My past blog talked about non-traditional GP practices and how you should approach them, this blog will talk about the “large practice” GP practices and the various ways you’ll need to deal with them.
What do I mean by “large practice”? The “large practice” is one which usually requires at least two dentists to handle all the dentistry. That doesn’t mean two full-time docs, at least one full time (4-5 days per week) and one part-time doc (2-3 days per week).
Sometimes these practices are offered as a A. total sale (100%) or as B. buyin opportunities that lead to partnerships. I’ll stick with the 100% large practice purchase for this blog since the buyin leading to partnership is a meatier topic.
You would think that there wouldn’t be much of a difference in the buying approach between a smaller practice with just one doctor to a larger practice that requires more than one doctor, however, you’d likely be overlooking some very important issues if you approached the larger practice process as though it was a smaller practice. What are some of the differences? We’ll talk about valuation, borrowing, associates, scheduling, and cash flow.
Let’s look at the valuation differences as we see them. First, the larger practices have the buyers with deeper pockets looking at them, I’m talking about DSOs. DSOs target the larger practices with sizable patient bases since they can plug in the GPs and specialists and generally grow the practice quite a bit. This means DSOs with the deep pockets will generally be willing to pay more, sometimes a lot more than the typical multiples of EBIDTA to get the practice. Therefore, solo docs looking to purchase one of these practices may have to pay quite a bit more in terms of multiples compared to the smaller practice.
Then there’s the borrowing issue. While many lenders will lend 100% of the purchase price on smaller practices with loans of less than $1mil, those same banks will generally limit their loans to as much as 80% of the purchase price when it exceeds $1mill which means sellers will need to take a note back for the remaining 20% unless the buyer has the 20% in cash. The other issue with lenders is that these larger practices may actually limit the number of lenders who will even look at the deal.
Now we have to deal with the dentistry and how it’s going to be generated between you, the buyer, and the associate. Sometimes the seller wants to remain and work as your associate and sometimes the practice already has an associate that is willing to remain with the buyer when the seller won’t. Worst case is you have a two doc practice where both docs want to remain, this can cause some issues with the buyer. You see, the buyer will need to know how much they need to produce themselves to be able to maintain their personal income to meet their cost-of-living expenses as well as meet their debt service payments on the loan to purchase the practice. This means careful consideration needs to be given to how the buyer is going to schedule the dentistry production to meet their needs while trying to meet the needs of the associates and what they want. Another issue with a practice that has a non-owner associate is whether or not the associate has proper restrictive covenants to protect the buyer and the practice if they don’t work for the buyer after closing.
Lastly, the buyer needs to consider the cash flow that larger practices can generate. Many buyers get scared of the larger debt they’ll be acquiring to purchase the larger practice and sometimes overlook the fact that these larger practices can generate a lot more cash flow compared to the smaller practice even with the larger debt service. If the buyer has what it takes to actually become an owner, which means the ability to manage the practice, manage the people, manage the doctors, and manage the finances, there’s no reason at all they can’t be successful with the larger practice and the larger debt. Any decent practice that continues to perform well will allow the buyer to payoff that debt in the same time, five to seven years, as the smaller practice.
Next up we’ll dive into the larger practice buyins and what buyers need to consider with those opportunities.
About Tim Lott
Tim Lott, CPA, CVA has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator on Dentaltown.com. You can reach Tim at email@example.com or any of the other dental partners/principals at (800) 772-1065 or firstname.lastname@example.org.