Last week I had the opportunity to look at a practice that a young doctor wanted to buy. He contacted me to ask my opinion. This happens four or five times a month in addition to seasoned doctors thinking about purchasing a satellite office or second location. As is the case with most doctors I speak with, they have fallen in love with the practice and just want my blessing. From their perspective it is just doing due diligence. I wish the conversation had gone a little more in the favor of the practice he was looking at, but as we discussed its merits and challenges, I think the young doctor walked away with a better understanding of “how to think” about a purchase of this magnitude.
The practice in question was originally a solo practice but the senior doctor limited her practice and moved to a different location. She had hired an associate and it was the middle of the first year since she stopped practicing there herself. When we looked at the last 3 years there was a decrease of about 10%-13% per year in collections and the owner and broker had failed to send the 2018 numbers or current Profit and Loss Statements. In 2017, the practice did a bit over $900,000 and they were asking $800,000+ or about 88% of the last 12 months collections. Yikes! Because brokers make their living on commission of about 10% of the sale price, it is not unusual to see exorbitant asking prices up front. Knowing the market is important but I usually see practices end up selling for about 70%-75% of the last 12 months collections and rarely more than 1.5 to a maximum of 2 times the profit for that same 12-month period. Now let’s take a closer look.
As it happens, the young doctor had not gone to the bank to see what dollar amount he could actually qualify for or borrow to purchase a practice. That would be like looking at million-dollar homes when you only qualify for $250K house. He was excited about the possibility of ownership without really looking at the numbers. When I look at buying a practice, I am looking for the upside. I am not looking for a multi-million-dollar practice that has every bell and whistle with a price and overhead to go along with it. This super successful practice is usually driven by the personality and horsepower of the owner doctor. For most of us this is difficult to replicate. My perspective is that most buyers are just average. Fewer still would be the “one” dentist that could take this practice to another level. Keep in mind that even if the overhead were average (67%-75% and this is terrible), a million-dollar practice ($83,333/month) would sell for about $750,000 and if we made the note for 7 years, the payment would be $11,064/month, which would raise the overhead at least 13.3% even if you could produce what the previous doctor produced. This is a huge gamble and not one that most banks will loan against.
On the other hand, looking for average to below average practices with an upside makes far more sense. Upsides examples would be a selling doctor that does not do Endo or Oral Surgery. I can do that. They only work three days a week and never a Friday or Saturday. I can word those days. They won’t work or kids. I will. They are not in network for any insurance. I will consider doing that. You get the idea. By being flexible and willing to do what the seller would not, you have the potential of doubling or tripling the practice in the first 12 months.
My next step was to ask for the name of the selling doctor and the office address. When buying a practice, you are also getting the reputation of the current doctor and staff and their location. This can be good and bad. I looked up the reviews for the practice and they were all 4-5 stars but there were only 6 throughout all of the review sites. This means that while the average was good, they probably had a poor marketing engine and just settled for any review that might pop up instead of making a point of encouraging their patients to refer. Had there been an average of 3 or below I would walk away. The ripple effect of poor or no reviews and low new patient counts means that whatever the current overhead is, you will need to add at least another 3%-5% for marketing. This is very common with older practices.
I next went to Google Earth to look at the actual location. While the area was a busy area, the actual location was at the very back of dozens of medical condos with no signage or “natural” marketing due to location and visibility. This is almost impossible to overcome. A location like this would mean spending at least 5% of your collections to compensate for the hidden location plus an extra $4,000-$5,000 every month to have any hope to attract a reasonable number of new patients. (Note: Professional buildings are the worst possible location anyone can find themselves in). Sure, any location can be compensated for, but it is expensive and even then you are at a huge disadvantage against consumer driven locations. Corporate practices are always on the busiest street corner in town with the best signage. The reason? It pays a marvelous return on investment. The location and lack of signage would have me voting no to this purchase. Why would you purchase a practice with this type of challenge to overcome? You shouldn’t. One of the primary issues in buying a practice or finding an ideal location is making sure that you are visible, there is great signage, and in a location where women are likely to be. Women make 92% of all the appointments made in any dental practice. My ideal location would be in a strip mall that was on the busiest street in town with a Whole Foods grocery store on one end cap, a dry cleaner, Starbucks, hair and nail salon, and a couple of restaurants. In addition to my awesome neighbors I would like to have my own LED sign, which can mean 30-40 new patients per month for the life of the practice. Get the location and signage right and you are 70% there.
I am going to divide this discussion into a second week because as we leave the physical plant and the external perception of the doctor and location, we begin to delve into the numbers and the implication of things most of us don’t think about.
Until next week.
Michael Abernathy, DDS
PS. Ever wonder why I sign off these articles with my personal email and personal cell number? I want you to reach out, call, start a dialogue and consider what you can do now to grow and preserve your financial future. There is a way and it begins with a call and a frank discussion of where you are and where you want to be. That is how you Summit.