Buyer Beware!

By Ken Rubin, CPA, PFS, Broker

Buying a dental practice is one of the most important decisions of your life. This decision will determine the lifestyle that you and your family will ultimately enjoy, so make it a good one! In evaluating dental practices do your homework and don’t act on faith, hope, trust or pressure.

Don’t rely on “rough rules of thumb”. As a Dental CPA I have evaluated hundreds of dental practices for dentists buying practices. In most instances the dentist had some idea in their head of what the practice value should be based on a “rough rule of thumb” that they had heard. The most common is “70% to 80% of last year’s gross collections.” Sound familiar? Sometimes this may actually end up being true, but no two practices are identical, and their differentiating factors dramatically affect the value. For example, if two similar practices have identical production and collection amounts, but one practice has twice as much net income, if all other factors were equal would it make any sense to pay the same amount to purchase both practices? Of course not.

In evaluating a practice, one cannot just crunch numbers and apply formulas. All of the different factors must be analyzed including (but not limited to): Annual gross production and collections, net income, growth trend, location, procedure mix, treatment philosophy, recall system, fee schedule, transition period offered, accounts receivable aging, number of active patients, type of patients (e.g. PPO vs FFS), length of time established, feasibility for expansion, expected patient attrition rate, staff, office lease, equipment and many more factors.

The value of anything depends on supply and demand. Currently it’s a seller’s market. There is a low inventory of dental practices for sale in San Diego. Practice values peaked in San Diego in 2005, but values have not drastically gone down (as of 2013). This should change within the next few years as the number of sellers will increase and number of buyers will decrease. Then it should be easier to buy a dental practice in San Diego.

Additionally, don’t assume that the practice numbers will stay the same after you take over. You may be slower and not as polished at presenting treatment plans as the more experienced seller. You may not be able to perform all the procedures that the seller is performing. There are many other things beyond your control to watch out for that can negatively affect the practice after you take over.

On the bright side, I’ve seen many instances where a buyer has done their homework, made an intelligent buying decision, and the numbers have absolutely skyrocketed after they take over. This usually happens when the seller has not been “focusing” on the practice and has only been presenting the bare minimum treatment plans. If the seller has been doing minimal marketing (internally and/or externally) this can be prove to be an excellent opportunity for growth.

In addition to having the practice evaluated, a due diligence should be performed to verify the financial information provided by the seller is accurate. Fortunately, it doesn’t happen too often that a selling dentist will “cook the books” in anticipation of a sell, but it does happen. On more than one occasion I’ve uncovered both honest mistakes and even intentional deception that significantly affected the selling price.

The total purchase price will be allocated between different categories (goodwill, furniture and equipment, covenant not to compete, leasehold improvements, supplies, consulting agreement, etc.) Structure the allocation of the purchase price to get the most favorable tax treatment possible. How the allocation is structured will affect how much you’ll have to pay in taxes for many years to come.

Ken Rubin has been helping dentists since 1984. He owns and operates both Ken Rubin Dental Practice Sales and Ken Rubin & Company, Dental CPAs. He is a frequent author, lecturer and co-founder of the Academy of Dental CPAs (“ADCPA”). He can be reached at (619) 299-6161 . Websites are www.krpracticesales.com and www.kenrubincpa.com