Friday, June 26, 2009

Two Options for Dental Pratice Purchase

I've been searching for a practice to purchase for quite some time. I've narrowed it down to two options. I'd appreciate some input on these.

Option1:

2008 gross 703k
overhead is 70 percent
1 full time hygiene, 1 part time(paid 30 and 33 percent of production respectively)
staff overhead is 205k
hygiene is assisted and both hygienists work with assistants on Tues and Thurs afternoons
3 full time assistants
1 office manager
cerec practice
6 ops(2 dr)
very nicely equipped and modern practice(digital radiographs, softdent software, caesy education software etc)
can easily switch from right to left-handed(I’m lefty)
very well-trained staff
nice looking free-standing building which dr owns
rent 3500/mo
approx 10 new pts/mo
town is about 13k pop with 7 other dentists in town
dentist very well-respected and has been voted best dentist in this town
dentist is referring more endo now and more exts (I do these)
asking price- 518k (cerec unit not included)
broker involved in this sale

concerns for option 1:
-very high overhead,
-asking price high,
-3rd assistant not being utilized fully as schedule is not too busy,
-low new pt numbers,
-not sure about potential for growth.

Option 2:

2008 gross 695k
overhead 58-62%
2 hygienists...1 works 4 days/week. 1 works 3 days/week. office hours Mon, Tues, Thurs, Fri 8-5
2 dr assistants
1 front desk
5 ops equipped(3 dr, 2 hygiene)...1 extra op not equipped
Both hygiene and dentist are extremely busy and booked out several weeks
20-25 new pts/mo average
set up for right-handed...delivery from side cabinets(I’m lefty)
older equipment
paper charts
hand-written schedule
phosphor plates used for radiographs(not familiar with quality of this system)
I've been told by another dentist(who I know) in this community that this dentist's work is questionable to bad(may or may not be true)
-very nice guy
-he wants to sell in Jan 2010 and work part-time for 1 year as transition(negotiable)
-i could work as associate until Jan and buy Jan 2010, or just buy practice in Jan.
-asking 450k
-rent 4000k/mo
-office is large(not sure on sq ft) and in strip mall with attorney/chiropractor/several others
-dr owns strip mall and is willing to sell at future date(would need to be determined b/f purchase of practice)
-town is 15k with approximately 24k including surrounding area
-growing area
- about 8 other dentists in town...will need to find out exactly

concerns for option 2:

-he may do poor quality dentistry and I may run into problems redoing his work or recommending work while he's still in the office
-office will need updating(equipment/decor/etc)
-will have serious work to do in order to convert to computerized and "less paper" at some point.
-need to convert to left-handed.

Option 1: I could step in and start working without any major changes. Option 2 would need at least 1 or 2 ops converted to lefty before I start...I could deal without all the extras for awhile until I have some debt paid down on the practice, but it will definitely need some overhauling in a few years. Looking long-term, it appears option two is a much busier practice and may have more potential for growth.

Thanks for reading thru this post...I know it's a long one. I'd appreciate some input. Let me know if you need more info. About either practice as I'm sure I left out some important details somewhere.


Both appear to have similar population to doctor ratios though #2 may be better with the additional 24k??

I’d love to know WHY OH in #1 is 70%, have you seen side-by-side 3 year P&L comparisons to evaluate? Maybe the 70% can easily come down to 60% and maybe it's not really 70% in the first place.

Do you know what the annual hygiene production is for each?

Sounds like #2 has hygiene production of at least $250k which could point to an under producing practice ripe for a clinically skilled doctor. If hygiene is around $250k that means doctor production should be closer to $750k for a $1million practice doing $695k which could mean $300k of dentistry waiting for someone. If that's the case a $1million practice with OH of 60% at a price of $450k will provide plenty of cash flow to upgrade the office technology very quickly.


Tim, thanks for your input. It appears doctor in option 1 does not oversee ordering of supplies and thus expenses seem very high for clinical and office supplies. He apparently likes to buy new stuff quite often as well. You may be right in that overhead here could be reduced considerably.

As for hygiene production, I'm waiting for that info from doctor in option two, but judging by the hygiene schedule, it looks like at least 56 hygiene hours/week x 4weeks/month x say 11 months would equal 250k+. Option 1 assisted hygiene production is closer to 200k.

So again, #2 seems like an under-producing office more so than #1 and it's OH appears to be well in order. While one could likely reduce the OH in #1, that's an additional task you'd have on your plate right from the start for a higher price.

For either of these options is it standard to get an appraisal of the buildings prior to purchase of the practice so when the owner decides to sell the real estate(assuming terms of lease have been set), the buyer can purchase for what the initial appraisal was?

That’s negotiable. I’ve been in situations where the owner agrees to lock down the price for 1 or 2 years, that's it. Why should seller agree to not enjoy the appreciation of their investment simply because the buyer isn't ready to buy the R/E? The seller would be doing you a favor by locking down the current price of the R/E, unless the value drops, then they’d be doing themselves a favor.

How does it typically work if renovations are done to a facility by new doctor if the selling doctor owns the building?

Get it out of your mind that the owner of the practice owns the building, pretend I own the building and you're not ready to buy, you'll enter into a lease with me, just as any tenant would and if you want to invest in your space you'll do so at your cost. chances are those improvements won't add much value to the value for me though it might add more value for you in terms of NOT wanting to move elsewhere and leave that investment behind.

Not sure about putting money into something I do not own, and do not want to pay more for the building when it becomes available for purchase after I've made improvements. Hope this makes sense.

Face it, the majority of dentists are putting money into something they don't own, that's the way it works when you're a tenant. There’s no getting around that unless you're ready to own NOW. Also, let go of this notion about paying more for something you've improved. You will pay the market value for the R/E whether you've made the improvements or someone else has and again, internal space improvements won't have a significant impact on the value of an existing building in my opinion. Most commercial R/E is valued based upon comparable sales in the area, this will drive the bulk of the R/E value, not the internal improvements a lone tenant decides to make.

If you want the building and can afford to buy it now along with the practice, great. If you can't, get a first right of refusal and possibly an option to buy when you're ready. If you're lucky the owner will agree to lock the price for a year or two, just don't get upset if they don't. As an owner of R/E if I thought the value might rise in the very near future I probably wouldn't lock down the price.

Contact George Vaill and ask him about R/E with buyer and seller options, he's quite good.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com
Follow us on TwitterFacebook and Pinterest

Tuesday, June 23, 2009

Bait and Switch by the Seller of Dental Practice

As the buyer of a dental practice, if you haven't heard the message yet, here it is again, do your due diligence!

Can there really be bait & switch when selling a dental practice? Absolutely, here are a few examples of items a buyer NEEDS to address early on in the due diligence process to ensure that the seller or their advisors won't pull the old bait & switch:

1. Seller compensation as an associate of the buyers - Many advisors will prepare forecasts of the target practice in the hands of a buyer and list the sellers compensation at say, 35%, showing how wonderful cash flow will be. Then, during negotiations, they will ask for 40% + other seller expenses.

2. Seller owned real estate - The valuation was prepared with a certain rent rate per square foot as are the forecasts. Then, during negotiations, IF real estate is not to be sold, they ask for a higher rate per square foot. Seems to me if it was "fair" for valuation and forecasts, DON'T suggest now that the rate should actually be higher....unless you plan on revising the valuation DOWNWARD to reflect this increase in expense.

3. Seller has a spouse as an employee and earning $x per year. Valuation and forecasts do not adjust the compensation with the explanation that the compensation is fair. Then, during negotiations they ask for a higher compensation for the spouse to bring them "in line" with the current market for pay.

4. Forecasts indicate seller is willing to reduce their time to working 2 days per week, down from 4, so that the buyer can ramp up their production & accelerate their time with all the patients. Then, during negotiations, seller decides their not ready to reduce their schedule more than 1 day which throws a wrench into the buyers plans.

5. Valuation and forecasts reflect staff wages at $x and they've been fairly consistent for the past couple of years with normal increases. Then during negotiations, the staff, or certain staff members get significant raises, like a parting gift from the seller which the buyer will ultimately be stuck with.

These are just some of the examples of bait and switch I've seen representing buyers. Be aware of these and any other areas where numbers can change after purchase at the hands of the seller. If there are any numbers that the seller can control OR can negotiate, address them early on in your due diligence process.

For example, if the valuation and forecasts show rent expense at $10 per sqr foot, first, do some due diligence to make sure that is a fair rate and second, ask the seller and their advisors early in the game if they believe that to be the fair rate and to declare that it is fair and it will be the rate used in your lease agreement....unless of course you determine that it's actually higher than market.

This first appeared on NewDocs.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com
Follow us on TwitterFacebook and Pinterest

Friday, June 19, 2009

Compare Two Dental Practices for Sale

I am about to finish a GPR and was hoping you could give me a little input on whether either of these options sound good.

Option 1 is a brand new, state of the art practice in a growing rural area. The practice grossed around 800k last year and has about 45 NP a month. The senior doctor wants me to work as an associate for 6 months to a year and then go into a buy in phase. He has been hesitant to establish the buy in price up front, but did give me a ball park price that seemed pretty fair. There is also a 15 mile non -compete radius.

How many days is the owner working now? How many days do they want you to work? How many days will they work once you are there? With a base of $800k that's about a 4-5 day per week practice (i.e. 32-40 doctor hours) so make sure you're not looking at a situation where you'll go in and sit around.

As others have said, nail a price down now. If he gave you a "range" asks that you agree to a number so you can move forward with the other issues.

You’ll need to see the financials (or returns) to make sure you're not getting sucked into something that SOUNDS great and winds up looking like crap.

The associate agreement is for 35% of collections and I would have to pay my whole lab bill.

35% of collections is good, again, agree with others, you should only pay at most 35% of lab, OR ask to keep it simple, 33% of collections period.

What about malpractice insurance, heath insurance, dues, licenses, CE? Who’s paying those?

There is a 5k minimum salary but I would have to pay the difference back to the doctor for months I under produced once I am making enough on my commission. For example, if I only made 3k the first month, I would get paid the 5k. But, if I made 8k on my commission the second month, I would have to pay the doctor 2k back for the first month and I'd take home 6k. Hope that makes sense.

You have no minimum then, you're working on straight percentage. If it's truly a minimum you wouldn't "owe" any shortfall back or have it offset future excess. Straight percentage isn't necessarily bad, just understand there is no minimum. Ask what happens if he pays you $5k for 3 months and you decide to split ways after producing only $30k. If it's a true minimum you'll owe nothing to him, just make sure you're talking apples and apples.

A percentage might be an issue if the practice doesn't grow fast enough to support both of you OR the owner doesn't reduce their days.

There is also a 15 mile non- compete radius.

NOT for the first 6 months to a year....

Option 2 would be a very small practice that is only open 2-2.5 days a week, 3 ops and is a little dated on equipment. The gross last year was about 250k and overhead just over 50%. I am still waiting on some more details, but will post more once I get them. This practice is also in a growing rural community and I suppose I could open it up 5 days a week and take Medicaid or more insurance plans to bring the production up.

Do either of these situations sound like good deals? How do the numbers in option 1 stack up to what the rest of you have been offered, and what aspects need to be negotiated before proceeding?


Depends on the price, many more specifics and what you're looking to do....

and what aspects need to be negotiated before proceeding?

On option #1, all aspects of your employment and buy-in.

On option #2, the purchase details....


Thanks for the reply. Here's the deal, doctor is not that old and is not planning on cutting his hours at all (4 days). I would probably be working 5 days a wk.

Can the practice support 2 full time doctors? Does it have 2 full time doctors now? If not, how is it that a one doctor practice can jump to two full time doctors immediately?

You suggest looking at the financials but what specifically should I ask him for? The transition company has done a full run down on this practice but I haven't seen any of it.

Ask for that, it may already have the practice financial information in it.

As far as benefits, I'll be responsible for everything in the 3 month probationary period and if we continue beyond that, I'll be reimbursed for malpractice and my license fees. No health insurance benefits though and I don't like that.

Then ask for it! Just because it's not offered doesn't mean you can't ask for it and maybe even get it.

You mentioned that the non-compete won't hold until after a 6 months to a year period.

What I meant is make sure that ANY non-compete they want you to agree to doesn't kick in until 6 months or a year. It can kick in immediately if you agree to it, however, the last thing you'd want to do is agree to NOT compete and leave an area you'd like to stay after 3 months because you agreed to do so.

Is this true everywhere because the contract doesn't make any distinctions on time period? I wish I could give more specifics about where I am and who the company is but I don't want to violate my confidentiality agreement.

Most if not all confidentiality agreements allow you to share the info with your advisors...so that means you'd have to hire me to tell me...

On option 2- I met the doctor yesterday and got some more specifics. Practice has grossed an average of 220k for the last 3 years and doctor has worked 3 days a week and taken an average of 2 months of vacation a year. Extremely low overhead and the doctor has netted a little over 50% of that. He is entirely fee-for-service and has pretty high fees for the area (8-900 per crown). He refers out all endo, extractions, implants, dentures, partials, perio other than scaling, and ortho. Basically, he only does fillings and crown/bridge. He is willing to stay on for 6 months to a year but no longer. The building is shared between him and another dentist and they have a common waiting room and lab/sterilization. It's 3 ops, 2 hygiene and 1 doctor. I would have the option of buying half ownership in the building or renting from him. Should also mention that the town has 12 dentists and only 2 are under 50 years old.

The buy out price is still in the process of being set but from what the rep said, they generally place practices at about 70% of gross which would be about 154k. I am sure I can’t do a startup for that and at least this would give me a little bit of a patient base. It would seem that if most of them stuck around, and I did all the procedures that he's referring out, that this could be a good deal.

Any advice on this one?

I don't like the office sharing arrangement and even if you wanted to own it's 50% at best. What was their relationship with the other doctor in the space? Did they cover for each other? Do the patients know the other doctor? I know it's a small amount to pay, still at $150k I just don't like the setting....

I'll continue to update as I get more info.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com
Follow us on TwitterFacebook and Pinterest

Monday, June 15, 2009

Dental Practice Purchase Evaluation Questions

Long and skinny story:

Two endo practices are for sale in a highly desirable major metro area.

Practice 1: Wife has been working there for two years. She put in a lot of sweat equity. Practice is in excellent condition. Has digital, Zeiss microscopes, all the bells and whistles except a computer software package. Fee for service in a wealthy area. 2008 Gross 780K/ Net 520K. Purchase price 485K. I'm ready to close the deal on this but the owner is being weird at the closing moments. Originally he wanted me to buy the practice in Dec. 08 and close in Aug. 09. As I watched the economy and markets tumble around me I got a bit spooked out. We went back and forth for awhile in discussions and the owner grew increasingly paranoid over the sale. Business slowed considerably in Jan./Feb. but has since picked up again. Owner starts doing weird stuff. He pulls last years appointment book out of the office. I have not seen it since to compare the schedule. He grows increasingly hostile in tone and actions. I am at final contract now and would like to see an updated quarterly PnL statement, gross production statement or just a collection statement to ease my mind that I can support the huge nut I'm taking out before I sign the contract. The owner absolutely refuses to give these to me and threatens me with a "sign the contract or we are finished" rant. I'm probably being paranoid as usual but I just wanted to see some updated numbers before I sign away for peace of mind, nothing more. I tried explaining this to him but I don't think he understands. The bank loves my wife and I because we have immaculate credit and low debt/income ratio, so financing is not the issue. It makes me suspicious that the owner has pulled the old books out and won't give me any kind of new indication as to current practice performance (keep in mind we are still closing in Aug!).

The only downside to this practice is that if I buy it, I have told my wife that we will not live near the practice. Although the area is spectacular it just does nothing for me. I am an outdoorsman and for me to do my recreational activities after work it is a real chore. So we would have to accept a 35 minute commute (20 miles) to work so that I can be within reasonable distance to recreational activities.

Practice 2: Mixed FFS/Major insurance plans practice. Much smaller than #1. Gross 350K/Net 260K. Purchase at 260K. Practice is in a larger office than #1, has a sublet to lower rent, and has similar bells and whistles. I need to make a few small upgrades over time but it is functional as is. There is room to add more ops, practice 1 has room for 1 more op. The downside to this practice is that the doctor has not been marketing at all, maintaining referral base or meeting new docs. He has let this slide a bit and it shows in the year to year performance. What I really like about this practice is the location. It is close to my home town. My commute would be about 5-10 minutes since I really like the town and could see myself living there. For the cost of a startup, I could get some immediate income and have a much smaller loan.

So what do you think?

There are always two side to every story....

I have all of the previous tax returns including '08. I just wanted to see how the first quarter performance was. My feeling was that it was a bad quarter.

And what are you planning to do if it was a bad quarter? All businesses have cycles...going forward the work will be on your shoulders anyway to get and maintain referrals, whether it's a good or bad quarter.

As I've said I just wanted to evaluate what the cash flow was during a down time and make sure I'm going to be able to cover the nut that I'm taking out.

You can evaluate that yourself by doing some projections with lower revenue, no?

My wife has been there for two years. She knows how cases are documented, the equipment is in good condition, etc. We did a lien search, no liens came up. There are no pending lawsuits, never been a disciplinary action, etc. I'm making the guy sound like a nutcase which he is to some degree but really I do like him and he has been very generous and treated my wife well with the exception of this purchase negotiation.

He may be getting annoyed with all the requests and if your wife has been working there you know so much more than the average non-working buyer.

I recall a few years back one of my clients was selling and the buyer kept asking for information, they were asking for every little thing and we complied all along. even a week before settlement they asked for some additional information that seemed so irrelevant, however, we smiled and complied (by the way, my guess is these requests were coming from buyers CPA who hadn't done any dental deals that I was aware of). What I remember most is that the day before settlement the buyer called one more time (I happened to be in the sellers office when he called) and the seller, my clients says "look Tom, if I can gather by tomorrow I’ll bring it, I’ll also come to settlement naked in case there's anything else you'd like to see"...to which I laughed so hard it brought tears to my eyes. Settlement went off without a hitch...though I think the buyer had some anxiety about what my client was going to wear that day....

We had a CPA look at all the accounts.

Endo. practices here are in high demand. They typically sell for 65% of gross.

With an off-the-street buyer I see endos selling for 40-60 % of gross.

What makes endo practices in high demand? Is it a lack of endodontist in the area? If so seems to me that would reduce the demand for the practices since one could do a start up for less then $250k and get busy rather quickly. Or is it a saturation of endos where you'll need to join and do a phase in\out to get the referrals?

I agree with you that the goodwill is risky.

As an owner\seller the best way to transition goodwill and have any value on it is for the type of transition your wife was in, i.e., work in the practice for a couple years and become an owner.

Well at this point, practice 1 seller has told my wife that her last day is next week.

Wow, that is strange. Either something really ticked off the seller or something in the seller’s life changed where they need to maintain ownership and profits. Very weird turn of events indeed.

Good luck, sounds like you'll do very well with #2.

This post first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com
Follow us on TwitterFacebook and Pinterest

Wednesday, June 10, 2009

Creative Dental Compensation Ideas

I was reading a post on Newdocs.com and saw your reply regarding new doctor compensation:

"Good topic. One way new doctors can find out what the compensation is like in their specific area is to seek out the dental specific professionals, like attorneys, CPAs, consultants, etc. who represent dentists and know what's going on.

They can also provide some great insight on how to approach compensation within the agreement, getting it all in W-2 compensation isn't the best way. See if the owner is willing to get creative, it'll be a win win for both of you."What are some of those creative ideas? This sounds interesting.

Steve

Barry summarized it pretty well. If you're an employee non-owner, the owner will usually only cover certain benefits like malpractice, maybe health insurance and maybe up to $1,500 of dues and licenses. Therefore, any other professional expenses that an employee incurs that might be deductible on their individual return are paid with after-tax and after payroll-tax dollars. Even if you can claim them on your individual return, you must be itemizing and they have to exceed 2% of your AGI to even begin to benefit AND you may be hit with AMT.

Therefore, IF you have expenses like business meals and entertainment, business gifts, CE, business travel, business use of the vehicle, cell phone use, and on and on, you're better off asking your employer to pay for those items in lieu of W-2 compensation. As Barry said, not only do you save income taxes and payroll taxes and avoid the whole AMT issue, the employer also saves payroll taxes as well.

So the "creative" part has to do with finding those business related expenses that you're paying with after tax dollars and seeing if your employer will pay them in lieu of your taxable wages.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com
Follow us on TwitterFacebook and Pinterest

Friday, June 5, 2009

Costly Dental Practice Mistakes

They say you learn a lot by the mistakes you make. By this dictum, I must be the most knowledgeable man alive!

I'd like to know what the costliest mistake you've ever seen in a dental practice.

I've only been open a year but have made several mistakes to date. I would say one of the costliest was paying 6000 for Golden (Yellow) Pages advertising and 3000 a year for directory advertisements. The ROI was pitiful. I have now stopped both as I feel the website brings in a lot more.

I’ll share two terrible decisions that two different clients made:

1. Successful 2 doctor partnership for nearly 15 years, one partner wants to leave and specialize. That goes well, what didn't go well is the next "shotgun" partnership. Remaining partner contacts schoolmate\close family friend to associate and discuss replacing partner that left. They agree on a deal and only after working together 9 months form their partnership. About 1.5 years later it goes down and really fast, schoolmate\close friend, while joining with great intentions, simply didn't have the same practice style\philosophy as existing partner, just too many disagreements clinically. After it was all said and done it probably cost each of them $30k+ in professional fees to undo, not to mention the money paid to get the deal done initially. Sad to say they are no longer close family friends either. There’s a reason an engagement period is prudent, you might find your future partner easy to get along with outside the practice, and you need to ensure you have similar clinical\practice styles philosophies.

2. 3 owner practice attends a Cerec seminar and 2 get sold on it. So they spend the $100k+ on a Cerec knowing full well what they need to produce monthly to breakeven with it. Neither of the two partners really got serious about taking the Cerec courses and learning what can be done with the machine so there it sits. One being near 50 yrs old and the other being into their 60's, both now acknowledge they simply can't break years of habits in performing procedures as they've always done and using their favorite labs. Before investing in the latest and greatest technology based upon a sales meeting you better be fully committed in learning it and using.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com
Follow us on TwitterFacebook and Pinterest