Friday, May 29, 2009

Dental Practice Buy-Out Question

Looking for advice on future practice transition....let me give you some background...

1. I worked as an associate for 3.5 years. Through the help of the owner (a great guy), he helped me grow my patient base to about 1,400 active patients by giving me most of the new patients. He brought me into the practice in order to take over when he retired so he wasn't so concerned about seeing new patients as long as his schedule was booked. He had a very busy practice and did not plan to retire any time soon, he was just too busy to handle anymore patients.

2. After this time (about 6 years ago), I bought half of the practice - which was basically the patient base, equipment, and everything I had built in those 3.5 years. After this half of the debt was paid, I was obligated to buy the other half, which is his patient base, equipment, and such. At this time, we started splitting the new patients. We have a joint operating agreement, meaning he takes what he collects, and I take what I collect. We pay for our own staff members and overhead, except that which is considered joint operating expenses (rent, phones, etc.).

3. Currently, my half of the practice has about 2,100 active patients, and his half has about 2,400.

4. My half of the practice collects about $650,000/year and his half about $480,000/year - he works 3 days/week.Now....after all is where I need advice. He is about to retire, but still wants to work maybe 2 days/week. I am about to start paying for the other half of the business, which means I, technically, own the practice (patients, equipment, etc). He will work as an associate. I will pay all overhead and he will make a percentage of his collections. In the transition, what patients will he see? I also want to bring in another associate to help out with patient load. His half of the practice could easily collect $650,000 with 4 days/week and some "want-to".

Should he do hygiene exams on his former/regular patients on his two days, and book diagnosed treatment on his schedule?

Should I give the new associate all new patients in an effort to build his patient base, as I don't need them with the current volume of patients? Eventually, it will be a buy in opportunity.

I guess I really need advice on how to make this a smooth transition, without making the retiring dentist feel like he doesn't need to be there. I really look up to this man, as he was a true mentor and friend. I know he is having a tough time with retirement and "giving up" his practice that he has grown for 35 years. Any advice is welcome.


I also think that when you have a sit down with the retiring doctor, you need to make sure he understands that the priority is that there be enough work for you and your new associate as you'll need that associate for your future. The retiring doctor needs to understand that and accept that he is third in line to see patients, in my opinion.

If you can work it out that he can work two days per week I agree that you'll want the new patients to see you or the new associate. After they've become practice patients though does it really matter which existing patients he sees? Won’t it depend upon the patients wishes to a certain degree?

I need some clarity on some of your numbers though.

1. You say your half of the practice collects $650k, is that JUST you or you and your hygiene?
2. 2,100 "active" patients? The typical GD practice with 1,000 patients does about $750k. You say you have 2,400 yet only collect $650k? I must be missing something.
3. He has more patients and less production? Again, maybe the $650k and $480k are just doctor revenue and even still, that seems really low for nearly 5,000 "active" patients. Maybe the 2,400 and 2,100 is simply chart count?
4. How many chairs do you have?
5. How many hygiene hours do you have each week, average?

We are primarily a PPO practice, so yes, those numbers are lower than avg. Those are not production numbers, but collection numbers, after write-offs. They include hygiene.

Yes, he has more patients and lower numbers. He only works 3 days a week and isn't really motivated to be busy. That's an issue for me. There is a gold mine a treatment to be diagnosed from his patients, he is just really conservative in his treatment planning.

It is not just a chart count. Every January, we purge charts and inactivate anyone who hasn't been in within the last two years. We may have lost quite a few patients due to the recession and just haven't realized it yet, as their charts haven't reached the two year mark.

We have 7 chairs, 2 for each of the doctors, 3 for hygiene.

32 hygiene hours per week.

32 hygiene hours equates to approximately 1,000 patients, $200k in hygiene so your gross moneys make a little more sense. The "active" patient count still doesn't make sense though. I’m still wondering if you'll have enough work to keep the retiring doctor there for 2 days.

Sorry....I should have clarified that we have 32 hours hygiene per week with each hygienist. I'm not sure if the retiring doctor keeps accurate count of his "active" patients. I know they purge charts every year, but I'm not certain they inactivate every patient that they should. Like I said, this is a joint operating agreement...I don't have much say in how he runs his side of the practice. He is not a great businessman, but an incredible dentist. I just want to move this practice in the right direction when he retires.

Ok. Now the numbers are beginning to make a little more sense. Sounds like you have a practice that can support one and a half plus doctors, hygiene is doing approximately $300k-$400k?? Therefore dentistry should be approximately $900k-$1.2million for a gross production of between $1.2million and $1.6million. Depending on your PPO mix you should be collecting approximately 85-90% of that on average and I think you said you're doing approximately $1.130million.

So with a retiring doctor that really doesn't have the desire to be as productive as they can, keeping them around too long won't be helping the situation if your real goal is to add another productive doctor who would become your partner some day unless you also implement a marketing plan to grow the practice with new patients, which would likely mean adding another hygienist.

It appears you do have a great patient base to work with, now it's a matter of choosing the direction you want to take the practice in, choosing the right mix of team mates and if necessary, making the difficult decisions that business owners must make.

Good luck.

This post first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest

Thursday, May 21, 2009

New Dental Practice Valuation Question

General questions about the appraisal of a relatively brand new office. I have been working as an associate for 6 months. I may get into partnership since I got offered.

I know that a practice with years can be assessed by an average of annual productions and collection rate. However, my office is only 6 months history.

Just be careful with this statement. Practice revenues should never be used as a way to value a practice. I believe what you're trying to say is that selling prices of mature practices are more likely to fall within certain statistical ranges. This is not a valuation method.

Production has increased gradually since I started. My first months was 30K and now around 60K and collection rate is still low (~ 70% because we provide with monthly payment option).

It will be greatly appreciated if you can give me items I have to put into my list.

The value of relatively newer offices that are still growing significantly will usually require an analysis of the hard assets, the office layout, location, etc. and compare that with the cost of duplicating the same thing if you start from scratch. Add to this the value of the existing patient base AND the value of the potential (and growing) patient base. It’s a little more subjective and professional valuators are more likely to use a future cash flows method to assist on their valuation as past cash flows are basically meaningless in a brand new\growing practice.

Sorry, not sure what you mean by "list".

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest

Friday, May 15, 2009

Recognition from our Peers - Dental CPAs

6 of our team members participated in a phone conference CE course yesterday on valuing dental practices. 2 of us do the majority of the valuations and I thought it would be helpful if others had some of the basic understanding on technique, tips, etc.

There were 3 conference call leaders & participants from around the country, no clue on how many particpated.

Anyway, about half way through the session they're reviewing resources we as professionals can use for our valuation work and the topic gets to brokers. One of the session leaders speaks up about making sure you seek out dental specific brokers, not just any general business broker.

With that, another session leader speaks up & says :

"Great point. You should be looking for resources that are specific to dentistry. for example, I was surfing the internet this morning in preparation for this session and I came accross a CPA firm that focuses specifially on dental practices and from what I can see on their site they have decades of experience and alot of knowledge about the business of dentistry...., this is the type of resource you need to be searching specific."

Our website hits took a HUGE jump after that session....


This first appeared on NewDocs.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest

Tuesday, May 12, 2009

Delayed Dental Practice Sale Question

Active duty doctor needs some advice. Found a practice to purchase. Seller wants to close in July. Can’t take possession until October. Selling doctor wants to hold retirement party to introduce me to patients in August or September. Has anyone else closed on a practice and taken possession a few months later? If so, did you have any problems?

Playing devils advocate, what if the seller backs out and breaches? What’s their "penalty"?

I hope it's a stiff amount of money and the seller also has to deposit it into escrow as well and the buyer gets it if the seller backs out.

I know it's a delicate situation, I’d be leaning towards owning it in July. Why can't the seller be treated as an associate for 3 months like any other deal where the seller hangs around? The "risks" associated with having the seller remain and work it during a 3 month time frame isn't any different that having an associate for 3 months, is it?

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest

Tuesday, May 5, 2009

Dental Accounting Advice - C-Corporation Tax Issue

I'm a corporation and cash basis. How do I wind up yearly with a profit and have to pay federal corporation taxes as well as state? Last year I had to borrow 40k to fund pension plan to create a 40k deduction to offset 42k profit and avoid a 35% tax which would be about 15k.


Any suggestions going forward?

Should I go to self employment and can corporate entity which today is not a must?

What I find crazy is how you can NOT know how you end up with profit and NOT know how you can plan for it.

Unless you double as a CPA and can handle all the nuances of proper planning, why not seek out advice to either explain it to you or get help planning for it.

You must be a C-Corp since you have a corporate tax liability to worry about and there are still plenty of C-Corps out there. There are several options for you. Still, maybe the C-Corp is your best choice.

So without knowing you and your specific situation, I don't see how I can give you any advice on how to move forward. You need very specific advice based upon your own situation.


This post first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest

Friday, May 1, 2009

What a Dental Associate Should Consider When Negotiating a Dental Practice Buy-In

I'm finding myself in an interesting position of trying to not "look a gift horse in the mouth" but at the same time make sure my interests are protected.

I don't want to be overly aggressive and have the dentist decide that I'm not the best candidate to take over the practice, but I also don't want to be too passive and end up with a bad deal. This is the one shot I have to end up back in my hometown so I really want it to work out, even if it means sacrificing a little bit, but I don't want to be so frustrated that I give up after a few years and go somewhere else anyway.

I'm sure the dentist would be fine with me taking the contract to my own attorney to make sure my interests are protected. Any advice on specifics I should watch out for?

First, you don't have to be aggressive to be prudent. Hopefully the owner will respect you for being prudent and making sure you're protected. Make sure that the owner knows that it's not that you don't trust what's been prepared, you simply are experienced enough to know exactly what everything really means and what the future consequences might be to certain sections of the agreements. You want YOUR person to go over the agreements with YOU to make sure they're fair and balanced just as they had their attorney draft the agreements and they probably went over them together as well.

There should always be give and take on both sides and the job of your advisors is to make sure that one side isn't doing all the giving while the other is doing all the taking.

Hopefully the owner will EXPECT you to get proper advice, if not, I’d be suspicious right from the get go.

What to watch out for?

1. Put the "verbal" agreement into a memo and have both owner and associate initial it so they know that what they discussed and is what is related to their attorneys.

2. Make sure your advisor has the memo of understanding so they can compare it to the agreement. Ask them if there's anything in the agreement that is drastically different than the memo.

3. If there are restrictive covs, see if you can get them NOT to apply for the first 6-12 months in case things don't work out and you have to part ways.

4. Make sure you know the price NOW and that the price is reasonable. Make sure you know what the price includes (A/R, yours and the total?, specifically excluded assets?, debts? etc.)

5. Make sure that if the owner wants to make any significant changes to the practice in the next two years that you are consulted and if possible, you have to agree to them. As the future owner, YOU want to make sure that the business that's been promised to you doesn't materially change in a way that YOU aren't comfortable with. For example, instead of giving bonuses the owner may give some healthy raises to the employees just before they retire. If what they want to give is bonuses to their long term employees, make the owner does that BEFORE you buy, or make it part of the purchase price, i.e. you and the owner agree that instead of a purchase price of $500k, you'll pay $475k and pay out $25k in bonuses the day after settlement, just be sure to factor in any additional costs like payroll taxes, etc. So you pay no more than $500k. It’s always cleaner though that the owner pays the bonuses out of their proceeds.

6. IF the owner lets you go after 12 months and before the end of the 24th month without cause, they simply get cold feet, they should pay you a severance and by the same token, if you walk due to cold feet after 12 months and before the 24th month, the seller may want something from you for wasting their time. The two of you may mutually agree after 12 months that the deal just won't work, no harm, no foul.

Your advisors will give you many other pointers to consider.

This first appeared on New Docs.

Send your questions to Tim Lott, CPA, CVA at

For more information or to sign up for our newsletter, please contact
Follow us on TwitterFacebook and Pinterest