10 questions to ask before purchasing a dental practice
For medical professionals such as dentists, acquiring an existing practice often makes more financial sense than launching one from scratch.
Why? Put simply, an existing practice delivers instant cash flow which can be used to pay debt associated with the purchase, while still leaving ample funds in your pocket. Those who choose to launch a new practice should be prepared to endure a couple of lean years before it is fully established and generating significant revenue.
But acquiring a practice isn’t without potential pitfalls. The wrong purchase could derail your personal and professional financial success for years to come. As a dentist, this is likely one of the most important purchases of your life, which is why it pays to ask these 10 questions before signing on the dotted line:
How much debt are you comfortable borrowing?
The vast majority of acquisitions are financed with bank debt. The amount you’re comfortable borrowing will define what practices are in your price range. For dentists, financing is easily obtainable and banks are generally willing to finance 100% of the purchase price.
What is the practice’s goodwill vs. physical assets?
Generally, the purchase price is a function of two things: goodwill, which is based on a percentage of the practice revenue, and the fair market value of the physical assets. The better practices are the ones where the goodwill is a larger proportion than the physical assets. It usually means that they generate stronger cash flow. That being said, you still need to look at the condition of the dental equipment to see if it is in disrepair, or whether it will need to be replaced in the near future since this would be an additional cost.
How strong are the active chart/new patient statistics?
The number of active charts is an indicator of the size of the practice. Charts where the patient has not had a visit in the last 18 months should be excluded since it is questionable if the individual is still a patient—and even if they are, they hold little value because of their infrequent visits. The number of new patients per month that the practice is able to generate is another strong indicator of its ability to grow.
Is the hygiene department under-developed?
Practices with under-developed hygiene departments give you the opportunity to increase the profitability of the practice by shifting hygiene work to a hygienist, thereby allowing you to focus on higher-margin dental work.
What type of dental work is performed at the practice?
Similarly, in practices where the dentist is largely performing low-end dental work, there is a major opportunity to an incoming dentist to increase revenue from the existing patient base by identifying opportunities where higher revenue-generating dental work could be performed. Of course, these opportunities depend on your dental expertise and experience.
Will you retain the services of the selling dentist?
Selling dentists are usually willing to stay on for a period of time to help with the transition, introduce you to patients, help you understand their office processes, etc. However, you do not want them around too long, because their presence might interfere with your ability to make the practice your own. Generally, I recommend no longer than one year.
Does the practice have valid associate/employee agreements in place?
Where associates are involved in the practice being purchased, check to see if there are associate agreements in place. The lack of an associate agreement leaves you exposed to the potential of the associate leaving the practice and soliciting the patients of the practice, hence eroding its value. If there are associate agreements in place, they should be reviewed by a legal professional to verify the adequacy of their non-competition and non-solicitation clauses.
With respect to employees, inquire about the number of years each employee has been employed by the practice. The greater the number of years of employment, the greater your potential severance and termination pay obligations.
What are the details of the lease?
With a lease, ensure there are a sufficient number of years remaining on the term to avoid the need to relocate the practice. If you are financing the acquisition with bank loans, the bank would require that the lease term is at least as long as the term of the bank loan.
Is it the right location?
A key point to consider about location is the demographic profile of the area, including household income, number of residents per dentist, number of competing dentists, etc. These considerations will directly impact the practice’s growth potential. Other location-based factors include visibility (pedestrian and vehicular traffic to attract new patients), as well as proximity to your home.
Do the clinic’s hours suit my needs?
Consider carefully the number of hours you’ll need to work to operate the clinic, and whether that schedules suits your lifestyle—especially if you have younger children and need to dedicate time for child-rearing.
George Grignano, Partner