Are you considering buying a dental practice and aren’t sure where to start? In 2014, Naden/Lean Partner Tim Lott presented Part One of a seminar on “Buying a Dental Practice: It’s Not Just About the Price.” In it, he discussed financial due diligence, what information to ask for, how to conduct the office visit, and what to look for beyond price. This year, Tim has new data to share and insights on unique transactions, which he’ll be presenting at Townie Meeting 2018 in Part Two of this seminar series.
Here are Tim’s top pointers from Part One of his presentation.
- Gather your advisory team.
The right team can make your transaction easier and more cost effective … or it could kill the deal. Your dream team should include a dental CPA, attorney, lender, equipment appraiser,
lease negotiator, and practice management consultant. Each of these roles should specialize in the dental industry, and sometimes the same person can fulfill multiple roles.|
- The financial due diligence process is crucial.
Here are some of the financial documents you need to gather before proceeding with a transaction: Prior year tax returns and CPA-audited financial statements, W2s, and staff rosters are good starting points. Also gather data on practice statistics like zip codes and patient demographics, the seller valuation report, and the most recently filed personal property tax return.
- How you organize the due diligence information matters, too.
As a potential dental practice buyer, how do you best organize the financial information mentioned above? To get the most value from the data, look for variable versus fixed expenses in the tax returns, and detail as much as you can, like profit and loss and staff positions. Then, evaluate expense groupings, identify outliers, and begin to put the pieces of the puzzle together.
- Assess the price AND practice performance.
As the title of the seminar states, it’s not just about price. When buying a dental practice, also consider practice performance. Calculate averages and percentages, normalize the cash flow, and look for trends and variances.
- Normalize the practice’s cash flow, especially overhead.
Normalize the cash flow of the dental practice you’re considering buying – especially overhead. Make necessary revenue adjustments, add other expenses like advertising, eliminate added discretionary items (the seller valuation report will help with this), and make other related expense adjustments to wages, taxes, and pensions.
- Consider the impact of the valuation report.
Remember there is more than one valuation method. Why does this matter? Because PROFITS drive value, not revenue. Depending on the valuation method the seller chose, you may get a different picture of the practice’s true value. Different valuation methods include capitalization of earnings (or excess earnings), or multiple of owner’s income (or discretionary or practice income). Furniture and equipment and intangibles are also valued.
- Other areas of the purchase process you need to consider beyond the price.
Buying a dental practice can be complicated, and buyers and sellers often have competing interests. Besides price, other areas of the purchase process to consider are seller’s compensation, leased versus owned space, area demographics, practice styles, and more.
- Do’s & Don’ts of the office visit
If you get as far as visiting a potential dental practice, the likelihood you’ll go ahead with the purchase is high – unless you encounter red flags during the all-important office visit. When you visit the office of the dental practice you’re considering buying, learn about billing/collection and scheduling policies, view the patient chart audit, inspect hard assets, have real estate appraised, and evaluate the practice management software.