Considerations When Purchasing A Dental Practice
After spending years in dental school and perhaps working for some time as an associate in another practice, you are finally ready to purchase your own practice. Buying a practice is, for many dentists, the most important decision of their careers, and it can be an intimidating task to take the necessary steps to successfully transition from graduate or associate to owner.
Oftentimes, the most daunting part of such a transition is simply determining, as a practical matter, where to begin. Naturally, you should always consult with an experienced attorney and accountant before purchasing a practice. Once you have secured advisors to safeguard your interests throughout the transaction, you should remain actively engaged in the process. To that end, here are seven key considerations to keep in mind when purchasing your own practice.
- Obtain a practice appraisal from an experienced professional.
While a practice’s annual gross may provide a rough, ballpark estimate of a practice’s value, a practice’s gross earnings are merely one aspect of the practice’s financial state. Consequently, you should always conduct an in-depth analysis of a practice’s value before making an offer.
When choosing an appraiser, look for one who is experienced with the type of practice you are buying, and who understands the importance of factors like cash flow, overhead expense, payment source (e.g. fee for service, PPO, HMO or Medicaid) and patient base. The appraiser should be able to offer several valuation approaches and help you decide which one is the best approach to use in evaluating the right price for the practice you want to buy.
- Review and understand the lease.
If the current owner is leasing the property/practice space, it is essential to understand what the lease term is, when it expires, whether it is assignable, whether there are options to extend, whether it is triple net, and what the common area maintenance (CAM) charges are. You would not want to spend hundreds of thousands of dollars on a practice, only to find that the practice’s lease expires in only a year or two. If (as is often the case) the lease is not drafted in an easy to understand, straightforward manner, an experienced attorney can help you determine whether there are any provisions of the lease that present cause for concern.
- Consider the age of the equipment and the condition of the office space.
Practice renovations and equipment upgrades can be extremely expensive and time consuming. When determining whether to buy a practice, or how much to offer for a practice, consider whether you stand to inherit costly projects, such as replacing the chairs, purchasing an E4D or Cerec, or refurbishing the reception area. If renovations or updates are needed, be sure to acquire quotes from equipment suppliers and contractors and incorporate those costs into your negotiations.
- Obtain detailed production information from the seller.
You should review and analyze the selling doctor’s CDT codes and billing records to understand the types of procedures the practice was performing, the volume of patients and the revenue generated by each procedure. This critical information will likely be considered by the appraiser who is valuing the practice, but you should review it with your accountant and attorney as well so that you have a solid understanding of the history of the practice and the expectations of the practice’s clientele.
- Evaluate the practice’s potential for expansion.
Once you have acquired and reviewed the practice’s CDT codes and billing records, you should consider whether it would be profitable to offer additional services to boost revenue and draw in new customers. For example, if the previous dentist did not perform cosmetic dentistry and you are trained in those types of procedures, the potential for expansion may be a major factor when deciding whether to purchase the practice.
- Make sure you are adequately insured, and be sure to consider the cost of insurance.
Buying a practice is a significant investment, and you need to make sure that your investment is protected. If you do not already have disability insurance, you should seriously consider purchasing a disability insurance policy. Roughly half of all practicing dentists will have some sort of health issue at some point in their career that will either cause them to reduce their hours or be unable to work for an extended period of time.
You should also review the scope of your general liability policy. Many general liability policies exclude coverage for certain weather-related losses like floods, and most exclude coverage for employment practices. You may need to purchase additional riders or policies to make sure you are adequately protected. The cost of purchasing insurance, and any additional riders, should be taken into account when estimating the potential profitability of the practice.
- Consider the location.
Find out whether the practice has engaged in any previous marketing or targeted a particular region or demographic. If the practice’s marketing history is minimal or nonexistent, there may be potential for growth of the practice.
You should also research the demographics of the area surrounding the office location to determine income, density, and competition from other doctors. You will want to confirm that there will be enough patients in the area for your practice to grow.
While this is not an exhaustive list of the issues you should consider when purchasing a practice, it can serve as a starting point. Every practice is different, and therefore every practice transition will necessarily involve unique opportunities and challenges. An experienced attorney can help you familiarize yourself with the various stages of this important process, and ensure that your interests are protected as you make the transition from graduate or associate to owner.