Buying your first dental practice is exciting and a little scary. For young dentists, buying your own practice is perhaps the biggest investment you’ll make in your career. The practice loan and your student loan debt can seem overwhelming, but the payoff can be great and the chance to be your own boss is one that many dentists can’t pass up.
There are several questions to ask of the selling dentist before you sign a letter of intent. These will allow you to make an educated, informed decision about the practice you intend to buy.
This is one of the most important areas you’ll discuss when buying a dental practice. Ask to see recent financial statements, tax returns, and record of practice expenses for items such as insurance, benefits, payroll taxes, reimbursements, and continuing education. Also ask about the percentage of collections used to cover overhead. You’re trying to gather how much it costs to run the practice and if there are any red flags to talk about.
You want to know how much the practice you’re buying is worth and what valuation method the seller used to determine value. Even if the prior year’s cash flow was used to determine the valuation, it’s a good idea to assess the entire history of the practice.
What you’re really buying is the goodwill and patient records – the intangible assets. Find out how goodwill will be transferred. You want the patient turnover to be as low as possible, and that might mean the selling dentist stays on for a period of time to make introductions. Also find out about noncompetition agreements – does the selling dentist plan to continue practicing? This could affect your future cash flow. Last but not least, are accounts receivable part of the sales agreement?
Find out if the selling dentist does any marketing or advertising, how much they spend on these activities, the methods they use, and what the results have been. You’re finding out how the dental practice gets new patients and where they come from.
There are typical questions, like number of active patients and number of new patients per month. Also find out patient demographics, the number of patients on specific insurance plans, and what patient retention activities are being done to keep loyal patients. What you’re trying to estimate from this information is the current and projected monthly cash flow.
Does the selling dentist expect to stay on for a time after the transaction is complete? For how long, and in what capacity? Depending on the type of transaction, the seller may stay on in a clinical role for up to one or two years, or as little as one or two weeks to assist with patient and staff transition. Also, is the seller available for a longer period of time in case questions about prior patient treatment or accounts receivable come up?
Should I hire a broker?
We’re biased; but yes, hire a dental broker experienced in the industry. The broker fees are minimal in the larger picture of having an objective, competent advisor on your side. With a dental broker, you can secure better terms, navigate the buying process easier, locate potential practices faster, and feel more confident post-transaction. When it comes to dental brokers, you should not have the same person as the seller – this is unethical and in some states, illegal.
This is not an exhaustive list. Many questions will come up throughout the buying process. Your broker can advise you on what to ask when, and how to tell if your purchase will be a smart investment. Contact our team of dental CPAs today if you’re interested in buying your own practice, and we can walk you through the whole process.