One of the main reasons cited by dentists and dental students for pursuing a career in dentistry is the potential to be their own boss. For many, that starts with the purchase of a dental practice.
Yet, many new dentists get so focused on clinical care that they ignore the business complexities of running a practice. To ensure that you are purchasing a practice that makes financial sense, consider these key areas of due diligence:
Market area — Who will be your competition within 1 mile, 5 miles and 10 miles of the practice? Just as important, are the demographics of the area appropriate for the type of dentistry you wish to practice? For example, if you are interested in emphasizing aesthetic and complex restorative dentistry, you’ll want to practice in a community where the demographics will support it.
Patient characteristics — Are most of the patients returning patients or are there a lot of “one-offs” on the books? How about the ratio of patients with dental insurance to fee-for-service patients?
Growth potential — Assume you analyzed several years of a potential practice’s production reports and saw that the majority of perio and endo services have been referred out. Depending on your personal skill set and comfort level, offering these services in-house might create excellent growth opportunities.
Equipment — If not already in place, it could cost tens of thousands of dollars to upgrade a low-tech practice with technology such as digital radiography, a high-end intraoral camera system and a robust Electronic Dental Records System. On the other hand, if the technology is already in place, how much will it cost to maintain the equipment annually?
Current financials — Have you been able to obtain at least three years of prior tax returns and financial statements? Is the revenue and net profit trending upward or do you see a drop off? Be wary if the seller has not been completely transparent and answered all of your questions in a satisfactory manner.
Financing — In addition to borrowing for the purchase price, you might need to borrow additional funds to support cash flow needs as collections ramp up (it may take time to get revenue flowing, but expenses start immediately).
Cash flow —Your lender will want to see a forecast of cash flow for at least five years. If you can, break the numbers out on a monthly basis for at least the first two years, and then on an annual basis for years 3 – 5. Of course, one of the benefits of purchasing an established practice is that you are purchasing an established income stream.
Structure of the purchase agreement — What exactly are you buying? With an asset sale, you are purchasing the agreed-upon assets of the practice. With a business sale, you are purchasing the owner’s equity in the practice and are, essentially, stepping into the ownership shoes of the seller — liabilities and all.
Allocation of purchase price — Will you and the seller be able to reach an agreement on how to allocate the purchase price between goodwill and assets eligible for accelerated depreciation? This will require some negotiating between both parties.
This Won’t Hurt a Bit
Acquiring a dental practice is a major step — one that requires some guidance. Our firm can help you with the financial aspects and planning you need to start out on solid footing. We have the experience to help set up new business ventures as well as structuring the purchase of an existing business.