Monday, November 24, 2008

Dental Practice Purchase Evaluation


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

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

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

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

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

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

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

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

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

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

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

Write off 40% for insurance.

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

Seller ALWAYS assumes debt, that's not unusual.

So many questions......

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

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

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

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

Square Footage is 2508. 3 Operatory.

List of OH: Rent 2340

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

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

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

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

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

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

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

IRA Employee 120, Health Ins 440.

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

Very unusual practice indeed.....

This post first appeared on DentalTown.

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Wednesday, November 19, 2008

Dental Scratch Start Up Questions

I'm currently working to hone my clinical skills, which no doubt have grown tremendously in the last year. I'm also living well below my means and saving my money for a potential future practice. I'm thinking about a startup, which will be financed a lot through my earnings and the rest on loans. I plan to work for a couple more years.

1) What can I expect to pay for a startup?

I assume you mean how much money will it take to create a practice from scratch, that's a wide range driven by size, location, type of equipment, buildout, number of ops to begin, etc. That said I’d say no less then $250k and as much as $500k. In your area I’d have to offer a guess of approximately $300k-$350k as a good target.

2) How much of the practice should be purchased in cash?

As little as possible, especially with the low interest rates today. Cash is king, try to preserve your cash which means if you can find a lender willing to lend 100%, take it. There are lenders that will do that.

3) Should the entire practice be purchased in cash?
4) What does my cash flow need to be for a startup? (Assuming 1-2 op, one assistant and possibly a hygienist to start)

I’m not sure what you're asking? Are you asking what to expect in terms of initial monthly overhead expenses which drives what you need to collect to break even? If so, again, it's a wide range, however, based on 1-2 ops, 1 assistant I’d have to say no less than $10k a month, probably closer to $15k plus per month. That includes the rent, debt service, labor, insurance, supplies, utilities, marketing\advertising, etc.

5) How far ahead should I start planning?

It’s NEVER to early to start planning. start finding out what it cost per square feet to build out, what it cost to equip a room, technology, labor rates, rent per square feet in the area you want to practice, etc. There's so much you can do a year or two before you begin to help the process go that much smoother. In fact, it wouldn't hurt to begin building your business plan along with creating a forecast of your future practice NOW even though you may not need it for another year or two. You’ll always be tweaking it, even when you're in the heat of it.
Good luck!

So it wouldn't be a good idea to put in more cash to possibly lower the debt service and cash flow requirement?

Not necessarily. You’re usually better of keeping your excess cash available for emergencies, funding ret plans, saving, etc.

Imagine using most of your cash simply to reduce your monthly debt service, things don't go so well and you need more cash, do you think a lender will be eager to lend you more? Usually not, not nearly as eager as they can be at the beginning, I’ve seen it many times. If things don't go as planned and you've stashed some cash away you have more options.

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Friday, November 14, 2008

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.

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Tuesday, November 11, 2008

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 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.

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Tuesday, November 4, 2008

Contemplating PPO to Get New Dental Patients

SO, my new OM suggested signing up for a new insurance. I am worried about the office income and I am thinking about her proposal, especially with this economy. I can try it, I know that some PPOs are awful I belong to a few already, but a business decision needs to be made now. Based upon the office income needed, I’m coming up short by about 3 grand a week. I can’t really lower the overhead anymore unless I fire an employee!! I’m not going to do that!! And when things improve, I could drop the plans again, I would appreciate some feedback and opinions on this.

With a shortfall of $15k per month it's not an overhead issue, it's a revenue issue first and foremost. I don't disagree with shaving a few hundred dollars in overhead, however, I’d be focusing on what could generate a few thousand dollars first and after getting that in gear, taking the next step and evaluating the excess overhead IF there is any.

Sounds like you need patients in the door and in the chairs. The fact is much of your overhead is now fixed, meaning, other than lab and supplies, all of your expenses are likely to be the same whether you have 4 patients in a chair or 8 on a given day. What you need to do is get the additional 4 patients in the chair.

PPO's will help you get patients in the door and in the chair, maybe more quickly than any other option, with NO upfront costs. The "cost" will be paid on a per patient basis (reduced fee). That doesn't mean you have to stick with PPOs, you're using them to boost your patient count, it'll be up to you to keep the patients, even after you drop the PPOs.

Good luck.

This post first appeared on DentalTown.

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Not Depositing dental Insurance Checks to Avoid Taxes

For the months of October, November and December I am planning not to deposit any cash and insurance checks (provided they are valid for 120 days) into my business accounts. This is to deplete the accounts so I can avoid taxes.

Does the term "constructive receipt" mean anything to you? The IRS says if you received it, whether you deposit it or not, it's income. Talk about a HUGE risk, audit wise.

Firstly, is it legal?

It’s legal not to deposit it, there's no law that says you must deposit it. Reporting it? See above in red.

Secondly, is it worth the trouble?

Absolutely not. It’s different if you're away the last week of December, office is closed, and you cancel your mail. When you receive your mail the first week of January you deposit the checks you received. Now, if you're going away for 3 months, closing the office for 3 months.....yea right!

This post first appeared on DentalTown.

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Dental Capitation Compensation Question

We do a doctor's salary pool that is based on collections. The only problem is if you post production and collections to a RDH. We split the week so we just split the hygiene collections 50/50. Remember the owner takes collections and then pays overhead, then pays himself. By the way I would gladly pay a "worker dentist employee' his production if I did all the treatment plans and financial arrangements. I have heard of this being done in various offices, with good success.

Not counting the cap checks is wrong in my opinion. I’d be looking to change that real quick.

I agree paying on production is a much easier task, however, with software systems today, why do folks seem to have problems tracking collections on specific production?

We get monthly reports from many of our practices showing gross production, adjustments and collections, by provider, including hygiene. Now, allocating the capitation checks in those few practices that still participate can be challenging I will admit.

This post first appeared on DentalTown.

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