Thinking about Buying a Dental Practice?

A common goal among dentists is to pay off debt, accumulate wealth (grow a successful practice), work a little, sell their practice, retire (and not necessarily in this order). Today more and more dentists are losing money in their portfolios and being forced to work until they die (likely in an operatory with a handpiece in their hand). That is no way to go, but for many aging dentists this is an unfortunate reality. On the flip side are younger dentists stepping up to the unwritten expectation (lie) that ‘successful’ dentists have to own their own practice to be successful and accomplished.

A few months ago I received a call from a young dentist who bought a practice from a retiring dentist. After the purchase the new owner discovered the former owner grossly misrepresented the volume and valuation of his practice. It turned out the person who brokered the deal may not have disclosed some important information. There were quite a few problems with this case. Sadly, the new owner may have little recourse and no choice but to buck up and grow the practice himself. 

Dual Agency

Unless real estate brokers practice transition specialists are not governed by laws regarding dual representation. Beware of working in dual agency situations, as they broker will always be biased in favor of the seller (the sale must happen or two people will not get paid). 

Buyer Beware

 

Buyers need to put their big boy and big girl pants on and spend some money to bring in experts to do a thorough due-diligence assessment of the practice to verify the information the sellers relate and ensure that everything is represented fairly and honestly. The phrase buyer beware comes to mind here! Real estate agents have a saying that buyers are liars and sellers are thieves.

Contemplate this for a moment. Buyers want to appear ready and able to make a buying decision. They may allude that are serious buyers and are ready to make a purchase when they have but only a desire to be an owner; they have not a clue what they’re getting into. Then there is the buyer’s reluctance to intrude into the privacy of the seller, so they fail to really dig in and do their due diligence. If they do any due diligence it is merely to review the books. How knows what B.S. numbers look like? No offense, but most dentists are too trusting of others (perhaps I have been a cop too long – I am healing).  

For the seller the sale represents a substantial part of their nest egg. They have worked in the practice for many years and they have expectations of a high cash return on the investment of their time, which is understandable. Their goal is to get as much out the sale as possible. If your seller has done their due diligence they should have started improving the practice (cosmetically, technologically, and patient volume) in recent years. A wise seller plans for their sale and spends time, money and resources to increase their production for 3-5 years before selling, which is contrary to what many sellers do. Many sellers slack off and hire an associate to be their donkey while they spent much of their time at the golf course, or shopping burial plots.

All of this applies to someone looking to join into a partnership agreement with another dentist as well. There are few more considerations in that situation because you become jointly liable for many things they have done and continue to do in practice. Call me before you join a partnership. I would be happy to discuss some things to look for in that situation.

Now here’s the part where I may upset some folks. Here are some clues that effect the valuation of a practice:

1)      How much continuing dental education has the seller completed in the last 3-5 years and what was the CE for? Anything related to the advancement of dentistry?

2)      What new equipment (technology) is used in the practice? How long has the technology been there? How well is it used? Did it improve the practice? Did it improve patient outcomes? Did the dentist purchase the practice last week, so it is there for appearance’s sake (for your benefit)?

3)      What training has the staff had in the same time period?

4)      What written policies and procures are place? Are practices and standards written down? Are they followed? Have they been revised over time to account for what the dentist and employees actually do? These established (written) standards and procedures are a system. When you buy a practice you are buying s system and opportunities to continue to serve a designed set of patients.

5)      How many active patients are there (patients that have been examined by the dentist in the most recent 12 months)?

6)      How many hours a week (and how many weeks/ year) has the dentist put in at the office over the last 3 years?

7)      What business promotion tools does the dentist use? How have they worked? Have they been measured? Does he/ she know what works and what does not?

8)      How many new patients has the practice seen each month in the last 3 years?

9)      What new patient to crown ratio? What does it matter how many active patients there are if the dentist doesn’t do any dentistry on them? How does the seller’s new patient to crown ratio compare with your ratio (in whatever environment you have practiced for the last three years)?

10)  Ask 10 of your friends to call and communicate with the receptionist. Their goal? They would like to be asked to schedule an appointment. The criteria? They need to be warmly received. They need to feel the practice is where they want to call their ‘dental home’. The receptionist needs to invite them to come in for an examination. Get their feedback. If the majority reports they did not feel warmly received and compelled to schedule an appointment you know you have a problem to address. This may NOT be an easy problem to correct (though it could be).

11)  If the employees are not following current CDC recommendations for infection control, they have not had annual OSHA training, or they are not in compliance with current HIPAA requirements you know there will be work to do in this area. Again, it will cost time and effort (probably some money too) to correct this important issue. If you buy a practice that is out of compliance and you (or the staff) continue non-compliant practices YOU assume the liability for the compliance issues.

12)  Scour the Internet to check out the dentist’s reputation. More and more Internet services have programs to build up positive reviews and minimize (or bury) negative reviews about a dentist. Dig hard and long. Google the dentist’s name personally (without the DDS/DMD) after their name and see what pops up. Heck, hire a third party to do a background check on the seller. Are they about to file bankruptcy? Did they file a bankruptcy recently? Look personally and professionally? Are they under audit or investigation for anything? What for? What about prior disciplinary actions? Each of these can impact the practice and you need to know what the sellers true motivation is for selling their practice.

13)  Trust your gut feeling about your decision whether to purchase the practice? If you cannot make a clear and relatively easy decision than either you don’t have enough information to make the decision and need to continue your due diligence or you may be the type of person who has difficulty making difficult decisions and therefore probably should not be buying a practice to begin with. If the later, don’t fret! Not every dentist is cut out to be a business owner. It does NOT mean you are a failure as a dentist.

Whatever the case it is important you avoid being bullied into buying a practice. Also, I find that few are willing to spend any money to have experts go into the practice and do a thorough due diligence assessment of the practice. Would you buy a home without having it inspected? Would you buy a car without test driving and inspecting it? If no, why would you ever buy a practice without a thorough understanding of the pros and cons?

My suggestion is to put more than one set of eyes on (in) the practice to verify the seller’s information, so you can know and understand everything about the practice. Like your patients you deserve to make an informed buying decision!

 This goes for going into a partnership with someone as well. There are few more considerations in that situation because you become jointly liable for many things they have done and continue to do in practice. Call me before you join a partnership. I would be happy to discuss some things to look for in that situation.

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