This is part five and the final part of my five part blog on “What’s most important to YOU when looking to purchase a practice? In case you missed part I, there’s a great thread on www.dentaltown.com asking this question and it got a lot of great feedback from people with different perspectives. As a reminder, I won’t be telling what SHOULD be important to you, that’s for each doctor to decide and prioritize for themselves. I’m just giving you some food for thought as you contemplate purchasing a practice.
Part I and II revolved around the revenue and expense portion of the practices cash flow and assessing the asking price and practice performance while part III addressed the people issues related to a practice purchase. Part IV addressed the location and facilities aspect of a practice purchase. Part V will include all the other aspects of what should be important in buying a practice that weren’t covered in the first four blogs.
Let’s talk about potential, I know certain brokers and advisers will use this as a selling point for some practices. Should that be important and if so, how do you quantify it? In terms of its importance, it depends on you, the buyer. You see, in my opinion, in general, the value of a practice should not be influenced by its “potential” since potential is basically based upon someone’s opinion, and we’ll all likely have a difference of opinion. Also, there’s no guarantee of potential. Can it be quantified? It can be, however, it’ll be based on projections, opinions, assumptions and therefore the weight you give it should be very low. That said, a buyer should certainly consider potential in certain situations. For example, one such situation may be where the practice has hygiene production that’s 40% of the total production instead of 25%. If these are the facts, then the dentistry could be twice as high as what it currently is and that is where one may be able to quantify potential.
Then there are situations where the hygiene production is less than 25%, maybe 10% or 15% of the total production. This begs the question what kind of dentistry is being produced and if the dentistry isn’t done on “regular” patients of the practice, where are these patients coming from? Even more important is can you, the buyer, attract the same kind of patients? I recall a practice purchase I was advising a buyer on where the dentistry was 90% of the total production when the norm is 75%. So what was being done to produce this much dentistry and where were the patients coming from? Turns out the owner was routinely giving seminars in the area on full mouth restorative type dentistry and they had made a name for themselves to other local GPs, specialists and other healthcare providers and that was feeding these very large restorative cases. Most buyers would NOT be able to step into the sellers shoes and replicate the kind of production this doctor was doing. You have to understand how the patients are finding the practice.
What about the transition strategy? Is it important to you to have the seller available after settlement for a period of time to help transfer the patient goodwill to you, the buyer? Or are you confident you won’t need them and ask the seller to leave immediately. This gets a lot of debate on Dentaltown. Sometimes the decision is driven by the size of the practice. If the practice is so small there simply won’t be enough work to keep the seller around whereas of the practice is large enough there may be a need to keep the seller around to help maintain the dentistry. So what about those practices where you may not “need” the seller stay, however, you can afford to have them stay for a limited number of hours per week for a limited number of weeks or months. How important is that to you for the retention of goodwill?
Maybe this next point should have been the very first point in part one, is the practice in an area you want to live and work? Or would you prefer to have a practice that’s comfortably far apart from where you live so you’re not running into your patients when you’re our socially with the family and friends? Again, I’ve seen strong arguments for both. On one hand, some believe to have a successful practice you should be integrated into the community, attending the local places of worship, joining local social clubs and having patients that are also friends and neighbors. On the other hand I recall a townie stating the last thing they want is to go grocery shopping and having to bump into a patient in every isle and chatting about stuff. They prefer to keep business separated from their personal lives. I bet most buyers don’t give this enough consideration.
The last issue that will be important is the advisers each party is using. I could have included this in part III when we discussed the “people” aspect of buying a practice, however, I wanted to stick with the staff and patient base for that part.
The fact is, advisers can make or break a deal so this is a VERY important piece of the puzzle. Having the wrong adviser on the sellers’ side may keep a seller from selling to qualified buyers or selling with terms that will not be favorable to the seller. The same could be said for the buyers, having bad advisers may keep you from acquiring a practice that may be perfect or one with lots of potential. Having the right advisers on either side can keep you from making a HUGE and costly mistake or enable you to work through the purchase transactions in an orderly, efficient manner so that both parties get what they want neither party feels like that get a raw deal.
As the buyer, make sure you’re working with knowledgeable advisers and make it a point to find out who the seller is using as their advisers. Find out who the broker is if one’s involved, who their CPA and attorney is. Be prepared to share this information with your advisers in case they know something about the sellers’ advisers you need to know.
This ends my five part series on “What’s most important to you when looking to purchase a practice?” Hopefully I’ve given you some good information to consider when you’re looking to purchase a practice and I would encourage any potential buyer to make sure they sign up with Dentaltown, do a search for this specific thread I’ve mentioned and peruse all the practice transition forums to gain some great information on practice transactions, what traps to avoid and what steps to take.
Written by Tim Lott, CPA, CVA. Send your questions to email@example.com.
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