Planning to Purchase a Dental Practice
Deciding whether or not to purchase a dental practice is arguably among the most important steps that face a young dentist. The decision will have a great impact on his/her professional development, financial success, and lifestyle for many years.
If you've decided to purchase, you should take certain steps to achieve a good outcome. Just as with the old sports adage, "Games are won on the practice field," successful dental practice purchases are achieved through proper planning.
Before investigating dental practice purchase opportunities:
Select competent, experienced advisors.
Your accountant and attorney will have equally important roles in helping you achieve a successful purchase. It is crucial that both have an understanding of issues involved in a practice purchase. A sister-in-law who works in mergers and acquisitions at a Wall Street firm might be fabulous at huge multinational transactions. However, she will very likely have no experience with dental practices. I once had such a person submit a 17-page "due diligence" checklist regarding workers' compensation issues for a five-person dental staff! The checklist was obviously cut and paste from a recent project. The result? The highly desirable practice sold to another buyer two weeks later.
You may also want to consider using the "buyer representation" services offered by a dental practice broker. Nearly all brokers offer this service, and it's hard to imagine someone with more direct experience than a practice broker.
Understand practice valuation methods.
Preconceived notions about the worth of a dental practice often collide with reality — to the detriment of the prospective buyer. The commonly used "gross revenue" rule of thumb is a primary source of confusion and disagreement over practice value. Let's say practice "A" has a profit of $241,000, practice "B" has a profit of $192,000, and practice "C" has a profit of $164,000. All have annual collections of $550,000. Do they all have the same value? The ADA sells a booklet called "Valuing a Dental Practice." It should be part of your dental practice purchase planning. Also, experienced advisors will have useful advice on this subject.
Nothing is more frustrating to a seller — or potentially damaging to a transaction — than to accept an offer and then wait weeks while the buyer seeks financing. Access to acquisition financing has never been easier or more available. If you have average consumer credit scores, you can be approved for a purchase loan. As a result, nearly all practice sales these days are cash-at-closing. Being able to assure your seller that you have the means to deliver the purchase price makes your offer that much more attractive.
Keep in mind that attractive practices frequently have more than one buyer making an offer. If you have found a practice you like well enough to make an offer, you certainly don't want to lose out to a competing bid while you're waiting for a loan approval. Unfortunately, this often happens.
There are two main types of lenders. Dental specialty lenders generally lend only to dentists or other health-care providers. They see thousands of dental practice tax returns annually and are very familiar with the business side of dentistry. As a consequence, they frequently offer fast lending decisions. Additionally, they can offer fixed-rate loans with seven-, 10- or 15-year repayment schedules. Generally, they make fewer (or no) demands for other collateral than commercial banks.
Commercial banks run the gamut from small local lenders to national giants, and make loans to any and all business segments. Primarily because of federal banking regulations, they typically require that their loans carry a variable interest rate and be set up on a five-year repayment term. They also generally insist on a greater amount of equity and/or collateral for their loans.
Just as in choosing your advisors, you need to choose a banker that will help you purchase the dental practice you want. Interest rates, terms, collateral, and experience are all areas you should examine.
A final note: I often find that buyers are reluctant to submit credit applications for fear of lowering their credit rating. Yes, it's true that credit inquiries do affect FICA scores. But the effect from one or two inquiries is relatively benign. And, if you are serious about buying, you are going to have to apply sooner or later. Without a doubt, sooner is better than later.
Envision the practice you want in five years.
It will help you recognize if this practice is "the one" for you.
Now, you're ready to seek opportunities.
Stephen D. Jordan began his dental industry career in 1978 with Kerr Manufacturing. He later founded a full-service dental dealership, and sold it to Patterson Dental in 1993. Since then, he has operated a dental brokerage in Ohio. He is a member of ADS Transitions and several other professional societies. Call Steve at 330.335.9042 or e-mail SteveJ@ADSTansitions.com.
Click here for a PDF version of the article that appeared in Dental Economics in August 2008.