What to consider before purchasing a practice
February 27, 2018
By Adam Reisch, CPA, CFP®, CCA, CGMA
When it comes to dental practices, the rule of thumb in business valuation doesn’t always apply. If you’re looking to purchase a single practice for your sole operation or expand your existing practice by adding a location, consider more than just average collections and revenue. In fact, when it comes to the traditional business valuation rule of thumb – which says percentage of collections dictates value – most of what people think they know about a practice value goes out the window.
Beyond collections, the value of a dental practice can be found in the number of staff, the average number of appointments, the age of the practice and its equipment, the synergies between their services and yours, and the market in which the practice operates.
What to consider beyond collections
Staff: A practice’s staff can be one of its largest assets. The number of staff members, their credentials and education, and their wage and benefit values can significantly impact the value of a practice. Highly-educated, well-trained, skilled staff come at a price, and they are worth the investment to a practice. This means they also come with obligations like benefit plans and retirement packages.
Before you purchase a practice, get to know the expectations of the staff, understand who will stay and who is likely to depart, leaving you with gaps to fill. Realize you will likely be expected to commit to the same level or greater of benefits. Acknowledge that the staff knows your future patients, they know the market, and they can be an invaluable asset to you. Keeping them in place can be paramount to a smooth practice transition.
Schedule: The schedule a practice keeps and the expectations that have been set by the patients is also a consideration. Choosing to purchase a practice where the schedule culture is 24/7 availability, but you prefer Fridays off, is likely not a good fit. Client retention will go hand-in-hand with schedule maintenance. Understand the client base you are purchasing, what their expectations are, and the kind of shifts in scheduling they can accept or adapt to. Your schedule is how you make profit, and collections cannot happen without it.
Reputation: In addition to staffing and scheduling is the value of reputation. This is an obvious but sensitive component to purchasing a practice. What kind of reputation does the practice have and what would you like to establish as the norm? Is it possible to maintain or improve the existing reputation, depending on need? Prepare yourself for success in a new market by understanding the dynamics of the culture both internally and externally in the community, in addition to weighing the value of revenue before purchasing a practice.
Equipment: As one of the largest tangible assets, the equipment is a significant component of a dental practice’s value. It’s essential that the age and condition of the practice’s equipment is evaluated before making any kind of purchase. If purchasing a practice will require you to make significant upgrades, you must have those costs in hand in order to secure funding from your financial resources. You know the hard costs of technology and equipment, so do not take this aspect of practice value lightly. It is not likely to be factored into the projected value in the financial statements you initially received.
Market: Disastrous if overlooked, the available market share of the practice you are looking to purchase is paramount to your success. You must not only understand the marketplace and what consumers are willing to pay, it is also crucial to know if the marketplace can maintain the current number of dental practices it has, or is it open to growth in the number and availability of practices. If you’re purchasing from a retired dentist and hoping to capture or grow their entire marketshare, set realistic expectations. Do your research. Are there other practices in the market? What is their reputation? Are some of your potential future clients likely to switch to a competitor or vice versa? Be realistic and establish benchmarks for what is and is not acceptable marketshare for your goals.
Services: Along the same vein as marketshare, evaluate the synergies of the services you offer versus the services offered by the practice you’re looking to purchase. Is there a way to merge and supplement one another? Are there services you will need to stop or start offering? Additionally, how do their insurance reimbursement rates factor in; is there room for improvement or do they hold a higher buying power than you currently do? Audit your services against theirs and see what parallels and what will need greater attention. If you can find a practice with stronger buying power and absorb that asset, it could make for a stronger upstart for you.
If you’re going to purchase a practice, due diligence on revenue and how it is realized is essential. Success will be difficult without it, and you cannot rely on annual financial statements to be your only guide in a good versus poor purchase of a dental practice. Think about the tangibles and intangibles that go into the value of a practice where quality of staff and services are just as crucially important as hard numbers.