Tuesday, February 9, 2010

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

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

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

Have you done a demographic analysis of the area?

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- Office has 5 ops and is outdated, including very outdated equipment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

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

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

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

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

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

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

Are 8 new patients per month good enough?

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

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

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

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

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

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

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

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

3. There is no Pano

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

$556k to be exact, correct?

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

This first appeared on Dentaltown.

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

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