.

- Also, the owner is able to collect any money due to him for treatment started before the sale or not completed until after the purchase. He also reserves the right to collect any money due to him for up to 2 months after the purchase of the practice.

Worry about the final draft.

- The owner is asking for 35% of collections for treatment provided by him. Also any credit balances become my property, i.e. I am responsible to repay that credit to the patient.

Worry about the final draft and see above about assumed debt.

- Hygiene is given only 40 min for adult appointments, whether is a new patient or 6 month recall. Patients are often rescheduled to take an FMS since there is not enough time to complete everything in this amount of time. There is no pano, so it is not possible to just take a pano and BWs. If I take over the practice, I plan on giving hygiene more time for new patients, so this would decrease the hygiene production.

Why? It should increase hygiene expense.

- Since I'm a new graduate, it may be near impossible to complete this deal even with some owner financing. Owner does not seem to want me to work as an associate and then buy-in. He seems to want to retire and get out ASAP.

If seller wants out ASAP and you can't get conventional financing owner may HAVE to be the bank.

I do not want to worry about problems with equipment, building, etc. after paying $500k for a practice. Is it normal to purchase a practice at the asking price, and then have to go in right away and replace equipment, fix plumbing and A/C problems? I want to make this a win-win situation; however, I am not sure how much the owner is willing to compromise.

In some cases absolutely, in the end the buyer needs to prepare a business plan based upon practice purchase price AND re-investment into the facilities and equipment to see if the deal is doable. Again, IF this is a $1.6 million practice in which the final price is $500k, you'll have plenty of profits to afford the upgrades.

The real question is as a new graduate can you handle a $1.2 million practice and turn it into a $1.6 million practice?

Sorry about the long post; I am new to this and wanted to give as much info as possible to help avoid pitfalls and to see if this sounds like a deal worth pursuing.

You really need someone to assist you in evaluating the practice financial issues and talk through the potential purchase of this practice. My fear is that this practice may be too big for you at this stage of your career.

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

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Dental Practice Purchase Concerns

OK, here is the short story. Wife and I are endo. Wife has worked for about two years now in a FFS endo practice, I am finishing endo residency. We want to buy this practice together. It is located in a wealthy town (2007 data) average family income $164,486., average home value 780K. High level of education, dental education. Practice is located near major highways, train station, etc. The town can support high, quality centered endodontics and dentistry.

Gross/net profit based upon previous tax returns:

05: 648/414
06: 597/391
07: 740/499
08: 776/529

Practice was valued between 495-512K, we negotiated to 485K

Lease is a renewable, transferable 5 year renewal. This issue has been taken care of. There are no liens nor judgments.

Now the catch. Seller wants closing to occur at the end of August, 5 months from now. He wants 50K in escrow, non-refundable. I made provisions to the contract to protect the escrow in the event of catastrophe, death, lack of financing etc. The escrow makes me uncomfortable but I can understand it.

I have contacted Matsco, Bank of America to get competing rates. Both are similar. I have yet to contact MBNA and PPC. We are pretty sure we are going to go with a private loan as opposed to a SBA loan. I have not decided on a lender yet and want to sign the contracts first, and then get the lender in line since we have five months till closing and they will need to extend a promissory note for an extended period of time. In addition they are likely going to review a profit/loss from January to June as well as a cash flow analysis. Both of us have very high credit ratings. Financing should not be a problem. We are aiming for 100% financing to mitigate risk of our personal assets. All lenders have assured us this should not be a problem.

Questions and anxious thoughts:1. Any advantages to the different financing companies out there?

BofA, Matsco, ProMed will usually finance 100%, local banks may not.

2. We are planning on purchasing the practice as two S corps.

Why? What are the advantages of two? If you finance 100% and don't put any of your money into the corporation and the corporation has a loss, be prepared NOT to deduct that loss.

3. Business is down, significantly this quarter. It is not just this practice, it is every practice. This makes me very, very, very anxious. I am wondering if I should offer less.

I’m seeing this quite a bit in transitions, buyers who have entered into negotiations are seeing lower revenues and wondering if the price they agreed to should\could be lowered? It’s certainly a dilemma. If your seller needs\wants to sell and there aren't any other buyers waiting in line, at least you have the upper hand if you DON'T have to buy.

4. Loan amount would be 535K for working capital we have an option of 6 or 10 year repayment with no prepayment penalty after 3 years.

Hmmm, I’m seeing no pre-payment after 12 months. I haven't seen a 3 year wait in....probably 3 years. I’d go for a 10 year term, you can always pay it off in 5 if you wish. Also make sure about what "pre-payment" means, there's a good thread on here where George from ProMed explains the difference in language in loan agreements and you have to be VERY careful NOT to assume you THINK you know what the language means.

5. Accountants records are not included.

6. Goodwill is valued at 387K and amortized over 15 yrs.

I am not sure this is good for me tax wise, it is a compromise between buyer/seller.That’s the reality though, goodwill is generally the bulk of the price in any sale and especially with endo where so much revenue can be generated with less numbers of rooms and profits are high (due to low OH). You might consider trying to negotiate a consulting agreement with the seller, deductible when you pay it, not over 5,7 or 15 years.

7. Owner wants to stay for six months two days/week. Wife is there 3 days, I will be there 1 day/ week. I am not happy about this but fortunately both my wife and I work at other endo. offices or for other doctors. Our plan of failure is that we can likely live off of our outside income from our other work if our practice did not do well. We do not own a house, have a modest new car, and live a very frugal and simple lifestyle, no kids yet...

I would think that one of you would want to be there at least the same days the seller is so you can meet the patients along side the seller and get a chance to talk to the referrals. Lets face it, endo is all about your referral sources. So even if you aren't doing dentistry the days you're there you need to be out meeting with your referrals sources and it's preferable that the seller go along with you to those introductory lunches, etc. After the 6 months, ask the seller to make himself available for another 6 months, 2 days per week to attend these lunches with you.

How many other endos are there in the area that the GD's would refer to? How long have they been there?

Quite frankly the price of $485k might be somewhat high considering the risks associated with retaining the goodwill of a referral based business are so much higher compared to a business where something like location comes into play a lot more, like a general dentistry practice.

Good luck !

This post first appeared on Dentaltown.

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

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Dental Practice Purchase Question - Is the Practice Worth It?

I've been contemplating starting a brand-new practice from scratch or buying an existing practice. Here is a summary of the practice that is for sale:

What was your budget for a start-up?

-selling doctor is female and selling because she will be working for the state

why did she decide to become an employee?

-office is currently open 24 hours/wk (Mon-Wed) and has been for the past 5 years.

Sounds like it's been hobby, has it been? Is she married? Does her significant other work?

She only has 2 full hygiene days per week.

So that's approximately 400 "active" patients going through hygiene (16 x 25 weeks = 400) assuming the majority are seen twice each year. Is that the case? Is there any hygiene on the docs schedule?

-patient count is approximately 2000 patients (1500 were seen in 2007)

Is this a tourist location where patients are seen once for emergencies? Of the 1,500 patients supposedly seen in 2007, how was that determined? Are these 1,500 DIFFERENT patients or simply 1,500 "visits”?

-roughly 8-10 new patients/month (mainly internal marketing)

Again, sounds like a hobby, no interest in working more than 3 days per week, no desire to market and grow the practice?

-selling doctor refers all ortho and endo, and some dentures and some pedo

Do you perform any of these procedures? Any other procedures you do that she doesn't and vice versa?

-practice is 60% FFS and 40% PPO (only 2 PPO plan accepted - metlife and delta dental)

Decent mix.

-2008 gross through Oct (10 months) is $245,000 and net is $85,000
-2007 gross was $323,000 and net was $110,000
-2006 gross was $335,000 and net was $120,000

What's the breakdown between hygiene and dentistry? Hygiene should be around $80k based upon the 16 hours per week which puts her production at $240k for a total of $320k, is that about right?

The asking price is $285,000 and is negotiable. There seems to be a lot of potential to grow this office:

What’s the population to dentist ratio? Is the lease renewable? Have you had the lease looked at yet?

-accept more PPO plans-implement more external marketing (direct mailers, etc.)
-open more days and hours
-keep a lot of procedures that were referred out in house

Ok, you answered one question...

In addition to the potential, some red flags about the office I see are:

-why are there only 2 full hygiene days/ wk when the office has been established for 6 years with 2000 patients? Probably has poor recall and STM program.

This isn't necessarily a red flag, again, if the income wasn't "needed" by the doc who only wanted to work 24 hours per week, why would you want more patients you can handle?

-only 2 equipped OPS after 6 years!!!! WHY!!!

See above....hobby....heck, doctor only worked 1 chair 2 days per week...tells me a lot about her motivation, which is not intended to be negative, I’m just guessing her motivation for this specific practice wasn't the same as someone else’s.

What do you think???

See if you can answer the questions and tell me more.

How much do you think this office is worth?

Depends upon the buyer. If the byer was looking to start from scratch and looking to spend $250k for a 1,500 square ft space with 2 equipped ops and I compared this to spending $250k for the same space WITH an immediate patient base of $300k.....well, I’d be working TOMORROW instead of waiting 90-150 days for my space to be ready!

What price would you negotiate?

That’s for the buyer to decide.

Any suggestions??? Do you need any additional information???

Yep, dig a little more. I agree with you, sounds like it has potential though you need to find out more about the demographics and look into some of the issues I raised.

Don’t get hooked into the price versus revenue ratio in this case, it's irrelevant in this case. Think about what I said above:

1. how much would it cost you to build out 1,500 sqr ft ? $100k-$125k with landlord allowances?

2. how much would you spend to equip 2 rooms & have everything else they list? $100k ?That’s $200k to $225k right there. So lets discount it because it's 6 years old, $150k ? $125k?

Now the kicker:

3. how much would you be willing to pay for an immediate patient base of $300k ? $150k? $100k?

$285k doesn't look to bad to me compared to opening from scratch in 90-150 days for about the same cost and with NO patient guarantees!

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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Evaluate Three Dental Practices for Purchase Potential

Practice #1: Town of about 25,000
Asking price: $218,700
Practice Gross: $312,461
Hygiene: $56,300

Based on hygiene alone, typical doc production would be approximately $170k for gross of $226k, and doc refers out a lot. Will there be any real dentistry left for you to do?

Older dentist working 3.5 days a week/ Been at office for 10yrs- just wants to retire completely
5 hygiene days

Problem. Assume average hourly hygiene production is $100. $100 x 40 hours per week x 48 weeks is $192,000 in hygiene production, you say it's only $56k above and that number looks more realistic. It can’t be 5 days of hygiene. With $56k can’t be more than 1.5 days of hygiene.

Number of Active Patients (Seen in last 24months by this report): It list 3744 (I think this must be total pts), 1080 also listed (thinking active) (20 new per month)

If $56k is hygiene that's approximately 300 "active" patients at best, 1,080 MAY be patient visits for 1 year and are the different patients?

Dentist referring Pedo, Endo, Full dentures, 3rd Molar and difficult extractions18% Hygiene/ 5% Surgery/ 36% Restorative/ 41% Crown/Bridge

These numbers just aren't jiving, need to dig deeper.

Practice #2: Same town as #1
Asking price: $249,900
Practice Gross: $431,736
Hygiene: $120,886
Husband and Wife set up second office here (other office about 40minutes away) and now want out after 4 yrs
4 Dr days/ 4 hygiene days

Ok, these numbers look a little cleaner, still, if average hygiene production per hour is $100 I get approximate hygiene production of $150k. So either my average per hour is high for your area OR the hygiene days have some holes. Also, based on hygiene production, dentistry seems a little low.

Monthly Rent: $2500
4 operatories equipped
Practice was about 60% Medicaid- now trying to change to FFS and get rid of Medicaid
# of Pts seen in last 24 months: 3000 (28 new per month)

"Active" patients can't be much more than 600 plus or minus 100 or so.

Referring most endo, all ortho, impactions, implant placement
11% hygiene/ 12% Surgery/ 20% Pedo/ 19% Restorative/ 25% Crown Bridge/ 3% Perio/ 5% Endo/ 5% Denture

11% hygiene? That’s approximately $47,000 of the gross, 120k of 431k is 27%, which is more realistic. So some strange "facts" here as well, though closer to reality than the first practice.

Practice #3: Town of about 4000 (1 of 2 dentists there)
Asking Price: $367,000
Practice Gross: $539,600
Hygiene: $167,277
Older dentist retiring been at location over 30 yrs
4 Dr days (Older DMD working 3 days and associate 1 day)/ 5.5 hygiene days

Hmmm, my average hygiene production per hour of $100 must be high for your area, I get approximately $210k in hygiene for this one, still pretty close to $167k. Doc production also looks real low based on hygiene production, might be some nice untapped dentistry in this practice.

Monthly rent: $900/ Will sell building- price $125,000
4 Operatories
30% Cash/ 10% Medicaid/ 60% Insurance
# of Pts seen last 24 months: 1200 (20-30 new per month)

See, this makes sense. I’m guessing "active" is around 800 so 1,200 may very well be different patients seen as the others are listing patient visits which many are the same patients.

Referring some surgery and some endo
20% Hygiene/ 20% Oral Surgery/ 5% Pedo/ 35% Restorative/ 10% Crown Bridge/ 5% Denture

Makes me wonder if using 24 months of patients is too mislead potential buyers into thinking there's more patients there than there really are.Can’t assess asking price without knowing true profit, sorry.


Can you tell me what you think a decent practice numbers should run?

I’m not sure what you mean by "decent", can you narrow the question?

What should I be looking for in hygiene production: doctor production?

In an average general dentist practice, doctor production runs about 3 times hygiene production, OR doctor production is approximately 75% of gross production and hygiene is 25%, you might also here 2/3 doctor, 1/3 hygiene of gross production, the stats are close enough to be comparable.

Therefore, if you’re looking at a practice where confirmed hygiene is 15-20% and doctor production is 80-85% plus you have to find out why. Is the hygiene under producing, or doctor over producing? By the same token, if the hygiene is 40% plus and doctor is 60% less, chances are the doctor is under-producing which might make the practice under-valued, or said another way, a bargain.

On average, the typical 4-5 day per week "mature" practice will have approximately 1,000 patients which is approximately 4-5 days of hygiene per week. This should produce approximately $800k give or take of gross revenue each year, doctor doing $600k, hygiene doing $200k.

And what questions do you think I should be asking the broker?

That depends on what you find as you go through the due diligence process. That begins by gathering the pertinent information about the practice and analyzing it. Going through that initial process will generate many additional questions for the broker and each case generates the some of the same questions and many different questions. If you don't have a practice purchase checklist you can go to newdocs.com and find it in their download section for "new doctors" or email me and I can send it to you.


I do need to follow up with practice 1 to check on those hygiene numbers. It lists $56K in hygiene production but then the report I got says they have 5 hygiene days with 3 different hygienists working part time and the hygienist salaries add up to about $53K so something doesn't add up. Don't know if they are trying to cover up doctor's lack of production or if is a typo. Dentist has had the practice on the market for a while with no luck so maybe there's more to the story here.

Practice #1 has no computers/no digital so would need some working capital to make some upgrades.

See, it's this kind of info that might hint at a diamond in the rough. If hygiene wages were $53k and hygiene production usually averages about 3 times their compensation, then hygiene production is closer to $160k, which would put doctor production at approximately $160k as well, indicating a grossly under producing practice. If dentistry is usually a 3 to1 ratio of hygiene as well, doctor production should be closer to $450k for a practice grossing $600k and what's the asking price?

The only way you'll know for sure is to verify the production numbers than visit the office and pull 50-100 charts and see what's been going on with the treatment planning. It's very, very possible that the seller has been winding down without cutting back on the hygiene, hence the 50/50 split of production between doctor and hygiene when it should be 752/25.

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

Follow us on Twitter, Facebook and Pinterest