Friday, June 26, 2009

Two Options for Dental Pratice Purchase

I've been searching for a practice to purchase for quite some time. I've narrowed it down to two options. I'd appreciate some input on these.

Option1:

2008 gross 703k
overhead is 70 percent
1 full time hygiene, 1 part time(paid 30 and 33 percent of production respectively)
staff overhead is 205k
hygiene is assisted and both hygienists work with assistants on Tues and Thurs afternoons
3 full time assistants
1 office manager
cerec practice
6 ops(2 dr)
very nicely equipped and modern practice(digital radiographs, softdent software, caesy education software etc)
can easily switch from right to left-handed(I’m lefty)
very well-trained staff
nice looking free-standing building which dr owns
rent 3500/mo
approx 10 new pts/mo
town is about 13k pop with 7 other dentists in town
dentist very well-respected and has been voted best dentist in this town
dentist is referring more endo now and more exts (I do these)
asking price- 518k (cerec unit not included)
broker involved in this sale

concerns for option 1:
-very high overhead,
-asking price high,
-3rd assistant not being utilized fully as schedule is not too busy,
-low new pt numbers,
-not sure about potential for growth.

Option 2:

2008 gross 695k
overhead 58-62%
2 hygienists...1 works 4 days/week. 1 works 3 days/week. office hours Mon, Tues, Thurs, Fri 8-5
2 dr assistants
1 front desk
5 ops equipped(3 dr, 2 hygiene)...1 extra op not equipped
Both hygiene and dentist are extremely busy and booked out several weeks
20-25 new pts/mo average
set up for right-handed...delivery from side cabinets(I’m lefty)
older equipment
paper charts
hand-written schedule
phosphor plates used for radiographs(not familiar with quality of this system)
I've been told by another dentist(who I know) in this community that this dentist's work is questionable to bad(may or may not be true)
-very nice guy
-he wants to sell in Jan 2010 and work part-time for 1 year as transition(negotiable)
-i could work as associate until Jan and buy Jan 2010, or just buy practice in Jan.
-asking 450k
-rent 4000k/mo
-office is large(not sure on sq ft) and in strip mall with attorney/chiropractor/several others
-dr owns strip mall and is willing to sell at future date(would need to be determined b/f purchase of practice)
-town is 15k with approximately 24k including surrounding area
-growing area
- about 8 other dentists in town...will need to find out exactly

concerns for option 2:

-he may do poor quality dentistry and I may run into problems redoing his work or recommending work while he's still in the office
-office will need updating(equipment/decor/etc)
-will have serious work to do in order to convert to computerized and "less paper" at some point.
-need to convert to left-handed.

Option 1: I could step in and start working without any major changes. Option 2 would need at least 1 or 2 ops converted to lefty before I start...I could deal without all the extras for awhile until I have some debt paid down on the practice, but it will definitely need some overhauling in a few years. Looking long-term, it appears option two is a much busier practice and may have more potential for growth.

Thanks for reading thru this post...I know it's a long one. I'd appreciate some input. Let me know if you need more info. About either practice as I'm sure I left out some important details somewhere.


Both appear to have similar population to doctor ratios though #2 may be better with the additional 24k??

I’d love to know WHY OH in #1 is 70%, have you seen side-by-side 3 year P&L comparisons to evaluate? Maybe the 70% can easily come down to 60% and maybe it's not really 70% in the first place.

Do you know what the annual hygiene production is for each?

Sounds like #2 has hygiene production of at least $250k which could point to an under producing practice ripe for a clinically skilled doctor. If hygiene is around $250k that means doctor production should be closer to $750k for a $1million practice doing $695k which could mean $300k of dentistry waiting for someone. If that's the case a $1million practice with OH of 60% at a price of $450k will provide plenty of cash flow to upgrade the office technology very quickly.


Tim, thanks for your input. It appears doctor in option 1 does not oversee ordering of supplies and thus expenses seem very high for clinical and office supplies. He apparently likes to buy new stuff quite often as well. You may be right in that overhead here could be reduced considerably.

As for hygiene production, I'm waiting for that info from doctor in option two, but judging by the hygiene schedule, it looks like at least 56 hygiene hours/week x 4weeks/month x say 11 months would equal 250k+. Option 1 assisted hygiene production is closer to 200k.

So again, #2 seems like an under-producing office more so than #1 and it's OH appears to be well in order. While one could likely reduce the OH in #1, that's an additional task you'd have on your plate right from the start for a higher price.

For either of these options is it standard to get an appraisal of the buildings prior to purchase of the practice so when the owner decides to sell the real estate(assuming terms of lease have been set), the buyer can purchase for what the initial appraisal was?

That’s negotiable. I’ve been in situations where the owner agrees to lock down the price for 1 or 2 years, that's it. Why should seller agree to not enjoy the appreciation of their investment simply because the buyer isn't ready to buy the R/E? The seller would be doing you a favor by locking down the current price of the R/E, unless the value drops, then they’d be doing themselves a favor.

How does it typically work if renovations are done to a facility by new doctor if the selling doctor owns the building?

Get it out of your mind that the owner of the practice owns the building, pretend I own the building and you're not ready to buy, you'll enter into a lease with me, just as any tenant would and if you want to invest in your space you'll do so at your cost. chances are those improvements won't add much value to the value for me though it might add more value for you in terms of NOT wanting to move elsewhere and leave that investment behind.

Not sure about putting money into something I do not own, and do not want to pay more for the building when it becomes available for purchase after I've made improvements. Hope this makes sense.

Face it, the majority of dentists are putting money into something they don't own, that's the way it works when you're a tenant. There’s no getting around that unless you're ready to own NOW. Also, let go of this notion about paying more for something you've improved. You will pay the market value for the R/E whether you've made the improvements or someone else has and again, internal space improvements won't have a significant impact on the value of an existing building in my opinion. Most commercial R/E is valued based upon comparable sales in the area, this will drive the bulk of the R/E value, not the internal improvements a lone tenant decides to make.

If you want the building and can afford to buy it now along with the practice, great. If you can't, get a first right of refusal and possibly an option to buy when you're ready. If you're lucky the owner will agree to lock the price for a year or two, just don't get upset if they don't. As an owner of R/E if I thought the value might rise in the very near future I probably wouldn't lock down the price.

Contact George Vaill and ask him about R/E with buyer and seller options, he's quite good.

This first appeared on Dentaltown.

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

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