Before we move on to an actual look at a real brokerage offering, there are some simple but necessary questions that you need to ask in this process of finding that ideal practice with a huge upside and a quick profitable growth curve. As you will see, these questions delve into the very heart of what you will be buying. You will also learn that few if any of these areas are proffered in a brokerage package for a practice. Maybe it is just me, but I tend to notice that information given to you by a broker seems to highlight the positives and points that might support the asking price, while never adding data that actually shows you the true value of a purchase. It is the absence of these areas that should cause you to want to ask these questions. Keep in mind that any communication with a broker is subject to their primary concern: Their 10% commission on the sale. These people can be useful, but they are not your friend.
Every successful leader needs to understand that the art of asking questions is an essential leadership skillset. It is not only the actual question you ask, but how you ask it. It comes down to staging each of our search parameters in a way that creates synergism and clarity for our final purchase decision while never alienating the seller or broker (on second thought, I don’t care about the broker). Speaking of brokers, in your dealings with any broker for the purchase of a practice, you will find a reluctance from the broker of letting you speak directly with the seller. It is as if they know that speaking with the seller might allow you some information that they would rather you not have. I have also seen brokers refuse to give further information unless you proffer an actual offer on the practice. One key element is that if you ask for something or ask a question, make sure that the question is answered IN WRITING. After the fact, a “he said she said” disagreement is a loss for you. Memorialize everything in writing or a text or email. A literal paper trail so that everyone remembers what was said. It just keeps everything transparent. The second element is that you should, as much as possible, try to bypass the broker and ask your questions directly to the seller. The time spent speaking with the doctor selling the practice affords you the opportunity to understand their goals as well as how they think and process this transaction.
There is never a successful transaction if it is a win/lose result. The process and the actual result must end with integrity and fairness to both parties. If you “take the man/woman card” from your seller, you will often live long enough to regret it. Many times, the seller will live near the practice, and can make or break the after sale result you were looking for. If the seller feels wounded or upset after the sale, there is an excellent chance that one or more of the staff will line up with the previous owner and quit or make your life miserable. I want this purchase to end with the seller feeling rewarded and comfortable enough to have his or her dentistry done in the office. That they remain an advocate for your success and continue to be a raving fan to those they know and might refer to you. This is a huge bonus to creating an atmosphere of trust and commitment on both sides of the transition. You never know when you might need the previous owner to step in for a couple of days if you arere injured or need the help.
Allow me to list some of the important things to ask during the transaction of a sale.
Ask for the names of each team member, years worked, schedule they work, pay for each, and position they hold. Approximate age will help also. High turnover is a huge red flag and indicates poor training, poor hiring, poor culture, low referrals, bad reputation, etc.
Make sure you ask if the team knows that the doctor is selling the practice. If not, then ask when they were going to tell them. If they have told them, ask who is staying. You need a feeling for who is important to make this transition as smooth and profitable as possible. Retention of hygiene and existing patients is paramount to a successful purchase and ultimate overhead control.
You need to be able to see a copy of their schedule in order to look at how they schedule, the length of time used for every procedure, productivity in an average day, lunch time, etc.
You need to see how much time hygienists schedule with recall and new patients. Is it too much, too little, or consistently the same? For instance, everyone gets an hour for a recall (even someone with an upper denture and lower partial but still schedules an hour).
How are hygienists and associates paid? Hourly, commission, hybrid.
Why is the doctor selling? Age, illness, litigation, retirement, new practice, moving, divorce, etc. Each will influence how you approach a transition.
Do they lease or own? Real estate could possibly be purchased. If leasing, you will want to see the actual lease. Is it assignable? Can they transfer it to you without going through the process of a new lease? Do not take their word that it is assignable. In this purchase, half the value of what you pay is the leasehold improvements. I have seen uninitiated doctors take the sellers word, buy the practice, only to be kicked out of the lease and have it released to another entity or held captive by an overly aggressive landlord who wants to double the lease knowing that you have no choice but to pay it. If the lease is assignable but the lease will be up in a year or two, I would only make an offer on the practice with the stipulation that the offer is contingent on the successful negotiation of a new lease with the landlord. Another contingency when making an offer is the successful funding by your bank. That way if they try to jack up the new lease, you can walk and find a better deal. Occasionally, you will find a great office to buy and find out that the lease is either lapsed and they are paying month to month or is ending in a couple of months. If this is the case, you might find it helpful for you negotiating a better deal quicker with the threat of them losing the lease or being forced to sign a new one before they sell the practice. Many times, the sellers have their back to the wall and have to sell before they have to sign a new lease of at least 5 years. If they do this new lease, it might subject them to the liability of $400,000 of lease payments over 5 years. This will always work in the buyer’s favor. In fact, I was helping a doctor buy a pretty poor practice in a great location, when I learned that they still had 5 years left on their lease and were losing $20,000 a month on the cost of having the practice open just two days a week. The final resolution was we got the practice for just taking on the lease. The equipment, supplies, patients, and software ended up costing us nothing. Another time, I was helping a doctor buy a practice, the price was set, and the seller was doing a month-to-month lease until the sale closed. We were set to close on Friday, had the cashier’s check, and a signed contract. Then I get a call on Wednesday evening from the seller. He decided the price needed to be $150,000 more than we agreed upon (I was not buying the practice; I was helping a first-time owner do the deal). He did not say this, but what probably happened is that he went to his CPA and attorney after signing the letter of intent and found out that after taxes he would end up with nothing or even a shortfall on what he thought he would net out of the sale. He had opened a practice 40 miles away and had been running the practice we were buying with an associate. I reminded him that we had agreed on a price, and we had the check and were ready to close on Friday at noon at his attorney’s office. He repeated that in no uncertain terms that the price was $150,000 more than what we agreed upon. I told him we would be there on Friday at noon. The minute he hung up, I called his landlord and asked if he would consider selling the building. I explained that I could do a cash deal and close tomorrow, Thursday, in my brother’s law office. We struck the deal, I paid him the money, and went on my way. The next day, Friday, the young doctor, with check in hand and a signed contract for the original contracted sale price, showed up at the Title company’s office. We sat down, I explained that we had the check and signed contract for the original price and once again asked if you would accept this for payment in full for the practice. He said no. I said, are you sure? He said, yes, absolutely sure. I then tore up the contract and check and we stood. Oh, I forgot to tell you, I never told the young doctor that I was going to do this. Before I left, I turned to the seller and told him that his landlord was taking back the building and his equipment would need to be removed from the premises by Monday morning at 8 AM. He challenged me one last time by saying that his landlord would not do that. To this, I responded that I was the landlord now and, yes, he needed to vacate the premises and then handed him the legal documents to enforce the demand. We ended up with the building, that I currently still own, and got the equipment and patient records for less than $20,000. Business is business and I believe that a yes is a yes and no is a no. People just need to do what they say they will do.
Ask for a production by provider report. This will allow you to see the percentages contributed by an associate, hygienist, and owner doctor. It is another red flag if we don’t see about a third of the collections coming from hygiene. In fact, figure out what the hygienists percentage pay is. If they are paid hourly, just take their pay statement, and divide it by the net adjusted production for the same period and time. You now have the hygienist pay as a percentage of what they bring in. For most offices, you now have a challenge. The percentage pay is usually over 50%. Would you pay an associate that much? Do you make that much on your production? Each of these questions will allow you to get a preview of areas that you will have to deal with. Keep in mind that any change you make in the future will rub the team the wrong way. Consider the breadth of what you will need to modify or deal with up front. Is this doable? What should I do? What do I have to do to double this practice in the first 6-12 months? Let those answers help you make the decision on whether to buy or not.
Ask for a production by procedure report. We want to know what drives the production. It is important that you understand that there may be income from procedures you don’t currently do or will ever want to do. For example, what if 22% of the total collections comes from Six Month Smile orthodontics and you don’t do this or ever want to do this. Not only would you lose patients but also the referrals that they might make to the practice. If there is some service that is profitable and adds to the total collections, consider lowering your offer to purchase with that percentage removed from what you might pay. In other words, you would need to offer less because that income or patient has no value to you if you cannot do that particular service. This percentage could sink an otherwise successful transition. NOTE: You are becoming an educated consumer in dental transitions. Remember to never fall in love with the deal until it makes sense on paper. Make sure you don’t even consider a deal if an “average” dentist couldn’t make the numbers work. Don’t think like a dentist and have a great self-image for no apparent reason. In all likelihood you are not the one in a thousand that could pull a shaky deal out of the fire. Be realistic, be self-aware, know your limitations, and look for the right combination to ensure your success.
How is a new patient handled? Who sees them first, how much time, are their teeth cleaned, treatment plan done at same time, where does this all take place, when does the doctor see them, hygienist, assistant, who handles financial agreements and scheduling? Is this a successful protocol or does it need work?
Ask for floor plan of the building. This will allow you to determine whether the facility is expandible or if it will be an issue as you double the practice. What are the physical challenges to growth for this facility? If you are purchasing the building, ask for a plat of the property. Adding on to the building in the future could be limited by the setbacks on the property lines, requirement for additional parking spots if you increase the square footage, signage ability, and overall layout of the practice.
Ask about percentage recall, systems, staff, and protocol for reactivation. Surprisingly, most doctors will not be able to give you this information. But you must track it down. 67% of all dentistry done will come out of recall hygiene patients that continue to return to the practice. A low recall percentage can indicate poor systems, poor staff-patient interaction, sloppy use of technology and a less than stellar culture. In every practice management software, except Open Dental, there will be a pre-formatted report available that will describe the demographics inside the office. In Dentrix it is the Practice Statistics Report and in Eaglesoft is the Patient Analysis Report. These reports include the number of patients by age, by zip code, male to female ratios, insurance and no insurance, number of active patients, and number of active patients that do not have a future cleaning appointment. This type of report will give you a deep insight into the inner workings of their practice. If the report says they have 3,000 active patients and there is only one full time hygienist (a hygienist can only see about 600 patients a year if they see them two times per year and see an average number of new patients), then the report is flawed by a team that does not deactivate patients when they don’t return, they are defining active as the last 3 or more years, or the software has never been updated. NOTE: Keep in mind that with your purchase of the practice, you will have to buy and update any current software used. Usually another $6,000-$10,000 increase in what you need to have after the sale. In addition, most offices will need to redo the signage and upgrade it. This can be $4,000-$40,000 depending on what you do.
Ask about the in-network insurances that the office has. If you plan to stay in-network this could take months to get certified and should be done before you occupy the purchased office so that nothing changes for the patient. I have seen some pretty ugly results when a young doctor buys a practice, the selling doctor stays on to “mentor” the purchaser, and they file on the old doctor’s in-network status even if the new owner does the work. This is referred to as insurance fraud: Automatic loss of license if convicted on this felony. Bottom line is that you need to step in ready to go the day the office changes hands. It takes a little planning to pull this off.
Ask about office hours. If the office hours are 8-5 Monday through Thursday, this is going to be a problem. If I bought this practice, we would be open every Saturday 8-1, every Friday 8-5, and add more peak demand times (before 8 and after 5) during the rest of the week. The challenge is that if you make the wise decision to expand the office to consumer hours, you have a team that will not want to work them. Ask yourself what you are going to do? What are you willing to do? How do you find out what the team is willing to do long term?
Where do all the new patients come from and what are they spending their marketing dollars on? Regardless of how many new patients there are, we need to understand where they come from. Do they come from PPOs from a large employer in town? Is the doctor marketing some service? Nail this down and determine what to keep and what to eliminate. NOTE: You will need an extra $50,000 plus for external marketing in the first 6 months of the new transition. If you want to double or quadruple the production and profit, understand that you must get what you do and who you are out to the public.
Look at all the reviews online and read every one. Do not limit it to just Google reviews. Check Yelp, Health Grades, Vitals, etc. Check them all. In a small consumer business, only the client’s opinion matters. Goodwill in a purchase is reflected in a large number of reviews. Poor or no reviews lowers what you should pay for the practice.
If you are down to one or two options on purchasing a couple of practices, pay for a background check on the doctor, both civil and criminal. I would also do a State Board check. It doesn’t happen often but occasionally you find lawsuits, state board actions, and maybe a criminal past.
Ask about the allocation of sale. In an asset sale, the price is allocated to four different areas for tax purposes: Goodwill, Non-Compete, Accounts Receivable, and Supplies and Equipment. Each of these has a different tax consequence for the seller or buyer. The seller will want as much in Goodwill as possible because the tax will be at the capital gains rate of about 20%. The buyer will want as much as possible in equipment because that amount can be depreciated over the effective life of the equipment or, using Section 179 of the IRS code, you could accelerate the depreciation and write off hundreds of thousands of dollars in the first year. Just so you understand, if the seller was taking $1,000,000 for the practice and they got 80% in Goodwill, the tax on the 80% or $800,000 would be approximately 20% or $160,000. The rest of the categories of non-compete, supplies and equipment, and accounts receivable would be taxed at ordinary income or perhaps close to double of what they would pay in capital gains. Big difference for the seller. If the buyer could buy a $1,000,000 dollar practice and supplies and equipment was $400,000 then in effect, you actually end up paying the million, but the government gives you a dollar-for-dollar tax credit for the $400K so you will really end up only paying $600,000 after the depreciation is factored in. Check with your CPA. NOTE: There is always back and forth on the sales price, but after that the negotiations start all over on the allocation of sale. Bargain hard and consider the ultimate results after considering the tax consequences. One other area is that if real estate in being purchased, you can sometimes refigure where the money goes when we consider the price of the practice and that of the building. By putting more money in the price of the building while lowering the price of the practice and still paying the seller the same total amount, you might find that one way or the other benefits you or the seller. Take the time to have your CPA craft the best deal possible for both of you.
Ask for the summary of their aged Accounts Receivable. Many times, prices for a practice do not include the accounts receivable. In all DSO sales it will. There is a good reason to include them or buy the accounts receivable when purchasing an office. If you do not, often times the seller will turn the accounts over to a collection agency who is paid on commission of retrieved monies. They are aggressive and often will upset patients of record. If this happens, they will assume that you are doing this to them, and that good old Dr. Nice Guy sold the practice to the wrong person. So, quickly these patients who are upset tell everyone they know not to go to the new doctor’s office. You get the picture. If you buy the A/R, it will be valued at less than face value, not dollar-for-dollar. Anything over 90 days is worth $0, nothing, nada. Current A/R is dollar-for-dollar, and the 30-60 days and 61-90 days (and beyond) are diminished in value by about 50%. If you do negotiate the purchase with the accounts receivable, and close on Friday, any money coming in on Monday is yours. In a way, this purchase helps you capitalize the practice rather than needing to have a line of credit to cover the first 90 days of the new entity. Remember: In business, cash flow is king! The takeaway: Look at what works for you and what your CPA and attorney suggest. Be fair but fight to make sure that you are not taken advantage of because you just did not understand the game.
The second reason for wanting the summary is that 95% of dentists do not understand the report you will be looking at. Every software runs a “net” aged accounts receivable, not a real aged account receivable total. In other words, there will be credit balances (balances paid but service has not been delivered) and debit balance (services have been delivered, but the patient has not paid the office for it). Any report you get from them will have a number of credit and debit balances, so the computer subtracts the credit from the debits and give you a net number, not the true accounts receivable total. What you will ask for is the report for aged accounts receivable for debit balances and a separate report of credit balances. Based on what you see, you can value the purchase price, but you will not want to include the credit balances. In a sale, the credit balances are a liability for the seller and they must either deliver the service before the sale, return the money to the patient, or write a check for the credit balance and send it to the respective state government account for unclaimed monies. Sounds a bit complicated, but your CPA can give you guidance as well as explain your particular state laws and statutes on credit and debit balances.
Next time we will explore a Brokerage package for the sale of a dental practice and define exactly what we are looking for.
Michael Abernathy DDS