Buying an Existing Practice: Be Prepared for Surprises

by Alex Zlatin, MaxiDent

2/3 NEW OWNER POCKETBOOK – A Three Part Series

In this uncertain time of the COVID-19 pandemic, there are still clinics being sold and bought. Credit is still being issued and some transactions are expedited while others are stalling. When it comes to assessing a business, most rely on a broker’s appraisal document. Although it carries a lot of valuable information, it often does not cover everything you need to know in order to understand what you are getting yourself into. The ability to read between the lines and walking into something with your eyes wide open will be the difference between preparedness and disappointment / surprise.

1. Staff – The people who form your (potential) new team – are probably the most important and valuable assets that you will be acquiring. In any appraisal, you will encounter some dry data describing the team members. The info will include their age, how long they have been with the clinic, their hours, their hourly wage and sometimes some info with regards to whether they have a contract in place and whether there are agreed-upon special arrangements with them.

We all understand that people are way more complex than this bundle of data. I recommend entering a contingency clause that requires a visit or a meet-and-greet with the staff (or at least key staff). I cannot stress enough how important becoming familiar with the staff personally and getting a feeling about the office dynamics is.

2. Equipment – It is no secret that most offices for sale will not have the latest tools and equipment. If anything, dentists who are planning their retirement are deciding to avoid any upgrade of
tools and equipment and wait it out until it is no longer their expense. Learning through the appraisal about the current equipment and comparing it to how you envision your clinic will give you a good checklist of the things that need action. I recommend to new owners that they add 3 columns for each item – what is the urgency of the new item, what is the impact of having the new equipment on your patients and your clinic and whether you should purchase it or lease it. The latter is something you should consult your accountant and banker on. I recommend incorporating the urgent items with the highest impact into the financing received for the purchase of the clinic.

3. Renovation – Similarly to the previous point, most offices for sale will not have a clean and modern appearance. If anything, there will be a need for new flooring, a fresh coat of paint, a few new office chairs, new waiting area chairs and potentially some touch ups for the front desk. Organizing the most pressing areas of concern will be beneficial here as well. If major work is required, getting a couple of quotes and incorporating this into your financing will help get things underway faster. One thing to consider when you are exploring renovations is the possibility of it pausing or crippling your ability to see patients. At times when you have taken immense debt, you would like to avoid a long period with reduced availability for patients.

A word of warning from renovation contractors – please make sure that you are clearly defining the scope of work. This way it will not turn into a complete clinic overhaul that will be over your original budget and can result in loss of profitability.

4. Patients – going back to the appraisal, it presents you with data about the clinic’s patients. For the most part, it deals with 3 aspects:

i. Age distribution – the way you should analyze this graph will highly depend on the area of the clinic and the oral health of the population in that neighborhood. For a GP clinic, you would generally like to see a healthy “Bell Curve” of ages where you would have around 25% of children, 50% of adults and 25% of mature patients.

ii. Procedures done by categories (production) – This graph will allow you to understand 2 main points for the clinic:

  • a. What type of dentistry has been performed in the clinic – all restorative procedures broken down by their categories? You’ll see what was performed and what percentage of all restorative revenue each group represents.
  • b. Breakdown between restorative and preventative (in percentage) – generally speaking, in a healthy clinic, you would have 33% of revenue come from preventative (hygiene department) and 66% from restorative (dental treatments).

Note: you should always be cautious when you are looking at information, which is presented in percentages. In many ads, percentages are being used to misrepresent the actual data. You must always ask the percentage presenter to share what this is a percentage of.

iii. Breakdown of referrals out – when dentists are preparing to sell, there is a tendency to work less hours, less days, perform the types of treatments that they enjoy performing and refer out everything else. When you are buying a clinic, this information will be crucial to determine what type of increased revenue you can generate by performing those treatments in-house without referring out. Having said that, you must take these numbers with a “grain of salt”. In many instances that I have seen, these numbers did not match reality. Even if they were generated from the database, nothing is promising you that you will see similar amounts after you purchase.

As an additional risk, when it comes to patients, there are many patients who are emotionally connected to the previous owner and you will run the risk of them leaving your clinic.

5. Marketing to build / expand – as with previously discussed topics, marketing is another aspect which is often neglected by owners who are planning their retirement. When you are assessing a clinic, you must look at its marketing and obtain information as to where new patients are coming from. You should be extremely concerned if most new patients come from word-of-mouth, which is the “politically correct” way of saying this clinic does no marketing. Understanding what marketing you will need to do and what those costs will be, are crucial to determine if this clinic is the right one for you.

6. Goodwill – Goodwill is defined as “the established reputation of a business regarded as a quantifiable asset”. I can assure you that Goodwill will be the item you pay the most for, when it comes
to buying an existing clinic. Throughout the many appraisals that I have reviewed and consulted on, I found that brokers tend to come up with a dollar figure based on the location of the clinic and the market condition and multiply it by the square footage. It is obvious to all who are reading this that you cannot measure reputation with this formula, as reputation is an individual thing that does not corelate to the amount of square footage that you have and even does not correspond to the number of years the clinic has been around. Reputation is built through investing in your clinic, in your staff, in your community and back into the profession. There is a way to quantify reputation, but templated formulas are misleading, and you should argue this, when you feel it is overpriced.

About the Author

Alex Zlatin is the CEO of dental practice management software company Maxim Software Systems (MaxiDent). He helps dental professionals take control and reach the next level of success with responsible leadership strategies. He leverages his experience in “Responsible Dental Ownership – Balancing Ethics and Business Through Purpose”, a detailed guide providing practical tools and a unique, proven approach to running a successful practice.;