Next up we’ll dive into practice mergers. This is a very exciting topic for me because the practice merger is probably one of the BEST investments an existing practice can make with likely the BEST ROI of all practice growth strategies. That’s my opinion anyway.
Now, a “merger” is usually seen in three different forms:
- Multiple existing practices merge to form one larger practice. These are quite rare; however, I won’t be surprised to see an uptick in this form from the entrepreneurial docs who want to hold their own against the rising tide of DSOs.
- Usually two practices combining yet remain two separate practices in a space sharing arrangement. Again, not as rare as option 1 since it provides the docs with an avenue to remain “separate” yet enjoy some of the economies of scale by combining overhead.
- The third form is the one I’ll focus on for this blog, that’s where one practice “absorbs” one or several smaller practices and remains as one practice.
First, the due diligence process is less intense than the typical due diligence process when buying a practice outright with equipment and space. You don’t need as much information to assess the practice performance issues and if the merger is structured properly. You won’t need multiple years of tax returns, practice financials, equipment valuations, practice valuations, sellers lease information, etc.
The main “due diligence” areas you WILL need to concern yourself with are PPO participation, yours and theirs, procedure mix of the seller (and yours of course) and what the annual production and collections have been for the past couple of years for each provider. That’s it!
You’ll want to know what PMS they’re using, you’ll want to know their staff compensation arrangements, the patient demographics, referral patterns to outside specialists, their UCR fees and if they’re a Delta Premier provider if you are NOT!
You’ll want to be aware of any non-financial barriers between the practices. What do I mean by barriers? They’re the physical barriers like highways, rivers, mileage between practices, etc… There are perceived barriers like treatment philosophies, gender, ethnicity, race, etc… You may also find other barriers like previous associates and/or previous staff members.
In my opinion, the BEST way to structure a merger is for the buyer to pay for what they get. That is, a buyer should only have to pay for the patients that actually come AND stick to the new practice location. There are ways to increase the “stickiness” factor. You want the seller to practice from your location for at least six months if not twelve, only if it’s on a limited basis. You will likely want to hire the seller’s hygienist as well to maintain patient care continuity between sellers’ team and your location. You want these patients to COME to your location and having the same doctor and hygienist can be a strong magnet to pull those patients to your location. Once they’ve travelled to your location once, hopefully twice, its less likely they will leave after the seller finally leaves.
Lastly, it’s VERY important that the deal be structured properly legally, meaning, the legal wording is crucial as to not have the appearance of paying a referral fee or the like so make sure you use a dental attorney who has experience with merger transactions.
As I said in my opening, a merger is probably one of the BEST investments an existing practice can make and likely has the BEST ROI of any practice investment if structured properly. The buyer should only have pay for the patients they actually get, meaning, those patients that come and STAY with the practice. If done right, you’ll quickly see how great a practice merger can be for your practice.
My last couple of blogs from my 2018 townie presentation will cover some specific areas of buying a practice like price negotiation tips, how to handle accounts receivables whether you buy them or not and landmines to watch for with A/R, covenant issues, closing and post-closing issues and lastly, current trends we’ve been seeing in the practice sale/purchase space.