There’s a right way to do it. Here are the tips you need.
Many young dentists will consider purchasing an existing practice this coming year. Whether you work with a broker or you find one on your own, a number of key factors have to be considered in order for you to ensure that you make the right choice.
The most important reason for purchasing an existing practice vs. considering a start up is the purchase of an income stream. For example, you purchase a practice grossing $600,000 and pay $360,000. Let’s assume the overhead was 60 percent and the growth rate for your new practice is 6 percent, then your pre-tax cash flow over 10 years would be in excess of $3,000,000, even though you are assuming $360,000 in debt. Conversely, if you were to cold-start a practice, chances are this level of earning capacity would not be achieved in the same 10 year period since it would likely take you three to four years to hit the $600,000 mark.
In our experience, the three keys to a successful practice transition are location, size of patient base, and high net profit. If these key ingredients are reflected in the practice you are purchasing, chances are your acquisition will be a successful investment. In addition to these key ingredients you need to consider other factors such as: type of practice, service mix, condition and size of the facility, and number of new patients. Let’s address each of these in greater detail.
Key Ingredients
Location
In any successful business venture, picking the proper location is critical. If you are new to the community we strongly recommend that you obtain a demographic analysis. This analysis will give you data about the community’s economics, characteristics of the area population, unemployment rate, and future growth.
Size of Patient Base
The size of patient base will dictate how well you will fare in the early days of ownership. For example, purchasing a practice with 500 active patients vs. a practice with 1,500 active patients, it goes without saying that the second scenario will afford greater potential opportunity. Since most dental practices grow from internal marketing, having a larger referring patient base bodes well for long-term success. We do not imply that you should not consider purchasing a practice with 500 active patients; but if so, take a careful look at the composition of these patients, such as travel distance and age. Two reports that should be analyzed to know your patient base are a ZIP code analysis and an age analysis.
ZIP Code Analysis
Knowing how far your patients travel is important. If you are purchasing a practice in a community where the owner has practiced 25 to 30 years, it is highly probable that a number of patients are second generation patients who may be traveling some distance to visit their dentist. They were young patients who have moved away from the immediate community, but who are willing to travel some distance based on the long term relationship they have established with their dentist. If the distance is substantial when the doctor retires, there is a high probability that these patients will not continue to visit the new doctor; they may take the opportunity to find a practice in their immediate area. This scenario is more likely to happen if the seller leaves immediately after the sale.
Age Analysis
Another key report to analyze is the age analysis report. What is the age distribution of your patient base? Depending on the type of services you want to provide, it may be a problem. Is it an older patient base or one that has a good cross section of ages?
Number of New Patients
New patient flow is a clear indicator of a practice’s vitality. Practices where the owner has been cutting back on his practice time and possibly not accepting new patients may be a real problem. For example, purchasing a practice with three or four new patients per month will guarantee a substantial investment in internal and external marketing strategies. Conversely, a healthy inflow of 15 to 20 new patients monthly would be preferable.
Profit Margins
Clearly understanding practice overhead is a key ingredient of successful practice acquisition. Practices that have overheads of over 70 percent vs. practices that have overheads in the 50 percent range will have dramatically different practice values as well. We also found tremendous success in practices that are acquired with good healthy profit margins, thus allowing you to have a good lifestyle and still maintain proper debt service.
Other Factors
Service Mix
Knowing the type of dentistry you aspire to practice is critical in your selection of the type of practice you wish to purchase. If you are interested in emphasizing more elective services such as esthetic dentistry and complex restorative dentistry, then clearly you need to practice in a community where the demographics will support it. If, on the other hand, you are interested in general dentistry, you’d like to have a broad range of services in endo, perio, restorative, crown and bridge, etc. Therefore, analyzing the practice’s production reports is a very critical component of your due diligence analysis.
For example, if the retiring dentist has been focusing on complex restorative dentistry, it is not surprising to see 50 percent to 60 percent of the Seller’s Production relates to this category. This may imply, especially in smaller patient bases, that many of the clinical procedures have already been performed or that you’d be purchasing a “maintenance” practice. Conversely, if you analyze the production report and see minimal perio and endo services, that provides an excellent opportunity for growth. Nonetheless, carefully reviewing the last two years’ production reports will give you a good picture of what is happening in this practice.
Condition and Size of Facility
With most young dentists being trained in state-of-the-art facilities, purchasing a practice with “museum quality” equipment is always a problem. Obviously, practices of this nature will not command as high a value as practices with recent renovations, newer equipment, and state of the art of technology. Many times purchasers will severely discount their offer to purchase price for practices with older equipment. If the practice does not possess the clinical technology, part of your overall financing scheme may be investing in technology at the outset.
These are only a few tips that if carefully analyzed and reviewed, will make your practice acquisition a sound business investment.
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