8 steps to take before buying a dental practice.
Buying a dental practice can be exciting, overwhelming and a bit mystifying. Many dentists choose to buy an existing practice for the built-in roster of patients, but having plenty of patients is no guarantee of success. There are several other considerations to weigh, like how much income you can expect to generate and the potential for growth (or decline).
On one hand, you’re evaluating how likely you’ll be able to grow professionally in a practice. And on the other hand, you’re navigating a sometimes-complex business transaction. Ultimately, you want to be in a practice that is both professionally fulfilling and a financially-sound investment. To help you get there, we’ve broken down the business side of the decision. Here are eight things to consider before you buy a dental practice.
1. Seek help early.
Once you have narrowed down the location where you’d like to establish your practice, reach out to dental brokers, dental supply companies, healthcare-focused accountants and a small business banking specialist. They all may know dentists who are approaching retirement age or who might consider adding an associate interested in purchasing their practice.
Early on, when you start discussions with a practice owner, confidentiality is critical. You can expect to sign a non-disclosure agreement to protect both parties’ financial and personal information, and to avoid raising patient and staff concerns. It may also be a good idea to retain a buying agent, such as a dental broker, to represent you.
2. Develop a budget.
From student loans to living expenses, preparing a budget helps you determine your personal expenses and how much you’ll need to earn from your practice. In addition to your salary, the net income from your practice will need to cover the loan payment for your practice as well. Altogether, your budget information will help inform what size practice you look for.
There are additional considerations you may need to factor in, though, depending on your situation. For example, you may ask the original dentist to stay on to help ease the transition and retain patients. If so, how will he or she be compensated? You’ll want to factor that into your budget as well. It can help to share your budget with your banker as you explore financial options.
3. Don’t forget the value of existing staff.
When you purchase an existing practice, you are also acquiring its support staff, including hygienists, billing staff and others. These professionals not only help ease the transition for current patients but also maintain an understanding of the business systems used to operate the practice. The institutional knowledge they share can be invaluable to your long-term success.
4. You’ve got to see it for yourself.
Every dental practice, from its staff to its patient flow, is different. That’s why it’s important to get a first-hand look at any practice whose purchase you are seriously considering. Be sure to pay a visit in person.
You’ll also want to find out how many patients have visited the office over the past 18 months and get a sense for whether the practice is appropriately staffed. Patient flow, like cash flow, provides insight into whether a practice is growing, stable or shrinking. A shrinking practice may not necessarily be a deal-breaker if you’re able to identify untapped opportunities for growth.
5. The seller’s asking price may – or may not – reflect the practice’s true value.
Before making an offer, take time to investigate whether the practice is a good investment. Seek the advice of professionals with a history of valuing and financing these kinds of transactions, like a small business banking specialist. They will review financial statements, tax returns and other records and compare the practice’s finances with national benchmarks. For instance, if 40 percent of gross receipts go to staff salaries, beware. The national average is closer to 20 percent.
6. Negotiate price first.
Your financial offer is only one of many details that must be agreed upon when you purchase a practice. There are also property, equipment and staff considerations, transition details and more. But your financial offer is the best place to start. Because emotions can run high – especially if the owner thinks the practice is worth more than the financial records support – it is best to make an “offer to purchase” through a third-party professional.
With a financial agreement in place, both you and the seller will be more motivated to negotiate the other details.
7. Owner-financing may be risky.
Once your offer is accepted, you’ll need to obtain any financing required to complete the purchase. If the selling dentist offers to self-finance the purchase, proceed with caution. A seller has less incentive to bring in a knowledgeable third party to assess the practice valuation or asking price. After all, the sale will likely finance the seller’s retirement, which could make him or her more invested in getting a certain result.
Many dentists find that their bank provides a more neutral route to financing. Your banker will ask for several documents to support your loan application: tax returns for the previous two years, a statement of your net worth and a copy of your dental license and resume, for starters.
From the seller, your lender will want a copy of the practice valuation, along with tax returns, profit and loss statements, and depreciation details. The practice business plan, budget and patient count may also be requested.
8. The real estate purchase or lease negotiation is a separate transaction.
Your purchase of the practice is a separate transaction from the purchase or lease of the dental office. Be forewarned: your lender will require a lease – including extensions or renewal options – equal to the term of the loan.
Your banker can be of great help with real estate considerations as well. As with every part of the acquisition process, the key is to involve them early. They have a vested interest in helping you succeed.
The process of buying a dental practice can be a bit daunting, but by doing your due diligence you’ll be more likely to line up a practice purchase that works for you. Just remember to seek help early, assess the value and health of the practice and make sure your financial needs are met as well.
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