What You Need to Know Before Buying a Dental Practice

Alan Clemens

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If you’ve made the decision that it’s time to buy a dental practice, there are a lot of steps you can take that will ensure the efficiency of your efforts and prepare you to act fast so you don’t miss out on the right one when you find it. Before you see your first office, you need to fully know what you are looking for. Your checklist should include: 

Location: The best first step is to specify what geographical area you are interested in. It can be a large area, but keep in mind that larger areas hold many different demographic groups. You need to know if all of them are for you, or if you would like to focus on specific ones within that region. But the biggest determinant of location, obviously, is ease of travel. Where will you be living, and will you be willing to make that commute?

Chairs: The number of chairs is an extremely important long-term consideration when purchasing a practice. Transition specialists avoid the term “size” when discussing an office because different people interpret it differently. The number of chairs determines the potential growth of the office income, which can be very different than its current production. When considering this factor, you need to think about how big your plans are and how much you’re willing to invest upfront. If you plan to grow aggressively, making a larger investment initially can be much better than outgrowing your office down the road.

Mix: What forms of payment will you accept? There’s fee for service (FFS), preferred provider organization (PPO), insurance, Medicaid, and capitation. You need to get specific here. It matters greatly to your long-term enjoyment of your practice. Each one of these methods requires a certain approach to be profitable, and most doctors are better suited to some than others. Do you like to shmooze with the patients and bring a lot of personality to the office every day, or would you rather focus on the dentistry and crank out the work? Do you mind upselling the patients? An analysis of what you do or don’t like about the work you’ve previously done often can help answer these questions if you’re a newer doctor.

Gross: Inversely to the chairs indicating the potential future revenue of the practice, the gross is the current practice income level. While the net is a much more important factor in evaluating a practice than the gross, the gross provides a basic indicator of where the practice stands. If you don’t intend to aggressively grow the practice, the gross lets you know how much income will be there for debt service and then what will be left for profit. If you do plan to expand right away, the gross lets you know how much you’ll need to invest in the growth, as well as the purchase costs, until you see return on your investment.

Rent or own: Anther big decision you’ll confront is whether to purchase the office space or rent it. While you often will not have a choice on most listings, you will see both options on the market. This again is largely about your long-term plans and how financeable you are. If you intend to keep the office for many years, and you can afford it, then owning your real estate can prevent any major landlord headaches down the line. Moving an existing office is very expensive and to be avoided if at all possible. However, if this office is a step to something else and you’re not sure how long you’ll have it, then it can be much cheaper to rent in the short term. In certain areas, the cost of real estate may prohibit you from purchasing even if it’s a good idea. 

Lender: A great initial step is to develop a relationship with a lender. There are a lot of options out there, and the choice comes down to what you think is most important. Some lenders are more hands-on and can provide you with a lot of guidance and a long-term beneficial relationship, while others are more rate-based. Whichever you choose, you should make sure your lender knows the dental market well, as banks that know the market are willing to lend much more money based on gross to dentists than they are to other businesses. The bank you choose will evaluate your personal financial situation and pre-qualify you for a certain amount. This means that if the office for sale is financially sound, the lender can provide you up to that amount for purchase. This will help you to properly set your search parameters, and most informed sellers will need to see this documentation before they consider you for purchase.

Lawyer: While not completely necessary, it is a good idea to choose your transaction lawyer before you get into the purchase process. Again, like lenders, there are a lot out there. It’s most important to choose one you have a good working rapport with and who has a lot of experience in dental transactions. As tempting as it might be to use your brother-in-law or someone you’ve used previously with minimal dental experience, it will save you a lot of money in the long run to go with a lawyer who isn’t re-inventing the wheel on your deal.

Accountant: Depending on your own financial knowledge, you may or may not need an accountant right away to help evaluate the office for sale, but it’s still good to have one in mind for when you do. The selection process and criteria are very similar to that of choosing the right transactional lawyer.

Diligence: Once you find the home-run practice and negotiate a purchase price, you’ll need to complete the process of due diligence. Having the right team already assembled can make sure you get through the purchase quickly and thoroughly without any mistakes that will prove costly in the future. 

So, how ready are you? To a lot of dentists, it seems like overkill to start on these steps before finding an office. Frankly, these dentists will miss out on great practices. High-quality dental practices are in high demand, and you have to act fast to secure one when you find it. Having these steps in place shows a seller that you are serious and will get their attention.

In addition, a transition specialist can help you find your right office much more efficiently if you can be specific about what you are looking for. There are countless “buyers” out there that have been looking for many years and still haven’t found what they are looking for. This is because they’ve yet to get serious about the process in a market full of buyers who already are serious.

Mr. Clemens, founder and president of the Clemens Group, has been providing dental practitioners with services related to practice evaluation and transition for over 40 years. He is a charter member of the Practice Valuation Study Group, professionals dedicated to providing quality and timely appraisals and valuation services, and is a founding member of ADS American Dental Sales, a national network of independent brokers/consultants specializing in dental practice sales, consulting, and appraisal services. He can be reached at alan@TheClemensGroup.com or (212) 370-1169.

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