Buying a Dental Practice and Wondering if Overhead was Adjusted Properly?

There’s a great thread on dentaltown.com about why buyers should NOT pay for potential and projections. Part of the discussion revolves around normalizing cash flow, particularly the overhead of the practice. This prompted me to write a blog post to help potential buyers evaluate a seller’s cash flow specifically with overhead.

Over the past 25 years or so, as I’ve assisted buyers with managing their due diligence, assessing the asking price, and improving the performance of the practice, I’ve witnessed how the overhead assumptions used to normalize cash flow can drive the price that sellers ask for their practices.

 I’ve compiled a list of common overhead expenses categories and some of the issues we’ve uncovered over the years. Buyers need to consider how various expenses might be impacted when they take over and how these expenses may have been adjusted for cash flow purposes. Keep in mind that many professionals  (broker, CPA, seller rep, sometimes the seller themselves, or anyone charged with the task of determining a practice's asking price) who are trying to normalize cash flow, may not have known about these issues with the expenses they adjusted or simply didn’t take the time to understand how their adjustments might impact other expenses.  After all, their primary responsibility is determining an asking price, NOT performing due diligence. That said, we know there are some professionals who will use overhead as a way to increase cash flow and therefore price. One way to accomplish this is by reducing overhead by adjusting (reducing) certain expense categories to “industry norms”. While the reduction in certain expenses may be valid and logical, unfortunately, we rarely see expenses adjusted by increasing them to “industry norms” which should follow the same logic.

The items below should assist a buyer when evaluating a practice’s overhead and how that overhead might change under their control and how “industry norm” adjustments might impact price. At the very least this will help them to know the appropriate questions to ask.

-          Accounting/Professional Fees:
Reducing this to “industry norms” may not take into account a CPA firm which also does payroll, maybe full-service bookkeeping, etc., a buyer may have to pay for the payroll processing and bookkeeping, therefore,  automatically reducing this may be an oversight.

-          Advertising:

 If a seller’s cash flow has little to no advertising, a buyer has to ascertain whether or not they will need to add this expense in order to properly maintain the seller’s existing patient base with an increased flow of new patients. Many professionals overlook this as a necessary expense and will sometimes reduce it to “industry norms” for a FFS practice when that’s how the FFS gets its patients. So make sure you understand the appropriate level of this expense.

-          Computer Maintenance & Expenses:

Many times we see old practices that haven’t been computerized and this expense is missing completely from their cash flow. With today's technology, it makes absolutely NO sense to operate any business, including a dental practice without computers, software, and other technology. Buyers must determine how much they need to budget for this expense as part of their overhead.

-          Contract Labor/Temp Help:

Many times when a practice pays an associate as an IC, the seller will categorize their compensation to this category. However, they may also use this category for temp assistants, temp hygiene, and maybe other necessary vendors. Sometimes, a professional will eliminate the entire expense assuming it is all associate related. A buyer needs to ask for details, maybe general ledger details, and/or associate 1099s.

-          Insurance:
Many times, professionals fail to adjust (increase) insurance expense for some of the additional insurances that lenders may require to provide a loan to buyers.

-          Office Expense and Supplies:

The industry norm is around 1%-1.5%, many times if its more than that, the professional will reduce this expense to industry norms without any consideration for what the seller may be including in this category. We’ve seen the following expenses coded as office expense and supplies: payroll processing, merchant services, software maintenance and monthly PM software fees, employee expenses like bottled water, telephone expenses, cable/internet, janitorial, dental supplies, repairs & maintenance, etc. Buyers need to see the details and determine if the adjustments the professional made are valid.

-          Office Rent:
This is primarily an issue when the practice owner also owns the space. We see some professionals completely overlook this missing expense or choose a very low rent assuming the buyer will buy the space or include the mortgage payment as the “normal” expense. We believe to maintain separation of the practice value and the value of the real estate, the normalized cash flow MUST include a fair market rent and related expenses that an arms-length tenant would pay. Buyers need to know what the fair market rental rate is, even if they’re buying the space.

-          Repairs and Maintenance:
We’ve seen situations where the seller is very handy and will do their own repairs to equipment and the space or, repairs and maintenance was included in dental supplies of office expenses that have been reduced to industry norms. Unfortunately, everyone can’t be a handyman & therefore, if a seller’s cash flow has very little repairs and maintenance, the buyer needs to understand why and include an amount for this, especially if it’s been eliminated from other categories.

-          Taxes:
If your locality assesses personal property taxes on the value or cost of equipment, many times the assessed value of a seller is very low or nothing. A buyer needs to understand this and determine how much they’ll have to spend due to state or locality regulations.

-          Dental Supplies:
Here’s another category where professionals like to reduce it to “industry norms” without looking at the details to see if they should be doing this. We have seen practices combine their lab expense, office supplies, repairs and maintenance, etc. in dental supplies. For example, many supply vendors will issue their monthly invoices that include dental supplies, repair services and\or contracts, computer services and software and even equipment. Unless sellers are careful to allocate these invoices to the various categories, it winds up in dental supplies. The professionals simply miss this fact and reduce dental supplies to industry norms blindly. Also, if the practice uses a CADCAM/milling  machine this will also explain “higher than normal” dental supplies, so you have to look at this area closely.

-          Lab Expense:
As noted above, we see situations where the professional has lowered dental supplies that include lab to “industry norms” and fail to INCREASE lab expense to an appropriate level. We’ve also seen situations where practices may use an in-house lab or employee, or maybe the doc creates some of their own “stuff” which makes this expense  low for them, however, the buyer may not be making their own cases or choose to use an outside lab they’ve been using.

-          Wages:
 Here’s another area where many professionals fail to look behind the total wages to learn more about who’s getting paid & why. This is why we want to see the W-2s, to see how much is being paid for assistants, hygiene, front desk, and admin. We’ve seen situations where professionals will lower the wages to “industry norms,” then, when we get the W-2s we see they have the cleaning person and/or bookkeeper on payroll. These are expenses the buyer will likely need yet the professional has eliminated them to industry norms.

-          Capital Replacement (replacing old f&e):
Here’s an area where we rarely see professionals ADD expenses to accommodate the need of a buyer to replace old equipment that’s either on its last leg OR is simply too old to even be used in dentistry.

-          Telephone/Utilities/Internet:
While we don’t see many issues with these categories, they should still be looked at for reasonableness…we’ve seen reductions for “estimated” personal cell phone usage that’s too high or reductions for “assumed” home phone or internet connections and we find out they are legit office expenses. We’ve also seen sellers use utilities for all three of these expenses, and the professional will reduce utilities to “industry” norms without looking at the details and asking the seller about them.

As a buyer, you’re getting ready to go on the hook for hundreds of thousands of dollars of debt for a business. Don’t hesitate to ask for details of certain expense categories to see what the seller has been paying or to understand why a professional adjusted them.

You, the buyer, are responsible for doing your due diligence on the business you’re buying, you better know exactly what it is you’re buying. That doesn’t mean you have to go into overkill and stuck in  paralysis by analysis, however, unless you do this sort of work every day, you won’t know what to focus on or what to move beyond.

Hopefully, this serves as a guide to those looking to buy a practice on how to evaluate the overhead of a practice and understand why normalization adjustments were made, if they should have been made and should different adjustments should still be made.

About Tim Lott
Tim Lott, CPA, CVA has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator on Dentaltown.com. You can reach Tim at tlott@dentalcpas.com or any of the other dental partners/principals at (800) 772-1065 or info@dentalcpas.com. For more blogs, visit our Dental CPAS blog page.  

2015 PRACTICE FINANCIAL STATS COMMENTARY – WHAT’S CHANGED FROM FIVE YEARS AGO?

We’ve completed the process of compiling our dental practice financial statistics based upon 2014 & 2015 data and the results show very little change compared to five years ago.

Remember, the US economy went through a downturn beginning in late 2008 which lasted probably through the majority of 2012. Therefore, the 2010 results included some of those down years and compared to 2005 we saw some interesting changes, likely due to that downturn. However, many practices began to rebound sometime in 2012, and we saw significant upticks in some practices in 2013, 2014, & 2015. We were curious to see how this would impact the financial statistics for dental practices.

We also know that over the past five years there’s been even more technology that practices are buying and using whether it’s their dental equipment, office equipment, computers, software, and even outside service providers (to handle calls, etc.). While we were a little surprised to see that overall, the changes were minor, we’ve summarized our findings below and provide commentary as to why we think some changes occurred.

     1.     Revenue:

The mix of dentistry to hygiene production has increased slightly in favor of the doctor, with a ratio of 3.1:1 as opposed to 3:1 five years ago. We expected the ratio to be even higher with practices adding implants, invisalign, other ortho, sleep dentistry, etc., however, we didn’t see a big increase.

The surprising statistic is the adjustments or write-offs. Five years ago the “average” practice was writing off 19% of their gross production, and it’s decreased to 14.4%. With all the talk about everyone joining PPOs, especially with the downturn years, we expected that to increase. That said, we’ve also seen an increase in the number of practices that have been maturing and attempting to reduce their PPO participation. Many practices have implemented in-house membership plans to battle the PPO participation urge. In-house membership plans will show a write-off percentage in the 10% neighborhood. It’s also possible and likely that more practices are opting to report their GROSS production based on their PPO reimbursements instead of the UCRs…that’s unfortunate.

We also see a positive increase in the ratio of hygiene production to hygiene wages of 3:1, up from 2.7:1 back in 2010. This increase is likely to the impact on hygiene wages that were forced down in many parts of the country due to the economy and practices doing a better job of making sure their hygiene departments are operating as efficiently and productively as possible.

      2.     Labor:

There wasn’t much of a change overall. If anything, we saw the lower end of the total labor cost range dip down to 25% and as high as 29% In some cases.  The average is still around 27%, and that includes wages, payroll taxes, retirement plans and other benefits. Hygiene remains around 8-10%. However, assistants actually came down a little on the top end, from 9% to 8% while front desk wages bumped up on the lower from 5% to 6%.

     3.     Facility Expenses:

There was no change in the facility costs and rent expenses. They both remained similar to 2010, 6-7% overall facility costs and 5-6% for rent expense.

     4.     Lab and Dental Supply Expenses:

These categories are beginning to show the changes in technology and additional procedure offerings. Whether it’s the use of CADCAM equipment or adding implants to the procedure mix, we think we’re seeing the changes. Dental supplies were at 4-7% back in 2010, and we’re seeing them around 6-8%, again, the cost of implants, maybe some milling supplies and even some practices doing more endo. Lab was 5-8% back in 2010, and the top end has dropped down to 7%. Practices manufacturing their own crowns will see the drop in lab and practices doing larger cases without a milling machine could see their lab hit 10-12%.

     5.     Other Costs:

In total, other costs went from 8.8% in 2010 to around 10% in 2015, a slight increase of 1.2%. We see an uptick in advertising and marketing to 2% on average, up from around 1.5% and 1.5% for collection expenses, like carecredit and merchant services, up from around 1.2% back in 2010. We also see more use of outside service providers like call centers, providers offering in-house membership, patient reminder systems, website SEO services, etc. which is likely driving the increase in some of these other expenses.

In summary, total overhead went from 48.8% in 2010 to around 51% in 2015. Keep in mind, this is based on gross production, we also provide the stats based on net collections for those practices that record their production based on PPO fees, NOT their UCR fees.

So overall I’d say the changes from five years ago have been nominal, yet there are a few areas like revenue, production, and clinical costs that are showing signs of “changing with the times” and for the better no doubt.

CLICK HERE FOR THE 2014-2015 GP Dental Practice Financial Survey Results

Tim Lott, CPA, CVA has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator on Dentaltown.com. You can reach Tim at tlott@dentalcpas.com or any of the other dental partners/principals at (800) 772-1065 or 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.

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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

Here is a helpful checklist of the things that a dentist needs to consider when buying a dental practice. For more information, see our new website: www.dentalpracticepurchase.com

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

Follow us on Twitter, Facebook and Pinterest

Letter to Older Dentist About Selling Their Dental Practice

So here's a question for older dentists that are starting to think about slowing down or selling their practice. How would you feel if you got a letter from a dentist you had never met looking for a practice to purchase? I've done everything that I know to do to find myself a practice with still no solid leads. I've thought about sending out letters to everyone that is nearing retirement age, but the thought of doing this makes me feel a little sleazy. Does anyone else share my same sentiments, or is this something I should consider doing?

Absolutely! We’ve assisted dentists with this strategy with success, nothing sleazy or desperate about it, it's a smart strategy whether you're looking for your first practice, a second location, or to merge another into your existing practice.

There are many doctors out there who have thought about cutting back and\or retiring and don't want to pay the brokers fee, don't know how to proceed, don't want to publicize their thoughts, etc. all they need is that one invitation to talk about it.

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