Friday, May 15, 2015

What’s Most Important to You When Looking to Purchase a Practice? Part II

This as part two of my five part blog on “What’s most important to YOU when looking to purchase a practice ? In case you missed Part1, there’s a great thread on 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 revolved around the revenue portion of the practices cash flow and assessing the asking price and practice performance. We will discuss the expense or overhead portion of the practices cash flow in this blog.

You’ll want to assess the cash flow that you will have available for the practice in which you’re considering, not necessarily what the seller had. While there are expenses you’ll have very little control or will have very little impact on YOUR cash flow, like rent, utilities, malpractice insurance, merchant services, etc., there are other expenses you’ll have the ability to control. Some of these are non-discretionary expenses like advertising, dental supplies, lab and the like and others are more discretionary ,for instance, retirement plans, computer expenses and support, office expenses and supplies, some continuing education and dues and maybe wages (I’ll elaborate more on practice wages below). There are also other purely discretionary expenses or owners perks that we don’t consider as required to operate a dental practice like the owners automobile expenses, meals and entertainment, some travel and maybe some family wages. Some of these purely discretionary expenses are easy to identify, others maybe be buried in categories like office expense and support, advertising, telephone, insurance, etc. . As a buyer, part of your due diligence is your ability to dig deeper and drill down into certain categories to make sure you understand which expenses are truly needed to operate the practice and which may not be necessary.

You need to verify exactly what YOUR overhead is going to be since it has a direct impact on the practice cash flow, which you’ll need to service the debt on the purchase price. Of course it also affects the practice price and it will help you assess the practice performance issues related to overhead. Some of the expenses are directly impacted by the procedures the seller was doing and the procedures you will be doing, they may be the same, maybe not. This is why you need to understand how the revenue is generated and how those procedures may impact your overhead.

So we spoke about the fact that there are some expenses you have very little control over and others you’ll have a lot of control over. While some believe a buyer has the ability to easily control labor costs, it’s an area where a buyer needs to tread lightly. There are many reasons a buyer may not want to hire an existing staff or let them go in short order. Maybe they think the practice is overstaffed or the employees aren’t needed for as many hours anymore. Maybe the employees’ hourly rate is too high (very common with long term employees) and\or maybe their benefits are too rich. Whatever the case is, we believe part of any goodwill of a practice relates to the staff and the buyer needs to examine every staff member currently employed with the practice and how much impact they may have on the stability of the goodwill. For example, in a very rural area, where everyone knows everyone, you may have a front desk person who’s been employed with the practice for a VERY long time, knows every patient in and outside of the practice and may be a real detriment to the retention of goodwill if a buyer were to NOT agree to hire them when they purchase the practice. On the other hand, there may be an assistant that’s only been at the practice for a month, chances are if they don’t return the patients won’t even notice. Then there are the hygienists and once again, the buyer really needs to assess each hygienist and whether or not they’ll have a significant impact on the goodwill if they aren’t hired for any reason.

The other area of labor costs that a buyer needs to tread lightly is employee benefits. We see practices where the seller has been able to afford to be VERY generous to their staff. They might be paying 100% of their family’s health insurance, providing them with four to five weeks paid time off for sick leave and vacations in addition to paid holidays and offering a very generous pension benefit. A buyer would be foolish to think they can simply go in and begin slashing these benefits without any repercussions from the staff. That’s NOT to say a buyer can’t control these benefits overtime, again, each practice and each employee is different.

There are many other areas of overhead that a buyer needs to examine as part of their due diligence, we’ve just touched upon a couple of them to get you thinking. Part three of our five part blog will talk about “people” side of a practice and the purchase transaction from a brief discussion again on the staff, to the patients and the advisors surrounding the transaction.

 Written by Tim Lott, CPA, CVA

Send your questions to
For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling or emailing

Monday, May 4, 2015

What’s Most Important to You When Looking to Purchase a Practice? Part 1

My good friend and fellow townie (that’s what we call members of, the forums board) Dr. Tom Bonsack posted a great thread on dentaltown with that question, “What’s most important to YOU when looking to purchase a practice?” It got a lot of great feedback from people with different perspectives so I thought I’d blog about it. Keep in mind, I won’t be telling what SHOULD be important to you, just giving you some food for thought as you contemplate purchasing a practice.

Since I am a CPA/CVA that represents buyers across our great nation I thought I’d start with some of the financial aspects that you, the buyer, may find important. This is part one in a series of five.
SO what’s the first thing you think a buyer considers when it comes to a practice they may want to purchase? Price, right? What’s the price? While this is very important, I will tell you that many times it’s NOT the most important financial piece you should be looking at. In fact, I gave a presentation at the 2014 townie meeting in Vegas on this very issue and you can actually still view that presentation here.

So what could be more important than price when it comes to the financial aspects of buying a practice? What about cash flow? Sometimes both buyers and sellers get so focused on price that they overlook cash flow, after all, that’s what’s going to service the debt to pay the purchase price isn’t it? What makes up cash flow? Collections and expenses. So to understand the cash flow that YOU will have, you have to dig a little deeper and drill down into the collections and expenses.

For collections, you need to understand how they’re generated…collections can only be generated from the production of the providers. For this blog I’m going to focus on a GP practice. You have to look at the production by providers, the doctor and the hygienists and analyze who’s doing what and understand their relationship to each other. As the doctor buying the practice you need to ascertain what procedures the seller is doing, what procedures you do, are they the same? Does the seller perform procedures that you don’t & vice versa? Can you increase production by adding procedure the seller doesn't offer?  Is the hygiene department performing the same procedures that you want them to? What about the frequency of those procedures? What about their recall system? All of these impact the collections.

What about the payors? Is it a fee-for-service (FFS) practice? Is it a PPO practice? Maybe a 60/40 mix of PPO & FFS? Do they accept Medicaid patients? Which PPOs do they participate with? Are you familiar with the delta premier issue? Again, all these things impact collections.

What about their fee schedule? How do the procedure fees stack up to the other practices in the area? When was the last time they raised fees? Even if their fees seem to be where you’d want them for the area, what about the fees for procedures they rarely or never offer and you do, where to they stand?
These are all the issues a buyer needs to consider when evaluating the revenue aspect of a practice and decide what’s most important to him/her with regard to these revenue issues. Part II will talk about the overhead aspect of the cash flow-financial aspects of the practice you’re looking to purchase.

Written by Tim Lott, CPA, CVA

Send your questions to

For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling or emailing