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Sizing Up A Practice Before Purchase
The fastest way to establish your own business and pave the way to success is to acquire an existing dental practice with an active flow of patients. But before purchasing, you should carefully evaluate the practice to determine that it’s a good fit and the asking price is fair and reasonable.
The true market value of any dental practices is what a buyer can afford to pay and still earn a living commensurate with the size of the practice. Proper due diligence on the part of the buyer requires that you ask pertinent questions about patient base, cash flow and staffing, and use a professional team of advisors to help interpret the many important aspects of the practice itself, including:
1. Income: Have the seller supply the tax records for at least the past three years. Your accountant can then help evaluate the true net income of the practice, which must take into account salary, personal withholding taxes, profit, pension, personal insurance, personal benefits, depreciation, travel, education, and many other hidden benefits. This will reveal what the seller actually earned and help estimate what you as the buyer can expect to earn.
2. Terms: Work with your finance company to find a rate and term combination that makes the practice affordable for you. Your accountant can help interpret the effect that certain fees have on the true rate, and what the bottom line income will be for you after note payment.
3. Goodwill: The best opportunity for preserving or improving practice income is to retain its current patient base. This is best achieved through positive goodwill factors that are built into the practice and can be readily carried forward. As part of your due diligence, work with the seller to answer many important questions related to goodwill that will ultimately affect the worth of the practice to you, including:
a. Personal Details. Why is the dentist selling? How long has the seller been in the area? Are there any known license, legal or financial problems that could negatively impact the practice?
b. Staff Details. How many staff members are there, what are their duties, how long have they worked there, how much are they paid, what benefits do they receive, and will they stay?
c. Patient Information. Work with the seller to determine patients’ average age range, how far away they live or work, how many are active (carefully define what you mean by active,) the rate of new patient flow, and the general ethnic mix. If you’re acquiring a specialty practice, determine the number of referring dentists.
d. Practice Management Structure. If necessary, work with a practice management consultant to be sure you thoroughly understand the practice’s insurance participation, PPO or HMO percentages, recall system, collection rate, advertising methods, general procedures, type and amount of work referred out, lease terms, and days and hours worked.
All of the above factors affect not only the market value of a dental practice, but the worth of the practice to you, the buyer. No practice is perfect, so as you size up a business for potential acquisition it’s important to prioritize your needs and achieve a level of comfort with the practice. If you like the location and the seller, and think you will do as well or better than the present owner, you may have found the practice that’s right for you.
Statements of opinion not necessarily endorsed by ADA Member Advantage, ADA Business Enterprises, Inc., or the American Dental Association, or any of its subsidiaries, counsels, commissions, or agencies.
|Frederick Polcari DMD is a Tufts University graduate and president of Polcari Associates, Ltd. He has brokered the sale of hundreds of dental practices since 1985 in Maryland, Washington DC and Northern Virginia. Dr. Polcari lectures extensively on practice sales, partnerships and appraisals, and has developed DentAppraise™ computer software for nationwide practice appraisals. He can be reached at firstname.lastname@example.org or 410-997-9413.|
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