Are you ready to buy a dental practice? Just like buying a house, when you take this big step forward, you have to have a plan, and you have to know the right questions to ask to make the best decision for your future. It’s important to do your “due diligence” before you buy a dental practice, so you know exactly what you’re getting in terms of the true value of the practice. True value includes all the assets and liabilities that come along with the business. It’s imperative that you know just what those are so you can have a proper understanding of the practice’s commercial appraisal.
A successful transaction will depend on who you talk to and rely on for information pertaining to the sale. It’s best to have an experienced professional you can trust who knows the full particulars of the dental practice industry. It’s especially helpful to listen to the advice and guidance of a dental CPA who has been through the process many times over.
Recently, we had the opportunity to speak with Matt Howard of Blue & Co., to ask him what a seller and buyer should know before going into the process of buying a dental practice. Howard is a dental CPA, an accredited business valuator, and a certified valuation analyst. Blue & Co. is the third-party non-biased valuator that we use here at ddsmatch Four States. Howard is the team leader for their business valuation team. Blue & Co has the right experience to give you a true value of the dental practice you are considering. They look at many different aspects of the practice to ensure the price is on point for both the buyer and the seller.
Understanding Business Valuation
How do dental CPAs figure out the true market valuation? Howard explains that it’s a multifaceted process,
“We’ll collect data, we’ll go through the data, we’ll enter it into our models. We’ll ask very specific questions about that data, about some maybe aberrations in the financial performance over time. Sometimes a dental supply category jumps 10% over a year. We want to really understand everything that’s going on inside the practice.”
During the valuation process, a dental CPA will look at any irrelevant costs that may look like “noise” in the valuation reports. Howard says that’s, “anything that’s inside the practice that is not necessarily operational, or is basically something that the owner has decided to do at the practice that doesn’t exactly reflect the operations of the practice . . . a lot of times a seller will own the building, and in owning the building, they’ll pay themselves a leased rate for that building. And sometimes that isn’t a market rate. Sometimes it’s a little bit above, sometimes it’s a little bit lower. And so what our job in this process is, is to really help really work through the practice financials, the historical financial statements, and just basically help sanitize or normalize the numbers as we see them. And as the true operations of the practice are reflected.”
Working with a dental CPA, you can be assured that you’re only paying for the true value of the practice and not the “noise” that won’t benefit you in any way. It’s not easy to decipher this on your own, so an experienced CPA is invaluable in these types of business measurements.
Should I Start a New Practice Instead of Opting to Buy a Dental Practice?
While it may seem like a good idea to start building a business from the ground up rather than taking over a practice from another doctor, your pocketbook will most likely disagree. Beginning from scratch means you’ll have to invest both capital and time, and be patient for years while your practice starts to grow. Not to mention all the things you’ll need to do before you can even open, like securing office space, purchasing equipment, finding employees to hire and train, and marketing and advertising to attract patients to your practice.
However, when you decide to buy a dental practice that’s already established, Howard says, “You’re walking into cashflow day one.” Starting a new practice means you’ll accumulate a significant amount of debt compared to buying an existing practice. Howard describes why, “It’s a three- to sometimes seven-year journey to maturity or average collections of [a new practice]. So basically what I’m saying is the first year, you’re probably going to feed the business, as in bringing money to the table to keep it going as you build up that collection stream. The second year you might break even or maybe pay yourself a little bit, but definitely not up to industry standards. The third year, between the second and third year is generally, during these startups, where we see you making some progress towards paying yourself a reasonable wage. It’s still probably not [the industry standard], what you could get out being an associate at another practice, but you’re on your way. And then . . . [the] fourth, fifth, sixth, maybe up to seven years, will get you hopefully up to average.”
At ddsmatch Four States, we match up selling and buying doctors so you can obtain a practice that already has an established client base and that you won’t have to go into so much debt from the get-go. Our goal is to provide you with the right infrastructure to help you achieve your career goals.
Is a Dental Associateship Right for Me?
Taking over an existing practice may not be the right move for you in your career just yet, and a dental associateship may seem like the more attractive option. If you plan it out carefully, an associateship allows you to try out ownership without going into so much debt upfront. Just be sure you know exactly what you’re getting into and don’t be afraid to ask hard questions before you say yes.
Howard explains, “Every practice has a limited amount of resources, of ops, of time for the staff to not hit overtime. So there’s a lot of variables at play here. Typically, we like to see over a $1.2 million collection practice in general. That way that there’s plenty of room for an associate to come in, inherit some of that revenue stream, as in, hopefully the seller wants to back off a bit and transfer some of their patient base over to the associate.”
Say you find a practice that seems like a good fit, but they aren’t ready to take on an associate just yet. It’s probably best to look elsewhere rather than wait around. You don’t want to end up in a situation where you don’t have enough work or aren’t making a full salary while your debts continue to pile up. Before agreeing to anything, look closely at the practice and see how many patients they have, how far in advance they’re booking patients out, and what their revenue stream is like. If they can’t book patients until two or three months in the future because their schedule is so tightly packed already, it might just be the right fit for you.
It’s unwise to accept an associateship that doesn’t give you a fair deal. You should expect a guaranteed salary for the first little while, maybe even for the entire first year. After that point, your compensation will most likely be based on a production or collections-based system. Outline your terms with the dentist you’ll be working with and be sure you’re fairly compensated.
If you begin an associateship and things don’t work out quite how you planned, that’s ok. Not every single job is going to be the perfect fit every time. Just don’t let it throw you off course. An associateship is a good step in the right direction towards owning a practice, and you can learn valuable lessons no matter what the final outcome may be.
What is Asset Allocation?
Asset allocation is definitely a contributing factor in the buying and selling of dental practices.
When you have a practice that is successful, it’s built not only on hard work and smart financial decisions, but also on the goodwill that has been cultivated in the community. How that goodwill is valued will have an effect on what you’re buying. Though it may not be tangible, it’s the thing that keeps patients coming in the door, so don’t discount it.
There are two main reasons why asset allocation is important. First, it makes a big difference in the money that is exchanged to the seller that is theirs for the keeping. Howard explains this concept further, “The million dollar price is great and all. However, it’s not about what the price is, it’s about what you keep. And obviously what I’m referring to here is taxation.”
Second, you need to acknowledge the goodwill fostered in the community when measuring the true value of the practice. Most likely the selling doctor has poured their blood, sweat, and tears into their practice and they regard it as their legacy. Their patients appreciate them and trust them, and may have been seeing this doctor for many, many years.
The sale of tangible assets will be taxed as normal income at the ordinary rate. Assets allocated as intangibles, such as goodwill, are taxed at the more favorable capital gains rate. So the more value allocated as goodwill, the more money the seller gets to keep. For you, everything you are buying—equipment, furniture, or goodwill—you will be able to write off through depreciation over time. But for the seller, it’s either money in their pocket or lost to taxes.
It’s a mistake to just look at the clear cut financial costs and gains of the practice without taking the time to consider the goodwill and time the previous owner has put into it. Their practice is their life’s work, and they’re way more invested in it than you are at the point of sale. When you’re negotiating asset allocation, do it in a way that gives the selling doctor the true worth of what they’ve built. That way when it comes time for you to pass the practice on to the next dentist, you can help create an outcome that works for both you and the buyer.
Preparing to Buy a Dental Practice
Howard suggests four main things that you need before you can consider yourself ready to buy a dental practice. The first is hand speed. Basically you need to make sure you have the skills to keep producing the steady profits the practice has gained, and also have enough time and energy to devote to things like documentation.
Second, be sure you have your own financial cushion. Howard says banks like to see that buyers have “some sort of margin in their life . . . that sounds very logical, but a lot of times a buyer is not a good candidate because they don’t have any kind of safety net in their life.”
Third, you really need to know what you are looking for in a practice. Sure, you already know you want to own a practice, but create in your mind an image of “what area you want to be in and what that practice might look like.” Your lender and the selling doctor will want to know that you are “fully vested in buying in a certain area for a specific purpose with a certain clinical skillset.”
And, fourth, surround yourself with a good team of advisors you can count on to help you throughout the process. The bare minimum should be an experienced dental CPA and dental attorney that you can trust. These advisors will “help you understand the logistics of the transaction and how to structure it. But really, beyond that, if you have the right people on your team—as advisors, we’ve been through this a hundred-plus times, so just helping you through that is part of what we do.”
With the right people there to encourage and support you, you’ll be better prepared to make the right decision about the practice your choose to buy,
Ddsmatch Four States Has Practices for Sale
If you are considering buying a dental practice in the Kansas, Western Missouri, Arkansas, and Oklahoma areas, we’re here to help! Check out our listings! You can set up a free profile on ddsmatch.com that will keep you up to date about available practices. Contact us today about potential matches.