You never make the shots you don’t take. This is the final article in the series “Ready, Aim, Fire” in taking advantage of the COVID reset and purchasing a practice or making a leap to multiple offices. We have readied ourselves, taken careful aim, and are now about to “fire” or get that practice started or purchased. Before we pull the trigger let me say this: Educated buyers will not pay more than 1.5 to 2 times net for a dental practice. (NOTE: Go back and read the article three weeks back titled: When There Is No “E” In EBITDA.) Few doctors and fewer brokers actually know what drives the value and subsequent price of a dental practice. If they knew that, they would not pay as much as we see practices selling for, and if they understood value, they might never buy an existing practice (pull the trigger and fire) unless there was an upside to the price. Let’s discuss the grey area between, ready, aim, and fire. You have done your homework and now, just before pulling the trigger, we need to do a bit of last-minute research that might be the most important step you take. You need to take a hard look at these next points of value and caution.
- Have you done a criminal and civil background check on the selling doctor? Cost is about fifty dollars and can give you insight into how doctor ran his or her business and life. Late payments, poor debt control, civil or even criminal actions including malpractice can signal danger lurking just below the surface.
- Have you done a State Board search for Board violations and sanctions? Keep in mind that the money allocated to Goodwill is directly affected by the reputation and track record of the selling doctor. You inherit that for good or bad.
- Have you done due diligence in interviewing and researching each staff member?
- Pay: You will sometimes find exorbitant pay for the job description that you cannot maintain or accept. This staff member will need to be let go and the selling doctor should do this. If you keep the person and reduce their pay rate, they will be disgruntled and likely sabotage your efforts to make any changes to improve the practice.
- Is there a problem staff member based on the selling doctor’s appraisal and that of his/her teammates? They too will need to have their future freed up. You cannot and should never keep marginal staff.
- Are there upsides to how the practice is run? This could actually first appear as a “downside” that you can take advantage of to easily increase production and maximize profit. Practices purchased because of historical production without an upside can be the fast lane for failure. You need to be able to grow that practice at least 20% or greater.
- Do they not have consumer hours? You could add those, but will the staff stay? Will you work all day Friday, at least half a day Saturday, and how about evening hours? You must put on that “whatever it takes” attitude bolstered by quick action.
- Do they do implants, see kids, ortho, endo, oral surgery? If not, and you can do these, these are upsides for you.
- Are they in-network for insurance? If not, and you can or already are, this is an upside for new patients. NOTE: If they currently operate in-network and you are not currently in-network for the same insurance companies, this will be a huge downside and may take months to remedy.
- Are the fees in line with current fees for the area? This can be good or bad but you need to determine if they are in the 80th percentile for fees. If high, then assume that this affects the current production levels and you will take a negative hit on new patients because the office will be thought of as being too expensive. If low, you will have to be patient as you raise the fees to competitive levels for the area. Raising fees too drastically and too abruptly will cause patients to perceive you as greedy and/or uncaring.
- Is there production from a particular service that you do not currently perform and/or cannot or will not do? This needs to be reflected in the value because if you do not do this service and 20% of the income is generated by it, there is no value for you and will limit your ability to offset this production loss.
- Will the staff stay and do you want them to? There will be key staff that you must entice to stay for the continuity and patient retention. If you are changing hours and systems, you need to check out the attitude of the staff members. It is even common to find out that the staff never was involved in the transition and the minute you walk in to take over the business is the first time they have heard about it. Buying the practice means that none of the staff have a job, and it is up to you whether or not you hire them, at what pay, for what hours, and exactly what their duties and responsibilities will be moving forward.
- Accounts receivable totals? They need to be in order and have almost no accounts over 90 days. If you find that there are a significant number of receivables passing the 90-day benchmark, it will be an indication that the staff and financial protocols are poor and they will need to be changed. Keep in mind that the staff will think they are doing a great job so you have an uphill battle to get compliance that will build synergy in your effort to improve the systems of the office.
- Is their overhead sufficient to support you after the sale? Assume that your ability to produce will be less than the seller to be on the safe side. Do the math. If the current overhead is 75% and your monthly payments represent about 10% of the seller doctor’s collections in an average month, then even if you did what the seller did, your overhead will be in the 85% range. This is a no go and you need to walk away. The biggest mistake I see doctors make after picking the wrong location, is taking on a projected overhead amount of over 72% and expect to be able to pay the debt and take income home. Do the math and make the difficult choice to walk away. This has to be a business strategy that will work even with average performance by the buyer.
- Can you compare and contrast the current results of the practice you are looking at compared to a Super General Dental Practice that can be found in chapter 15 & 16 of the Super General Dental Practice book available at no charge at www.supergeneralpractice.com . This is not a buy, no buy situation, but if you see that the production per employee is only $10,000 a month per employee and the goal is $20,000/employee/month, you have a long unlikely successful road to profitability. Any of the benchmarks will help you see the future challenges you face in adding value to the practice.
- Is the practice producing over a million a year in collections? Everyone one of you will face the decision of what level of practice to purchase. Higher producing practices are doing well, so ask yourself, why would someone sell them? Secondly, assume that you will be an “average” dentist, because most are. It would be foolish to have a great self-image for no apparent reason and have that show up in your balance sheet. Remember: There need to be upsides to guarantee a successful and profitable transition or purchase.
- Are there any low spending habits for overhead that would directly affect acquisitions of new patients? You find an average overhead practice but looking further you see that they only have 12 new patients a month and spend little or nothing on marketing. You should spend 3-5% of collections in a purchase and in a startup $50,000-$60,000 in the first 6-9 months. This has to be added into the projection of overhead. The same is true for not having adequate signage. The remedy for this is an LED sign and is going to cost in the $40,000 range.
You are now ready to pull the trigger. Follow a plan, don’t short cut your homework, something too good to be true is always a bad sign, and take the step. This is how you Summit. Next week we will have a bonus to the Ready, Aim, Fire strategy by looking at what it takes to become the successful doctor that can pull off an additional office or a startup as well as consistent yearly 15% to 20% growth regardless of the challenges that you will face.
Michael Abernathy, DDS
PS – SAVE THE DATE – The date and time is set for our upcoming LIVE (online) event. It will be on Saturday, January 9, 2021, from 9:00am to 1:00pm Central time. Details and registration info coming soon. Don’t miss this opportunity to insure a great start to the New Year.