Buying a dental practice is not something you do on a whim. Most dentists considering a transition spend significant time in the planning stages, from the time they first consider making a purchase to when they put an offer on a dental practice for sale. The dental practice you choose to buy will likely become the practice you grow throughout your career, and will be your legacy when you retire. It represents a significant investment, both financially and emotionally, which is why it is important to make sure you buy the right practice for you.
While there are many factors to consider before purchasing a dental practice, the focus of this article is the appraisal. The appraisal will give you a clear picture of the finances, business model, and inner workings of the practice. This allows you to make an informed decision about whether or not you could succeed after taking over the practice. Below we outline what information you should request when appraising a dental practice.
You may notice we recommend requesting quite a bit of data as part of the appraisal. Is all of this data necessary, and what happens if the practice you are buying does not have the data you ask for? When making a large purchase like this you need a full picture of what you are buying, which is why every little bit of information helps. Most dental practices for sale in Texas and New Mexico have the software necessary to track and store all the information you will need, so obtaining all the data should not be an issue. However, don’t write off a dental practice just because they cannot provide you with every piece of information you request. Raise a red flag, then dig a little deeper to find out why they cannot provide what you are requesting. Are they unwilling to share information? Do they simply not have the tools to track the data you want? Talk to your dental transition specialist and team of advisors for advice on how to move forward, and whether or not to walk away.
Appraising the Facility
The first thing you should do before considering a purchase is visit the physical location. Take a tour of the space and try to picture yourself working there and growing the practice. During and after your visit consider these factors as part of your appraisal.
- Equipment: What equipment is included in the sale? How old is the equipment? If the doctor putting their dental practice for sale has not upgraded to digital equipment is that a dealbreaker?
- Expansion Opportunities: Does the space allow for expansion in the next 5-10 years? If you plan on expanding your practice to include more services or additional associates you do not want to be limited by the space.
- Location and Vision: How does the physical location fit with your vision for the practice? Will it attract the type of patients you intend to direct your marketing to?
As you can see some of the facility details could affect the price, such as the equipment, while others only affect whether the practice will be a good fit. Keep in mind that when you are looking for a practice to buy you may have to compromise in some areas, such as the exact location of your future practice. A certain practice may be a great fit, even if it is a few miles from your desired location, or does not have updated equipment. Talk to your team of advisors for advice on what can and cannot be changed about the physical location and its contents, and how these changes may factor into the sales price.
Financial Data to Request from a Dental Practice for Sale in Texas and New Mexico
It goes without saying that each appraisal should contain a significant amount of financial information. But what kind of financial information goes into each appraisal? As we mentioned above, requesting as much information as possible will only help you make an informed decision. Modern dental practices typically have the software necessary to track the information you need, and the selling doctor should be willing to share it. Here is the financial information you should have as part of the appraisal:
- Tax Returns: At least three years of tax returns should be provided.
- Practice Valuation: A third party valuation performed by an experienced valuator is invaluable in the dental transition process. DDSmatch Southwest works with Blue & Co. to provide accurate practice valuations. For more information on what goes into a business valuation visit this page.
- Lease Agreement or Real Estate Appraisal: Does the selling doctor own the real estate? If so, does he or she intend to sell it with the practice or lease it to you after the sale? Buying the real estate is a separate transaction from buying the dental practice. If the office space is currently leased by the selling doctor, find out the terms of the lease and what you need to do to take it over.
- Cash Flow Model: How much money can you expect the practice to make after your transition? A cash flow model will help you get a good picture of how the business will work for the next five-to-ten years. The model should consider growth rates, factor in both variable and fixed costs, the debt payments needed to finance the transition, and how much you need to support your lifestyle.
- Production and Collection Reports: These reports allow you to see the production and collections of each employee, as well as how much revenue each procedure brings in. Knowing the current collections and production will help you plan for the future of the practice, especially if you know which employees plan to stay on after the transition.
- Aged Receivables Report: How many outstanding payments does the dental practice for sale currently have, and what is the average length of time an invoice is outstanding? Too many outstanding accounts, or a significant amount of time between sending an invoice and receiving payment could indicate the practice is in trouble.
- Employee List: The salaries and benefits of each employee should be provided in order to give you a full picture of the overhead costs of running the practice.
- Financing Information: Lenders take two important factors into consideration when deciding whether or not to finance your purchase. First, the creditworthiness of the buyer. Second, the ability of the practice to continue producing enough to cover the loan. In addition, the buyer will need to provide or borrow working capital for the first few months after the transition.
Before moving on from the financial section we want to address what is surely on everyone’s mind when it comes to valuing a dental practice. One of the most frequent questions we have received in the past year is, “how do you know a practice’s true worth after COVID-19?” The value of a dental practice for sale is based partially on production and collections from the last few years. However, these numbers were greatly impacted by COVID-19 as offices were ordered to shut down or only see emergency patients for a time. Now most practices are back open, but production may still be lagging behind what it was in years past. The selling doctor wants to make sure they get what their practice is truly worth, while the buying doctor wants to have confidence the practice will continue to grow. To address these concerns we wrote a piece outlining the way business valuators are handling valuations in this unprecedented time. Learn more by visiting this page.
Practice Characteristics to Consider
One of the great things about buying a practice as opposed to building your practice from the ground up is that much of the hard work is done for you. A typical dental practice for sale in Texas and New Mexico has a solid patient base, knowledgeable employees, contracts with insurance companies, and a legacy you can use to build your career upon. However, just because these things exist within a practice does not mean they are being utilized well, or that you are the best fit to carry on the work. Analyzing the patient and practice characteristics below will not only help you determine the practice’s worth, it will also provide insight into whether or not you will be a good fit to take over the practice.
- Active Patients: How many patients have visited the practice in the last 12-18 months?
- Insurance Patients: Of the active patients, how many are on insurance and how many are cash patients?
- New Patients: How many new patients does the practice bring in each month?
- Overall Patient Demographics: What age group is most prevalent in the practice? Do most patients come from a specific area code? Demographic information will inform your future marketing efforts.
- Hygiene Appointments: What percentage of appointments at the dental practice for sale are for hygiene? How significant is the revenue from hygiene appointments?
- Insurance Adjustments: What insurance companies is the practice currently contracted with? How much does each insurer reimburse, and is there room to negotiate new terms?
- Fee Schedule: Take a look at the list of procedures and fees associated with them. How do they compare to other practices in the area?
- Employee Schedules: Review the weekly schedule of each employee, including the doctor and associates, to learn more about the flow of work in the practice.
- Office Hours: Dental offices can vary in hours of operation. Find out which days and hours the office is open and determine whether or not the schedule suits your personal needs. We do not recommend changing schedules immediately after a practice transition. However, changing the office hours can be done in the long term.
As you can see, a dental practice appraisal is much more than a report detailing how much money the dental practice for sale is worth. There is much to consider beyond the price of the real estate and equipment, and you will likely find yourself pouring over the data trying to decide which factors are most important to you. That is why we recommend working with a team of experienced advisors. A dental CPA, dental attorney, and practice transition specialist will help you determine whether or not a practice is viable, and whether or not you are a good fit for taking it over. Success starts with careful planning, dedication, and knowledge of the process that comes from experience.
Finding the Right Fit
Many of the factors involved in an appraisal dive into both personal and professional territory. If you take on a practice and immediately change the hours, insurance providers, or fee schedule you risk losing your patient base and therefore your cash flow. However, the way you feel about your new practice will flow over to the atmosphere of the office, affecting the patients and staff. If you hate how it was run in the past, but don’t change anything because you worry about losing patients you may lose them anyway because of the new atmosphere. This is why, when you are looking for a dental practice for sale in Texas and New Mexico, it is so important to find the right fit.
At DDSmatch Southwest we focus on matching buyers and sellers in a way that benefits everyone involved. A dentist who lists their practice for sale is listing more than just the physical contents of the practice. They are parting with the legacy they built over many years. They should expect to be compensated in a way that reflects what they spent their career building. In the same way, buyers want to know that the legacy they are buying into will continue to thrive as they pour their time and energy into it. Each party wants a smooth transition and long-term success. With the help of our transition experts, and our clearly established Trusted Transition Process™, buyers and sellers know they can move forward with confidence. When you’re ready to move forward with your dental practice transition contact the experts at DDSmatch Southwest by calling 855-546-0044.