So, you’ve been an associate dentist for some time, but you’re ready to go out on your own and purchase your first dental practice. Buying a dental practice will likely be the biggest and most important career move you will make in your life. And you wouldn’t necessarily spend $500K-$1M on something you haven’t fully vetted. Many key factors go into purchasing a dental practice. So, before you leap, it’s crucial to understand the landscape of purchasing your first dental practice.
This guide provides insight on five (5) key considerations when buying an existing dental practice, ensuring you’re well-prepared for a successful acquisition.
Cash Flow
One of the biggest advantages of purchasing an established dental practice is the potential for immediate cash flow. Unlike starting from scratch, buying an existing practice allows you to step into a business with an existing patient volume. This means you can start generating revenue from day one. Want an accurate picture of the cash flow for a prospective dental practice investment? Consider the following:
- # of active patients on recall and the practice's retention rate: A strong patient base is a clear indicator of the practice's health and potential profitability. Many practice management software can generate an active patient count document. Patient count is the number one determinant of revenue for a practice (higher count = higher value). Chris Marshall DDS of Practice Ownership Advisors has some great tips on this in his How to Evaluate a Dental Practice Before Buying video.
- # of hygienists working at the practice: More hygienists often mean more patient appointments and increased production.
- Evaluated the practice’s financial records to understand its revenue trends: Are there seasonal fluctuations? What are the average collections per patient?
According to Dental Buyer Advocates, the average practice sells for about 76.8% of collections (i.e. $1M collections = $768K price for general dentistry; periodontics and OMS a little less; pediatric and orthodontic a little more). So having a clear picture of these numbers is crucial to help you forecast future cash flows and make informed decisions about the purchase price.
Network of Trusted Advisors
Buying a dental practice is a complex process, and not something you should go at alone. Having a network of trusted advisors (your Avengers...for the Marvel® fans out there) can make all the difference when purchasing a dental practice. The following industry experts can help you navigate the landscape successfully:
Practice Transition Consultant or Broker
A practice transition consultant or broker can guide you through the acquisition process. Their expertise in evaluating practices and negotiating terms can save you time and money. To understand the current market in the area where you would like to practice, be sure to speak with multiple brokers and look at a variety of practices.
Accountant Familiar with Dental Practices
Accountants or CPAs are valuable in the area of reviewing financial statements and ensuring the numbers add up. And a dental-specific CPA can provide valuable industry perspective such as best practices from existing clients, expense averages, equipment acquisitions, advice on tax strategies, and more. A CPA who has a dental client base can become a lifelong advisor for your professional and personal financial goals.
Dental-Specific Attorney
An attorney experienced in dental practice transactions is essential for drafting and reviewing contracts - buy/sell agreement, office lease negotiations, non-compete contracts, lender requirements, etc. With the broker representing the seller during the transaction, this specialist attorney can act as a reliable resource to represent you.
Dental IT Consultant
Technology plays a crucial role in the operations of a dental practice; therefore, you will want to ensure the IT infrastructure is healthy and secure. Consulting with a dental IT company can give you peace of mind that you're making a sound investment. They can help with a network assessment to provide an overview of the technology within the dental practice you’re planning to buy.
Associated Risks
While the benefits of buying a dental practice are significant, it's important to be aware of the associated risks. Some of which can be negotiating factors when purchasing a dental practice.
- Patient Loyalty: You may lose patients that are hesitant about changes in ownership and decide to look for another dentist.
- Business Practices: You’re buying someone else’s business which means the philosophy, workflow, treatment planning, staff training, and HIPAA compliance may not align with your vision and management style.
- Staff Changes: Some staff members may not bond with you and voluntarily leave the practice.
- Office & Location: The office building or location may not provide room for growth. A prime location can see increased foot traffic and new patient appointments, whereas a less accessible location might struggle to attract new business.
A big risk that many dental professionals overlook when buying a dental practice is the technology within the office. Technology considerations should be at the forefront of your acquisition planning. Evaluate the age and condition of hardware and software. Consider the network setup (cat cables, switches, battery backups, network drops, etc.). An outdated system (with end-of-life technology) can pose cybersecurity risks and lead to decreased efficiency.
Pro Tip: A dental IT company could provide a network health assessment to gather and present you with accurate information (age of equipment, state of cybersecurity, version of software, etc.). If a network system is deemed insufficient, it could be used as a factor in negotiations and help:
- Remove the cost of a network refresh (new computers, server, etc.) from the purchase price.
- Provide you with extra funds to update the practice technology.
- Decide whether the dental practice aligns with your business goals.
Weighing these associated risks when buying a dental practice will help you make a more informed decision.
Various Types of Acquisitions
When buying a dental practice, there are several acquisition models to consider, each with its own advantages and challenges.
Solo Practice Acquisition (100% Buyout)
A 100% buyout is the most straightforward option, where you buy the entire practice and assume full control. This model offers complete autonomy but requires significant financial investment upfront.
Partnership Buy-In
A buy-in option is where you buy a part of the practice (25 to 50%) with the potential to buy the rest over time (when the seller decides to retire). This allows you to gradually assume ownership while learning the ropes and minimizing financial risk.
Associate with Option to Buy
Another possibility is to join as an associate with an option to buy. This arrangement allows you to work alongside the current owner, gaining valuable experience and insight into the practice before committing to the purchase. This can be an excellent way to ensure a smooth transition and maintain patient continuity.
Each model has its own set of considerations, so it's important to weigh the pros and cons of each before making a decision.
Conduct Due Diligence
Conducting thorough due diligence is a critical step in the dental practice acquisition process. Most often there is a broker involved in selling the practice. Their best interest is in the seller and have done proper due diligence to represent the seller. Therefore, as the buyer, you will want to ensure the same on your end.
For buyer due diligence, conduct a comprehensive evaluation of the practice's financial, legal, and operational aspects to identify any potential red flags (such as inconsistent patient flow or a high marketing budget). Consider the following when transmitting your evaluation of the dental practice:
- Review financial statements, tax returns, and accounts receivable to ensure the practice's financial health.
- Investigate the patient records to understand the demographics and retention rates.
- Look for any discrepancies or irregularities in billing practices that could indicate underlying issues.
- Perform a legal review to ensure all contracts, leases, and agreements are in order. Check for pending litigation or regulatory issues that could affect the practice's value.
- Assess the practice’s compliance with industry regulations and standards (such as HIPAA, OSHA, etc.).
- Evaluate the reputation of the practice within the community by speaking with current and former patients, staff, and other dental professionals (referral sources) to gather insights.
- Hire a consultant to help analyze the staff, systems, and perform a complete chart audit/patient count.
Conducting due diligence will provide you with a complete picture of the practice and help you make an informed decision.
Making an Informed Choice
In conclusion, buying a dental practice is a important decision that requires careful consideration of several factors. From evaluating potential cash flow and building a network of trusted advisors to understanding the associated risks and different acquisition models, there's much to consider.
Remember, this is an investment in your future and taking the time to conduct due diligence and research will pay off overall. Armed with these five key considerations, you'll be well-prepared to make an informed choice about buying a dental practice. Good luck on your journey to practice ownership and if you ever need help with a network assessment, we’re just a call away!
Disclaimer
This article is designed to deliver general information and should not be taken as legal, financial, or tax advice. The intricacies of buying a dental practice can differ significantly from buyer to buyer. It’s crucial to see guidance from qualified advisors tailored to your unique business needs before making decisions that could affect your future.
Pact-One is not affiliated with Practice Ownership Advisors or Dental Buyer Advocates. They were used as resources within this article.
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Sources
- Marshall, Chris. “How to Evaluate a Dental Practice Before Buying.” YouTube, 21 Oct. 2024, https://youtu.be/1Smp49Vc30Y?si=4VvhsFWzHI_nEnWP
- Marshall, Chris. “If I was Buying a Dental Practice in 2024, I Would Do These 5 Things First.” YouTube, 10 Oct. 2024, https://youtu.be/lFZQoPeKbwI?si=ceWwS0fJlxq1jRYG
- Hanks, Brian. “How Much Does a Dental Practice Cost.” Dental Buyer Advocates, 23 Aug. 2024, https://www.dentalbuyeradvocates.com/how-much-does-a-dental-practice-cost/. Accessed 18 Nov. 2024.
