SHOULD I BUY THIS PRACTICE? – PART 2
We are about to dig a little deeper into this young doctor’s first practice purchase or your next practice. If you did not read the previous article, go back and read it so that you are not missing any of the steps in determining if this is a good purchase.
Before we leave the location, we need to discuss real estate and leases. Never buy a leased office without making the purchase contingent on the successful agreement of a new lease. Buildouts cost at least $100 a square foot and a third to fifty percent of your purchase price are these build out costs. The problem is that the landlord has no obligation to keep or decrease the lease. They kind of have you by the short hairs. Most leases today are triple net (you pay for taxes, insurance, things that break, maintenance, utilities, and any improvements, etc.). So, have an inspection done, and begin talking to the landlord about the cost of leasing and terms. If these don’t look good, walk away. Most leases that doctors sign are not assignable to another party, so make sure you have your attorney check this out. Never take the selling doctors word for it. Check it out yourself.
One other aspect of the physical office is that often times the real estate is also available. Banks like this because they can repo this property asset and recoup some of their losses on a loan. I would certainly entertain owning the building. For most situations the monthly purchase price payment is about the same as a lease. Building equity in ownership just makes sense. From a tax perspective you can actually talk to the seller to make the price for the practice less and the cost of the building more for the same net cost but a huge difference in tax exposure and depreciation.
Here is a short list of the information that you will need to have in order to assess the value of the practice before purchasing it.
• Profit and Loss Statement. For the current year to date and also for the last two to three years. We are looking for trends of growth or decline. We are assessing the actual overhead that they currently work under.
• Production by provider report. This will show you the production that the hygiene does and the doctors. You will want at least a 33% production by hygiene. 67% of all the dentistry you will do in a practice will come out of recall hygiene. A strong hygiene department is key to growing a practice, and in some cases will cover the entire cost of buying the practice.
• Production by procedure report. If you are buying an existing practice and a significant amount of production is in a service that you do not know how to deliver, you will need to subtract that percentage of collections from the total and then factor out what the practice is worth. These areas might be dentures, sleep apnea, ortho, sedation, endo, etc.
• Average number of new patients per month. For the last two years. Average would be 25-30 per month. Below average signals real internal problems or too much competition to grow the practice.
• Number of dentists within a 5-mile radius vs the actual population at large in the same area. Ideal would be one dentist for 2000 potential clients. Going lower than this makes it difficult for the average dentist to grow a practice. While you are looking at competition levels, pay careful consideration to the number of “corporate” 6 day a week practices that are in this five-mile circle. Most of us do poorly against the better large group practices.
• Practice or Patient management report. This outlines the demographics of the actual patient base of the practice. It will have the number of patients by zip code, number of patients by age, the male to female ratio, insurance or no insurance status, and the number of patients who do not currently have an appointment. This is the best indication of a healthy hygiene recall as well as how thoroughly they understand their software and how or if they purge or deactivate patients that are no longer coming in for treatment.
• Demographics for the zip code. Go to www.zipwho.com and enter the zip code. Now, compare this to the demographics in the aforementioned Practice Management report. If they are significantly different, there is a problem. An example might be that the practice has patients that are 60 or older while the community and surrounding area have an average age of 34. You might find that there are few children in the practice but you are in an area saturated by couples with kids. You get the idea. The greater the difference the larger the problem or the better the upside for you.
• Owners tax returns for the last 3 years. (Reveals the truth about the REAL overhead.)
• Actual pay for each employee and their ages. Most times there will be one employee that is being paid twice the going rate. This may not be sustainable when you become the new owner. This is troublesome if this same person is key to maintaining the existing patients. The age may signal that a particular employee may be nearing retirement or unwilling to change with the new owner. If you identify an employee that you cannot keep, it is the job of the selling doctor to do the termination prior to your purchase.
• Number of active patients. Be sure you get the owner and, if involved, the brokers definition of “active”. From my perspective, if the patients have not been in over the last 12 months they are not active.
While you are gathering the information, we will next discuss the actual process as well as the supple skills it takes to understand this information as well as the closing process.
Michael Abernathy, DDS