This as part two of my five part blog on “What’s most important to YOU when looking to purchase a practice ? In case you missed Part 1, there’s a great thread on www.dentaltown.com asking this question and it got a lot of great feedback from people with different perspectives. As a reminder, I won’t be telling what SHOULD be important to you, that’s for each doctor to decide and prioritize for themselves. I’m just giving you some food for thought as you contemplate purchasing a practice.
Part I revolved around the revenue portion of the practices cash flow and assessing the asking price and practice performance. We will discuss the expense or overhead portion of the practices cash flow in this blog.
You’ll want to assess the cash flow that you will have available for the practice in which you’re considering, not necessarily what the seller had. While there are expenses you’ll have very little control or will have very little impact on YOUR cash flow, like rent, utilities, malpractice insurance, merchant services, etc., there are other expenses you’ll have the ability to control. Some of these are non-discretionary expenses like advertising, dental supplies, lab and the like and others are more discretionary ,for instance, retirement plans, computer expenses and support, office expenses and supplies, some continuing education and dues and maybe wages (I’ll elaborate more on practice wages below). There are also other purely discretionary expenses or owners perks that we don’t consider as required to operate a dental practice like the owners automobile expenses, meals and entertainment, some travel and maybe some family wages. Some of these purely discretionary expenses are easy to identify, others maybe be buried in categories like office expense and support, advertising, telephone, insurance, etc. . As a buyer, part of your due diligence is your ability to dig deeper and drill down into certain categories to make sure you understand which expenses are truly needed to operate the practice and which may not be necessary.
You need to verify exactly what YOUR overhead is going to be since it has a direct impact on the practice cash flow, which you’ll need to service the debt on the purchase price. Of course it also affects the practice price and it will help you assess the practice performance issues related to overhead. Some of the expenses are directly impacted by the procedures the seller was doing and the procedures you will be doing, they may be the same, maybe not. This is why you need to understand how the revenue is generated and how those procedures may impact your overhead.
So we spoke about the fact that there are some expenses you have very little control over and others you’ll have a lot of control over. While some believe a buyer has the ability to easily control labor costs, it’s an area where a buyer needs to tread lightly. There are many reasons a buyer may not want to hire an existing staff or let them go in short order. Maybe they think the practice is overstaffed or the employees aren’t needed for as many hours anymore. Maybe the employees’ hourly rate is too high (very common with long term employees) and\or maybe their benefits are too rich. Whatever the case is, we believe part of any goodwill of a practice relates to the staff and the buyer needs to examine every staff member currently employed with the practice and how much impact they may have on the stability of the goodwill. For example, in a very rural area, where everyone knows everyone, you may have a front desk person who’s been employed with the practice for a VERY long time, knows every patient in and outside of the practice and may be a real detriment to the retention of goodwill if a buyer were to NOT agree to hire them when they purchase the practice. On the other hand, there may be an assistant that’s only been at the practice for a month, chances are if they don’t return the patients won’t even notice. Then there are the hygienists and once again, the buyer really needs to assess each hygienist and whether or not they’ll have a significant impact on the goodwill if they aren’t hired for any reason.
The other area of labor costs that a buyer needs to tread lightly is employee benefits. We see practices where the seller has been able to afford to be VERY generous to their staff. They might be paying 100% of their family’s health insurance, providing them with four to five weeks paid time off for sick leave and vacations in addition to paid holidays and offering a very generous pension benefit. A buyer would be foolish to think they can simply go in and begin slashing these benefits without any repercussions from the staff. That’s NOT to say a buyer can’t control these benefits overtime, again, each practice and each employee is different.
There are many other areas of overhead that a buyer needs to examine as part of their due diligence, we’ve just touched upon a couple of them to get you thinking. Part three of our five part blog will talk about “people” side of a practice and the purchase transaction from a brief discussion again on the staff, to the patients and the advisors surrounding the transaction.