When you are planning to buy a dental practice it is important to have extensive information about the practice you intend to buy in order to make the right decision. Asking the right questions will give you an idea of the assets and liabilities the practice has, and help you establish the practice’s potential.
Most dentists are not experienced in buying and selling dental practices, which is why it is important to create a team of experts to guide you through your transition. Dental practice transitions are complex, especially when it comes to the financial and accounting aspects. Make sure your team includes an experienced dental CPA to advise you every step of the way.
We recently spoke to Matt Howard, dental CPA, accredited business valuator, and certified valuation analyst at Blue & Co.. Matt gave us advice on what to know before you start the process of buying a dental practice. Blue & Co. is the third-party, non-biased valuator DDSmatch Southwest uses during dental practice transitions. Matt leads the business valuation team at Blue & Co., offering expertise in finding the true market value of a dental practice. Matt’s team looks at a wide variety of aspects, from a range of perspectives, so both those trying to buy a dental practice, and those trying to sell one will understand what the practice is really worth.
What is Business Valuation?
One of the most important things a dental CPA does during a dental practice transition is help the buyer determine whether the selling price reflects the true market value. “We’ll collect data, we’ll go through the data, we’ll enter it into our models.” explains Matt. “We’ll ask very specific questions about that data, about some, maybe, aberrations in the financial performance over time. Sometimes a dental supply category jumps 10% over a year. We want to really understand everything that’s going on inside the practice.”
When determining the true market value of a practice, valuators must separate out the “noise” in a valuation report. For those looking to buy a dental practice, Matt explains, noise is “anything that’s inside the practice that is not necessarily operational, or is basically something that the owner has decided to do at the practice that doesn’t exactly reflect the operations of the practice…a lot of times a seller will own the building, and in owning the building, they’ll pay themselves a leased rate for that building. And sometimes that isn’t a market rate. Sometimes it’s a little bit above, sometimes it’s a little bit lower. And so what our job in this process is, is to really help really work through the practice financials, the historical financial statements, and just basically help sanitize or normalize the numbers as we see them. And as the true operations of the practice are reflected.”
When you begin the buying process an experienced dental CPA will look at different aspects of the practice and help you determine what the noise is. While these aspects may be beneficial to the selling doctor, they aren’t always beneficial to the buyer.
Should I Start a New Practice or Try to Buy a Dental Practice?
We frequently hear this question from newer dentists ready to start out on their own. Does starting from scratch, or buying an existing practice yield better results? What you need to know is the difference in cash flow. Building a practice from the ground up means investing a lot of time and money. You will need sufficient funds to lease or buy an office, hire staff, and purchase equipment, all without a steady cash flow from patients. However, when you buy an established practice, as Matt says, “You’re walking into cashflow day one.”
Building a new practice is associated with much more debt than buying an existing one. “It’s a three- to sometimes seven-year journey to maturity or average collections of [a new practice],” says Matt. “the first year, you’re probably going to feed the business, as in bringing money to the table to keep it going as you build up that collection stream. The second year you might break even or maybe pay yourself a little bit, but definitely not up to industry standards. The third year… is generally, during these startups, where we see you making some progress towards paying yourself a reasonable wage. It’s still probably not [the industry standard], what you could get out being an associate at another practice, but you’re on your way.” When you buy a dental practice you bypass the most difficult years of starting a new practice.
At DDSmatch Southwest, our goal is to find the right match between buyer and seller. We want the buyer to find a practice that is already the way they want, rather than struggling to build one from the ground up. We provide a strong foundation that fits your career aspirations and allows you to build even further.
Should I Start as a Dental Associate?
What are the pros and cons to taking a dental associateship? A dental associateship can be a great way to start your career, but it is important to be cautious before taking it on. Carefully planned associateships provide good experience for those wanting to own a practice, without taking on heavy debt. However, it is crucial to understand the complexities of dental associateships and ask the right questions up front.
Matt explains how a dental associateship can benefit an individual looking to buy a dental practice in the future. “Every practice has a limited amount of resources, of ops, of time for the staff to not hit overtime. So there’s a lot of variables at play here. Typically, we like to see over a $1.2 million collection practice in general. That way that there’s plenty of room for an associate to come in, inherit some of that revenue stream, as in, hopefully the seller wants to back off a bit and transfer some of their patient base over to the associate.”
When is a dental associateship a bad idea? If a practice isn’t ready to take on an associate, but takes one on anyway, it is bad for both parties. If the owner-doctor isn’t able to provide enough work to justify the associate’s salary the associate is no better off than they were before. Before agreeing to take on a dental associateship look closely at the practice and their workload. If they are booked two or three months out they likely have enough work to justify taking you on.
Just like when you buy a dental practice, when you take on a dental associateship, it is important to consider the terms of the deal. In a typical dental associateship deal the associate is paid a guaranteed salary for the first few months, up to the first year. After the agreed upon time the associate is compensated based on production. Review the specifics of the deal you are being offered to make sure it benefits both you and the owner-doctor.
Taking on a dental associateship can be a good step in your journey to practice ownership. However, just because it involves less financial risk at the beginning doesn’t mean it will be less risky in the long run. Make sure the practice you are joining can support an associate, otherwise this step may turn into a major career setback.
What Do I Need to Know About Asset Allocation?
For both buyers and sellers asset allocation is a key factor in a dental practice transition. A successful dental practice is largely due to the goodwill built up in their communities. That goodwill is a large part of the value when you buy a dental practice because it is what keeps patients coming back, providing a steady income. However, unlike the building or equipment, goodwill is not a tangible object.
There are two reasons asset allocation is so important in dental practice transitions. The first reason is that it makes a difference in how much money the seller actually keeps after the sale. Matt explains, “The million dollar price is great and all. However, it’s not about what the price is, it’s about what you keep. And obviously what I’m referring to here is taxation.”
The second reason asset allocation is so important is that it recognizes the effort a selling doctor has poured into the practice. A successful dental practice represents the selling doctor’s legacy, one they likely worked on for decades. They have earned the trust and appreciation of their patients through hard work and time. Selling a dental practice means giving up something they poured their blood, sweat, and tears into.
When you buy a dental practice the sale of tangible assets, things like x-ray machines, is taxed as normal income at the ordinary rate. Intangible assets, such as goodwill, are taxed at the capital gains rate, which is more favorable. Everything the buyer gets in the sale will eventually be written off through depreciation. For the seller, however, the two different rates will represent either money in their pocket or money lost to taxes.
When you are negotiating a dental practice transition take into account the weight of what the selling doctor is selling. The dental practice represents their life’s work, and they have a great investment in it, both financial and otherwise. Negotiating asset allocation is better when you take into consideration the true value of what the seller has built, it creates a win-win situation. In the future, when it is time to sell the practice again, you will want the next buyer to do the same for you.
How Can I Prepare to Buy a Dental Practice
It is never too early to prepare yourself for buying a dental practice. According to Matt there are four things you need before you are ready to start the process. The first is hand speed. This refers to confidence and skills in your job. You need to know you can keep up with a certain level of production and everything else involved with running a successful practice.
The second thing you need is a financial cushion. According to Matt, banks like to see “some sort of margin in their life . . . that sounds very logical, but a lot of times a buyer is not a good candidate because they don’t have any kind of safety net in their life.”
The third thing is to know what you are looking for. The more specific you can be about the practice you want to own, the better. A general desire to buy a dental practice isn’t as helpful as knowing the exact area and type of practice you want. Both lenders and selling doctors want to know you are “fully vested in buying in a certain area for a specific purpose with a certain clinical skillset.”
Finally, the fourth thing you need is a good team of advisors. At the very least your team should include an experienced dental CPA and a dental attorney. According to Matt, advisors “help you understand the logistics of the transaction and how to structure it. But really, beyond that, if you have the right people on your team—as advisors, we’ve been through this a hundred-plus times, so just helping you through that is part of what we do.”
Trustworthy and experienced transition specialists will help you make the right decision when you choose to buy.
DDSmatch Southwest Has Dental Practices for Sale
Whether you are ready to buy a dental practice, or just want to keep a finger on the pulse of the market, you are invited to browse our listings. Simply create a free profile on DDSmatch.com to view available practices and stay up to date with the newest listings. Contact us today to learn more.