A great philosopher once said “If you can dodge a wrench, you can dodge a ball”. What does that have to do with buying a practice? A lot actually. What the philosopher is referring to is that if you can dodge an object, a wrench for example, you can dodge another object, such as a ball. Applying this theorem to the practice buying world, if you have ever completed a major purchase, or made a major decision, the process and steps are the same.
We know you have made major decisions in your life, otherwise you wouldn’t have a D.D.S. or D.M.D. behind your name. You decided which dental school to go to. In doing so, you did research. You looked at the pros and cons of each dental school and weighed them. You may have talked with some friends or mentors who went to those schools. You analyzed other factors like the location, cost and how good of dentist the schools have turned out. You also may look at socio-economic considerations. Then, you made the decision and lived with it. And, here you are facing another major decision in your life. Purchasing a dental practice.
Buying a dental practice is similar. The first step is figuring out the variables of what type of practice you want. Where do you want to practice? How many operatories do you want to have? Do you want to own the real estate? Do you want a practice with high production, or one that you can build? Cosmetic, or bread and butter crown and bridge practice? Once you’ve come up with your criteria, the next step is to locate potential practices that may be on the market. You may also consider doing a startup. You analyze the practices that are on the market. You may see one or two you like. You contact the broker to get information on the practice. This is typically called a practice prospectus or practice offering memorandum. Some brokers will send tax returns, profit and loss statements and practice management reports up front. You get all this information and it looks like it’s written in Latin. You may not have any clue how to read the reports. The broker can go over the numbers with you, or, you can also hire a buyers representative, phone a friend who knows business, or possibly a CPA. After you have looked at the numbers and that passes your and your advisors scrutiny, the next step is to go see the practice.
You contact the broker and set up a showing of a couple of practices. Looking at a practice is like looking at a house for sale. You may see things you like and things you don’t like. But, know that things can be changed. I’ve had doctors decide they don’t want a practice because the carpet is outdated, or the paint is ugly. There are people who can paint and change out carpet. They do it for a living. They’re called painters and carpet layers. So don’t exclude a practice because it’s ugly. Have a little vision and think about how you may make it your own style.
Another one that throws potential buyers off is equipment. The patient chairs may be older, or it may not have a pano or cone-beam. Chairs are very reasonable these days. I have seen middle-range quality chairs for $5,000 to $7,500. Remember, you may be in this practice for 20+ years. Spreading out the cost of new chairs, even if it’s $50,000, can be as little as $2,000 per year. That’s a few crowns a year.
After you have looked at the practice, you like the location, but there may be one or two things that do not fit your criteria. Remember that the cash flow of the practice is always the number one consideration. I have been selling practices for 15 years and I have seen some ugly, small, outdated practices collecting $1,000,000 and taking home $500,000. I have seen ugly practices collecting $400,000 and taking home $250,000 on 3 days of work per week. Don’t judge the book by it’s cover. It’s what’s inside, or the cash flow inside that really counts.
After you have decided that this is a good practice and you would like to purchase the practice, you make an offer through a letter of intent. It’s a non-binding agreement where the broker typically provides a template. You can either come up with your own offer, or work with your advisor to come up with the offer. If it’s a good practice and the broker has reasonably priced the practice, make a good offer close to or at the asking price. DO NOT LOW BALL THE PURCHASE PRICE IF YOU ARE SERIOUS ABOUT PURCHASING THE PRACTICE! You will just upset the seller and they won’t even want to work with you after receiving a low-ball offer.
You will want to begin contacting bankers who specialize in dental practice financing. Brokers know most all of them and which ones are lending at the moment. Ask the broker for a name or two. The banker will ask for your personal financials. They love to see you have some cash in the bank and not much credit card debt. Bankers will be more interested in how the practice is doing. They love to see a practice with great cash flow.
You next jump into due diligence on the practice after the offer has been accepted. You go into the practice on the weekend and go through the charts, x-rays, equipment, etc. There are checklists you can use to do the due diligence, or bring along an advisor. However, be careful with advisors as some will just want to look for the bad things in the practice. Don’t throw out the baby with the bathwater if they point out the hygiene is only 23% when it should be 30%. Remember, most everything can be fixed. Just note it and continue on.
If everything goes well on the due diligence, you let the broker know you are moving forward. The sellers attorney will draft up agreements. You will then hire your own attorney. Ask your advisor or broker for a dental specific attorney. Using a non-dental attorney will cost you additional money. After the agreements have been “agreed” upon, the next and final step is closing. At closing, you sign the agreements and take over the practice.
There are some additional steps in the process which your broker can help you with, but these are the basic steps in purchasing a practice. So, just like purchasing anything else or making any major decisions, you just need to go through the steps, rely on your advisors and dodge those wrenches! As always, we are here for you for a free consultation, just give one of our experienced brokers a call.