One of the most important decisions a dentist will make, after deciding to become a dentist in the first place, is the decision to buy a practice. It’s an exciting opportunity that will help you make significant progress in your career and gives you a much faster start than building a practice from scratch. Thus, you must approach this decision with thorough planning and preparation.
Like with most business transactions, buying a dental practice comes with risks. In this article, we’ll discuss 10 key factors that you should consider before you buy a dental practice. That way, you can make a financially sound investment and build upon a successful practice acquisition.
1. Consider the location of the practice
Location is an important factor when buying a dental practice. Keep in mind that you’ll be working and living in the area your practice is located, so it’s well worth the effort to do your research. Are there any other competitors in the area? Is the practice visible to the general public?
It’s good to know the demographics within the area so that you can determine whether your services are a good fit. Once you’ve gathered enough information, you’ll know if the location is prime for your business.
If you don’t plan on buying the real estate, do review the details of the lease and your renewal options. It’s one of the most important documents you’ll ever sign, so make sure you know everything before putting the ink on the paper.
2. Try to negotiate the lease terms with the landlord
Many dentists make the mistake of not negotiating the lease terms with the landlord. The last thing you want is to end up on the wrong side of the agreement by simply agreeing with the terms presented to you.
Try to work out a deal that’s fair to both parties. For example, you can negotiate the facility costs and other concessions like the security deposit. When acquiring a dental practice, the lease terms should fall in line with your needs. If they are firm with their initial terms, don’t be afraid to walk away in search of better deals.
3. Know how many active patients the practice has
Oftentimes, practice buyers end up disappointed after learning that the business has fewer active patients than what was previously suggested. A good way to know if a patient is active is by looking through their records and seeing if they’ve made transactions in the last 12 months.
You want to confirm how many active patients the practice has through their practice management software. The numbers may not always be accurate, but you can get a good idea of the active patient count by reviewing the charts. Take 10% of the samples and multiply them by 10. This will give you a good estimate that’s as close to the real active patient count as possible.
4. Discuss the staff transition
The staff is the lifeblood of a dental practice. They develop close relationships with patients and contribute a large part to the practice’s success. The ideal scenario would be to retain all the staff and ensure a smooth transition, though this is not always the case.
Discuss with the practice owner on their plans to transition the existing staff. It’s expected that the staff members will feel worried about their job security, so it’s recommended that you and the practice owner conduct a team meeting to assure everyone that no immediate terminations will be made.
The meeting should be done after the purchase transaction has been made. When you meet face to face with the members, you can greatly reduce their worries and make them feel confident about the change in ownership.
5. Determine the price of the practice
The price of the dental practice is one of many things that both parties must agree upon. Most of the time, practice owners value their business way above what the financial records show. This is understandable considering they spent years building their business and the amount of effort they put in.
But this doesn’t mean their pricing is correct. You want to have the practice valued by a dental practice broker to determine its actual worth. Working with an experienced professional gives you the accurate pricing of the practice as well as iron out the kinks that come with the negotiation process.
The broker will conduct an in-depth analysis of the practice’s tax returns, account receivables, future cash flow, and more. The practice owner’s insurance agreements will also be taken into account. After the valuation process is complete, you and the owner can agree on a set price that’s fair for both parties.
6. Check if the active patients have already received extensive dentistry
When buying a dental practice, you want to make sure you’re getting the most out of your hard-earned money. One way to ensure that is by checking the status of the active patients. Have they already undergone extensive dental care? If so, then the potential investment return will be less than what you expect.
For the most part, you’ll profit from the active patients through hygiene and minor dental work. If most of them haven’t received extensive dental care, then the potential earnings are very high. As you see the patients regularly, they’ll become more open to treatment recommendations.
7. Get a feel for the dental practice yourself
Dental practices vary greatly from their staff to their workflow operations. Each working environment is different which is why you want to visit the office first-hand. Observe things like the condition of the facility, the equipment, the technology used, how the staff works, and more.
This will give you a good idea of how the practice runs on a day-to-day basis. Is there room for improvement based on your observations? Or are you content with how things are operating?
In some cases, dental offices run a style of practice that’s severely outdated. Not only will this affect the value of the practice, but it’ll also be expensive to modernize or upgrade the practice itself.
8. Don’t hesitate to ask for help
There are a lot of financial ramifications when you end up buying the wrong practice. This is especially true for first-time buyers who have little to no experience in making a sound purchase. This is why we highly recommend you seek expert advice from dental supply companies, dental brokers, healthcare accountants, and even your fellow dentists.
Chances are they’ll recommend a dentist who’s leaning towards retirement or a practice owner who’s looking to add an associate. Having connections also helps in finding the right practice that fits your goals and budget.
Coming in with zero knowledge on buying a dental practice is a recipe for disaster. The more information you can get, the more confident you’ll feel with your investment.
9. Beware of self-financing agreements
Once you and the practice owner have reached an agreement, you’ll need to obtain financing to secure the deal. Some dentists will offer self-financing arrangements which is something you’ll want to avoid. This is because a seller will have less incentive to ask an experienced broker to assess the asking price.
After all, the sale will most likely go towards the practice owner’s retirement funds, making them more invested in obtaining a certain result. The wiser choice would be to opt for bank financing. Both you and the practice owner will provide important documents like tax returns, net worth statements, dental valuation papers, and more.
Having good credit is key to making a successful practice purchase. You want to make sure your debt (i.e. credit card debt, student loans, and lines of credit) are paid on time to get approved for financing.
10. Make the transition a success
The sale doesn’t end after the handshakes are done and the check is issued. A lot of work still needs to be done to ensure the transition is a success. To start with, you’ll need a well-written introduction letter to the patients. This will inform them of the change of ownership and keep patient loss as low as possible.
From there, you want the important documents to be reviewed by dental brokers and attorneys. Here’s a list of the papers that need to be checked:
- Letter of intent
- Lease agreement
- Sale agreement
- Financing papers
- Insurance documents
- Business and dental licenses
At this point, you should have already discussed with the practice owner how long they plan on staying in the practice. It’s uncommon for sellers to stay long-term unless they have associate responsibilities. Usually, they’ll stay for a few days to show you the ropes and promote continuity within the practice.
Take the time to listen to the staff, the patients, and the seller. This will allow you to gain a complete understanding of how the practice operates. Once the transition is complete, you’re now in full control of your new dental office.
Putting it all together
If you’ve made it this far, congratulations! You’re on your way to becoming a proud owner of a dental practice. As you can see, buying a dental practice involves a lot of research and planning. By following this guide, you’ll be able to make a sound financial decision and place yourself in the best position to succeed.