Gain insight from a virtual CFO, CPA and business advisor with years of dental industry experience in today’s discussion about buying a dental practice. If you are considering purchasing a dental practice, or specialty practice, today’s podcast is for you. We are talking about where to start, finding a location, some of the nitty gritty details like letter of intent and due diligence and more. Don’t miss this walk through with virtual CFO, Jaime Staley, who breaks down what you need to know.
What we cover in this episode:
- 01:19 – Where to start – vision and goals
- 04:57 – Location and demographics
- 05:45 – Advising team
- 07:56 – You’re ready to purchase – letter of intent
- 09:05 – Due diligence
- 10:46 – Purchase agreement
- 11:21 – Further considerations
- 14:27 – Final thoughts
Where to start – vision and goals
There are many things to think about when considering purchasing a dental practice. The very first item on your to-do list should be the task of identifying your goals. You have to know what you want to accomplish, why you want to be in this business, and what is going to set you apart from other dentists and specialists in your area. Before venturing out to purchase a practice, you should take time to think about your goals and long-term vision. In episode #01: Strategic Planning – Vision & Long-Term Goals, we share useful information and a free workbook download to help get you in the right mindset to determine where you really want to take your practice. If you missed this episode and are thinking of purchasing a dental practice, this is a great place to start.
It’s important for you to know your professional vision, where you want to go, and how you are going to get there. Ask yourself, does this practice I’m looking to purchase reflect my professional vision and where I want to take my career?
Additional questions to consider include, is this practice compatible with my goals? Does this practice have the same quality of care philosophy as I do? The quality of care philosophy varies from doctor to doctor. When purchasing a practice, you want to ensure you’re in alignment with the same care philosophy because existing patients are going to be accustomed to that and expect it regardless of the practice owner. Additionally, you want to be comfortable with the way you’re going to treat those patients. If what they are used to doesn’t mesh with your vision of patient care, your philosophies probably aren’t in alignment and this may not be the practice for you.
Location and demographics
When purchasing a practice, ideally you want to look for a practice that is in a highly visible location, can be easily accessed, and has a significant amount of traffic. You may want to reconsider if you’re looking at a practice that is hard to find, doesn’t have much parking, or is in the middle of nowhere. You’ll also want to do some research to determine if other dentists are in close proximity to the practice. It will be harder to stand out if patients have multiple options to choose from in one small area.
If you are a specialty dentist, proximity to other dentists is important. Consider a location closer to dentists you have established relationships with, or a location that has multiple dentists nearby so you can start to develop relationships with them. Ideally, you’ll want to be their specialist of choice when referring patients.
At this point, your mind may be going 90 miles an hour. Before that speed accelerates any higher, pause and get a team of advisors on your side. With all of the nuances of buying/owning a business, it is wise to have knowledgeable professionals supporting you. Plus, there is no need to do work that someone else, who is qualified, should be doing. The type of advisors we recommend include:
- A lender to get the banking and financing settled for the purchase of the practice. This will be an ongoing relationship throughout your business ownership journey that is important to establish in the beginning.
- An attorney to help you through all steps of the purchase agreement and due diligence with all legal aspects. Again, ideally this attorney becomes someone you rely on when any legal questions arise over the coming years.
- A dental-focused CPA to help you get set up, choose your financial systems to manage the business, and get your employees paid! They can even help you during the purchase process and should be very involved in your ongoing business strategy.
- A practice management consultant to assist you with setting up a practice management system. You and your team need to understand the practice management system and they can assist you with the setup and training.
Buying a practice is a big decision that you don’t want to take lightly. It is likely a long-term endeavor. Your team of advisors can help you consider details, large and small, you may not even be aware of so you don’t miss something important. The cost for a team of advisors may be a concern for you, which is understandable. However, investing in an attorney, good lender, and/or good CPA can help you succeed in the long run and can help you avoid costly issues and common pitfalls other people, unfortunately, run into. They’ve seen it all before and, as your supporters, they’ll have your best interests in mind.
You’re ready to purchase – letter of intent
After you’ve done your homework, consulted with your team of advisors, and found a practice that seems to be a good fit, it’s time to move forward. When you’re ready to purchase the practice, you’ll need to draft a letter of intent. A letter of intent is not an official offer. It is put together and presented to the current owner, including information for them to review to determine if there is going to be an agreement.
The letter of intent details your interest in purchasing the dental practice and outlines terms of the prospective deal. The letter of intent details:
- The purchase price
- The assets included with the purchase
- Whether or not the accounts receivable are included
- If you are purchasing the property/office or renting it
- The transition process, including if, or how long, the existing dentist will remain working
- The staff and whether or not anyone will remain with the practice
- Any restrictive covenants
- Whether or not you are purchasing the name of the business
Typically, if the current practice owner receives the letter of intent and is interested in what you are offering, negotiations will begin.
After negotiations end because you’ve come to an agreement on the terms of the letter of intent, you need to get more information. Likely, you’ll have to sign a non-disclosure agreement because you’ll be looking into information on how the current owner runs their business.
It is absolutely necessary for you to review the practice’s financial information. First, review the production reports and collection reports to see how the business is performing. Then, obtain and review balance sheets and profit & loss statements from the past few years to see how they have been, and are, managing their business. We always recommend consulting with a professional (CPA, CFO or other trusted accountant) since they will have the experience and insight to recognize any potential red flags and consult with you about what these financials mean.
Your attorney will be another important advisor in this process. If the purchase of the business includes purchasing the name, they will be able to determine if there are, or were, any legal issues or lawsuits against the business name that may make the business a less desirable purchase for you.
Practice management review
You’ll want to review reports that show information about their practice and their patients. Locate the number of patients listed in the reports and then verify that number accurately reflects their active patients. Some reports may list a total number of patients that have been seen at the practice, historically. This number could be different than active patients. Your accountant can help with this as well.
As always, be inquisitive and ask questions. If you see something you don’t understand or makes you pause, get more information. The goal is for you to know what you are getting in return for the money you are paying for this business. If you have asked all of the questions, received truthful answers, and obtained all of the information you need to feel comfortable with this purchase, great! That’s the goal! The last thing you want is to purchase a practice and be blindsided with information you could have known prior to purchasing if you would have simply asked a few questions.
If you feel comfortable with your due diligence, you are ready to draft a purchase agreement. This is a legal agreement that details out all purchase terms you established in the letter of intent. Some things may have changed based on information you gathered during the due diligence process, which is fine. This document may go back and forth between attorneys until both parties determine they agree on all terms. Once you have an official agreement in place, the purchase agreement would be signed.
Buy or lease
We briefly mentioned earlier that you should consider whether or not you want to buy or lease the property or dental office. Many times, dental practice owners will own the office. If so, they may be interested in selling it to you, or keeping it and renting it to you. This is a big detail you’ll want to discuss with them. If you decide to purchase the property or dental office, there may be additional loans you’ll need to obtain in order to complete the purchase. Ask questions and consult with your financial advisors to determine if this is something you should do right away, or something you can do in a few years once you’re more established.
You will need to determine the type of entity structure your business will be. Thinking through what legal entity you want is important so you can be protected, both personally and as a business owner. Episode #51: What dental school didn’t teach you dives into some of the first steps you need to do as you create your business, and why those things are important. It’s a great resource to check out as you get your business started.
You’ll need to set up a business bank account and a separate business credit account. Whatever you do, avoid commingling of personal and business funds. This topic is also discussed in Episode #51, mentioned above.
Another consideration you will have is your team. You can keep the existing team from the current practice, if the purchase agreement dictates this, or you can hire your own team. It is common for dental practices to bring on some, if not all, of the existing team. Even though the dental practice owner will be different, having the same staff helps with continuity. They are already familiar with the patients and they understand how the current systems work, which can be an advantage for you. Their experience can be invaluable. Over time, you’ll determine if everyone from the previous practice fits well with your new practice and can then make any necessary changes.
Marketing and advertising
How are you going to get your name out there? How are you going to start to build up new clientele? You may have patients from the current practice, which is great. However, you don’t want to rest your hat on that alone. There have been times when a practice owner announced his retirement to his patients and then a new dentist purchased the practice. Since the dentist had planned on retiring, his patients already started seeing other dentists. Plan ahead and get a marketing plan in place.
One of the last things you’ll want to do is create a long-term strategic business plan for your dental practice. Before you start working on that plan, we recommend listening to our first ten podcast episodes, our Strategic Planning Series. They provide helpful information and dive deep into what you need to do to get your strategic business plan in place.
If the strategic business plan seems a bit overwhelming, take baby steps. You can focus on shorter-term cash flow projections and budgets for next year. At some point though, you’re definitely going to want to look at those longer-term goals and figure out how you’re going to get there. A written strategic plan will help you take steps in the right direction as you progress and grow as a dental practice owner.
We started out today with stressing the importance of knowing the vision and goals you have for your business. Once those are solidified, you can decide what type of dental practice you want to purchase, or establish. You may be tempted to buy the first practice you find, but before you jump this long-term decision, make sure what you are purchasing aligns with your vision and goals so you have the best chance of success. Then, if you’re ready to move forward, start doing your homework. You’ll need many details about the practice before you take another step. After gathering all of the necessary details, you can begin the necessary step of analyzing the data, seeking the opinions of experts and eventually may choose to move forward with the purchase. The steps we suggest here are to save you the headache or heartache of missing information in the process of purchasing a dental practice. If you get stuck at any time, utilize your network of trusted advisors. Our podcast has many great resources as a starting point but please consult an expert for your unique situation. Before you know it, you’ll have your own practice and be on your way to achieving your goals.
Looking for CEU?
We are excited to share an opportunity for you to earn one CEU credit. View the on-demand webcast on Dental Economics, called 3 Ways to Lead a Profitable Practice While Working Fewer Hours. You can find this through the Dental Economics website or visiting www.pjscpas.com/dental-CPA. This course is free and available immediately. Don’t forget to register!