When you want to buy a dental practice, the most important thing is to be prepared with all the right questions. There is a lot of discussion in business transactions around “due diligence.” This is simply a comprehensive appraisal of a business transaction conducted by you, the prospective buyer, to establish the true value of the assets and liabilities of a business in order to properly evaluate its commercial potential.
As the vast majority of buyers are not experienced in this process, your success in buying a dental practice will depend on the team you create. It is essential that you rely on a trusted, experienced professional who understands the complexities of the industry. Especially on the accounting side, you need a dental CPA to advise you at every step of the process of buying a dental practice.
We’ve recently talked with Matt Howard of Blue & Co., a dental CPA, an accredited business valuator, and a certified valuation analyst, about what he does and some things you need to know about as you get ready to embark on the next phase of your career. Blue and Co. is the third-party non-biased valuator that we use here at DDSmatch Mid-Atlantic, and Matt leads their business valuation team. They offer a unique level of expertise in giving you a true market test for what a practice is worth at the date of valuation. They will look at a practice from a wide range of perspectives, trying to help both seller and buyer know what a true fair market value price is for the practice.
Understanding Business Valuation
One of the major functions a dental CPA will provide to a buyer is helping them to understand the true market valuation of the practice they are considering for purchase. As Matt explains, “We’ll collect data, we’ll go through the data, we’ll enter it into our models. We’ll ask very specific questions about that data, about some maybe aberrations in the financial performance over time. Sometimes a dental supply category jumps 10% over a year. We want to really understand everything that’s going on inside the practice.”
A major part of the valuation process is finding unnecessary costs that may appear as “noise” in the valuation reports. Matt explains that would be “anything that’s inside the practice that is not necessarily operational, or is basically something that the owner has decided to do at the practice that doesn’t exactly reflect the operations of the practice…a lot of times a seller will own the building, and in owning the building, they’ll pay themselves a leased rate for that building. And sometimes that isn’t a market rate. Sometimes it’s a little bit above, sometimes it’s a little bit lower. And so what our job in this process is, is to really help really work through the practice financials, the historical financial statements, and just basically help sanitize or normalize the numbers as we see them. And as the true operations of the practice are reflected.”
Your dental CPA will help you make sure that you are only paying for the value of the practice and not any of the “noise” that may be advantageous to the selling doctor, but not to you. You will need a skilled financial expert to be able to guide you through this process.
What About Starting a New Practice Rather than Trying to Buy a Dental Practice?
The key difference here is cashflow. Starting a new practice requires a lot of capital and time to grow. You need the money to lease or buy the office space, do the “build-out”, buy equipment, hire and pay staff, all without an income stream from patients. When you buy a dental practice, as Matt says, “You’re walking into cashflow day one.”
The debt associated with starting a new practice is much more significant than when buying an existing one. Matt explains, “It’s a three – to sometimes seven-year journey to maturity or average collections of [a new practice]. So basically what I’m saying is the first year, you’re probably going to feed the business, as in bringing money to the table to keep it going as you build up that collection stream. The second year you might break even or maybe pay yourself a little bit, but definitely not up to industry standards. The third year, between the second and third year is generally, during these startups, where we see you making some progress towards paying yourself a reasonable wage. It’s still probably not, what you could get being an associate at another practice, but you’re on your way. And then . . . [the] fourth, fifth, sixth, maybe up to seven years, will get you hopefully up to average.”
At DDSmatch Mid-Atlantic, our focus is on finding the right match between the selling and buying doctor. So, rather than having to create a practice from the ground up, you find one that is already on its way to what you want. We provide you a strong foundation to build on, one that fits your vision.
Should I Consider a Dental Associateship?
The short answer is yes, but be cautious. When carefully planned, a dental associateship can be a good path to practice ownership without the heavy initial debt. However, dental associateships are complicated situations that often aren’t understood well. They can be successful when the right questions are asked and answered up front.
Matt explains, “Every practice has a limited amount of resources, of ops, of time for the staff to not hit overtime. So there’s a lot of variables at play here. Typically, we like to see over a $1.2 million collection practice in general. That way that there’s plenty of room for an associate to come in, inherit some of that revenue stream, as in, hopefully the seller wants to back off a bit and transfer some of their patient base over to the associate.”
If a practice isn’t ready to take on an associate, you could find yourself in a situation where the owner-doctor isn’t able to provide you with an adequate amount of work to justify paying you the salary you deserve. If this is the case, then you may find yourself in a difficult position—no better off than you were before. So, before agreeing to a dental associateship, take a close look at the practice. If they are booking their patients two to three months out, they probably have enough work to justify bringing you and the ability to pay you.
Also, consider the terms of the deal you are offered. For a dental associateship, you can typically expect a guaranteed salary for the first few months, sometimes up through the first year. After that, however, you should expect to be compensated based on a production or collections-based system. You should be very clear about these terms and make sure it works in your favor as well as the owner-doctor.
Being an associate can be a good path to practice ownership, but just because it might seem like it involves less financial risk for you at the outset, does not mean that this is in truth the case. Do not allow a dental associateship at a practice that cannot support a second doctor to become a major setback to your career.
Asset allocation is a major factor in the buying and selling of dental practices. Successful practices are largely built on the goodwill they have engendered with their patients and in their communities and how that goodwill is valued will be largely what you are purchasing. It’s not real property, like a plot of land or building, and it’s not a tangible object, like furniture or a handpiece. But it is the thing that brings patients through the door, paying you money for your services.’
Asset allocation is important for two reasons. First, asset allocation makes a real difference in the amount of money that you are giving the seller that they actually get to keep. As Matt explains, “The million dollar price is great and all. However, it’s not about what the price is, it’s about what you keep. And obviously what I’m referring to here is taxation.”
Second and related, it’s important to recognize the importance of goodwill in the patient community in valuation of the true value of the practice. The selling doctor has worked for decades—most, if not all of their entire career—to build it. The practice is their legacy. They are appreciated by their patients, who have put a lot of trust in them. Selling their practice is to give up something that represents their blood, sweat, and tears.
The sale of tangible assets will be taxed as normal income at the ordinary rate. Assets allocated as intangibles, such as goodwill, are taxed at the more favorable capital gains rate. So the more value allocated as goodwill, the more money the seller gets to keep. For you, everything you are buying, equipment, furniture, or goodwill, you will be able to write off through depreciation over time. But for the seller, it’s either money in their pocket or lost to taxes.
When you consider the weight of what the owner dentist is selling you—their life’s work—they have much more invested in this than you do at the point of sale, both financially and otherwise. So, it’s better to negotiate asset allocation in a way that gives them the true worth of what they’ve built. You’ll want the same when it comes time for you to sell the practice to the next dentist, and helps you create a win-win outcome.
How to Best Prepare to Buy a Dental Practice
Matt advises that you need four things before you are really ready to buy a dental practice. The first is hand speed. You need to be sure that you can actually do what you need to do to produce at the levels that the practice you are looking to buy is currently producing at. This includes documentation time.
Second, you should have your own financial cushion. Matt says banks like to see that buyers have “some sort of margin in their life . . . that sounds very logical, but a lot of times a buyer is not a good candidate because they don’t have any kind of safety net in their life.”
Third, you should know what you are looking for in a practice, in a specific way. Rather than just a general desire for ownership, you should create a solid picture of “what area you want to be in and what that practice might look like.” Your lender and the selling doctor will want to know that you are “fully vested in buying in a certain area for a specific purpose with a certain clinical skillset.”
And, fourth, you need a good team of advisors, meaning, at very least, an experienced dental CPA and dental attorney. These advisors will “help you understand the logistics of the transaction and how to structure it. But really, beyond that, if you have the right people on your team—as advisors, we’ve been through this a hundred-plus times, so just helping you through that is part of what we do.”
With the right people in your corner, you’ll be better prepared to make the right decision about the practice your choose to buy,
DDSmatch Mid-Atlantic Has Practices for SaleIf you are considering buying a dental practice in Maryland, Washington D.C, or Virginia, check out our listings. You can set up a free profile on DDSmatch.com that will keep you up to date about available practices. Contact us today about potential matches.