ByDrew Hinrichs, CPA, CEO of Engage Advisors
Congratulations on your decision to buy a dental practice! Taking over a successful business that already has a patient base and infrastructure is a great way to accelerate your career. But the decision to buy is just the first step. To be successful you need to have a process in place that ensures you find a practice that’s a good match. As you begin your journey to practice ownership, here are a few things to keep in mind.
Valuation
While there is no mathematic formula for determining the true value of a practice, a good understanding of the financials will help you know whether or not the business is healthy. It’s worth taking the time to drill down on expenses and revenue in order to get an accurate picture of profitability. In the same way you’d want a home inspection performed before you buy a house, it’s also a good idea to have a dental CPA review the financials of a practice before you make an offer.
Overhead & Expenses
A healthy dental practice will operate at 55-60% overhead. Here are a few things to watch out for:
- Staff – An average practice will use about 25% of collections to cover employee costs. This number includes salary, benefits, payroll taxes. If your payroll is above that, find out why.
- Supplies & Amp; Lab Fees – Supplies and lab fees should run about 10-14% of collections, although these numbers are fluid and will fluctuate month to month. Fees will also change if you decide to add or eliminate certain types of procedures.
- Equipment – Take inventory of all the equipment and test it to be sure it’s in good working order. If not, factor the cost to repair or replace into your purchase price. Be sure to include computers and IT infrastructure in your evaluation.
- Building – If the practice is renting office space and you will be assuming the lease, review the terms and make sure they’re acceptable. If you’re buying the building along with the practice, have it inspected to find out what repairs or costs will need to be made in the next 3-5 years. If you have a roof that needs to be replaced in three years or an HVAC that’s not functioning properly, that should be reflected in the purchase price.
Profitability
A successful practice will have a profit margin of 40% or higher. In addition to knowing the number, you also should get an idea of what’s driving profitability. For example, look at what percentage of revenue comes from the hygiene department and whether or not it’s operating at capacity. For insurance, you should know what the procedure adjustment rate is for the practice, as well as the trend line for insurance revenue over the last few years.
Other Tips & Considerations
- Top Procedures by Revenue – Does the business you’re looking at match up with the type of dentistry you want to practice? Find out which procedures generate the most income, then decide if you’re ready to take on those cases.
- Check the schedule – Look at the patient schedule for the next three weeks to see how full it is. After having decided to sell, some dentists are tempted to kick back and coast, which can result in decreased production and declining revenue. If the valuation was based on the practice at its peak and it’s no longer producing at that level, it’s not worth as much.
- Future Team– When you buy a practice, a big part of the infrastructure you’re paying for is the staff. Find out whether or not they’re on board with the transition. Whether the answer is ‘yes’ or ‘no’, it’s better to know in advance so you can factor that into your decision-making.
- Marketing & Patient Outreach – Is the website outdated? What is being done internally to build the brand and drive referrals? What is being done externally to connect the practice with the community? Do they have a presence on social media? What is the overall patient experience? Get answers to all these questions before you make an offer.
There’s a lot to consider when you’re buying a practice but it’s worth taking the time to get it right. If you have questions about valuation or would like to run some numbers by an experienced dental CPA, schedule a call with our team at Engage Advisors. We have step-by-step process that can help you find the practice you’re looking for and lay the groundwork for a successful career.