Twelve Steps to Becoming a Dental Practice Owner

Predicting rain doesn’t count; building arks does. — The Noah Principle

1. Find dental practice brokers. Locate the dental transition specialists in your area. Google “dental practices for sale” and you’ll find a list of brokers, attorneys, and CPAs on the first couple of pages. State dental associations also run classified ads of practices for sale, and dental supply company reps are a great source of information about opportunities.

Don’t start calling professionals until you have a good idea of what you’re looking for — your desired geographic location, and whether you want an associateship with or without the opportunity to buy later. A dentist who is “kicking the tires,” making multiple calls without focused attention, will not receive priority attention. Call with specific questions, like “What will I take home as a percentage of my personal production after debt service?” and you’ll be at the top of the list for the most interesting deals — brokers, lenders, and CPAs will know you’re a real player.

Expect to sign a confidentiality agreement (sellers don’t want personal tax information out for public consumption). Remember that a broker isn’t “representing” anyone in the deal — they’re showing the deal, motivated to make it happen because that’s how they get paid. Know beforehand whether you can borrow the money — check with the bank. The amount available to borrow varies based on the practice’s cash flow; a bank will loan more against good cash flow.

2. Find an attorney and a CPA who specialize in dental practice transitions. You don’t need to reinvent the wheel or pay them to learn the process from scratch — you want their focus on the real substance, not routine matters. It’s easy to run up a tab before their input is truly needed, but get them involved before signing a letter of intent.

3. Do the data analysis. Most brokers will have all the financial data you need. Examine at least three years of data — tax returns, production and collection reports, dental procedure breakdown, producer reports. If you pay the asking price, how much will you take home after debt service — at least 30 percent of your personal production? Study the fee schedule to see if fees can be raised, and determine the number of active patients (seen in the last eighteen months). Below-average fees can be raised gradually, flowing straight to your bottom line. (Part 6 covers this analysis in more detail.)

4. Determine the hard assets. Have a dental equipment company evaluate the existing equipment. If you can get two to three more years out of most of it, that’s not a big concern — remember, that equipment has already been producing the financials you’re studying, and cash flow is what you’re primarily buying.

As an aside: it’s difficult for a small (say, three-operatory) practice to produce significant numbers without room for expansion — you’ll want space for two hygienists and possibly an associate. The cost of having to move and re-plumb another space can outweigh your initial savings (I know because I’ve tried it). Look for room to grow so you’re not forced to move within five years.

5. Find out how the lease is set up. Who owns the real estate, and is it for sale? Can you get a right of first refusal? The lender will want a solid lease to secure their investment. Remember, rent is real money, just like your practice loan payment. A practice advertised at 50 percent or less of revenues might look like a great deal — until you notice occupancy cost is 12 percent or more of gross (maybe the seller built a Taj Mahal and needs high lease payments to cover the mortgage). Always look at what you’ll take home as a percentage of your personal collections.

6. Study the demographics. Check the population-to-dentist ratio, but don’t get too fixated on it if the practice numbers already look good — competition is already baked into those numbers. In a small town, a new dentist arriving matters more to everyone; buying a practice there takes it off the market from future competition. In a larger urban area, a new dentist has less impact.

7. Draft a letter of intent. If the practice is still in your strike zone, involve your attorney and accountant. Yes, the practice could be bought out from under you while you analyze the data — but better to let a strike go by than swing outside your zone. If you use the methods in this series, it shouldn’t take more than a couple of days to get a good handle on the practice. Have your attorney produce a letter of intent (LOI) stating your dollar offer, nonbinding and contingent on acceptable financing and further due diligence; you may need to put down good-faith money to take the practice off the market. It’s advisable to wait on the letter until after you’ve analyzed the numbers, so your offer is confident and the deal isn’t derailed by later surprises.

A note on financing: before the LOI, the broker typically uses lender contacts to gauge whether financing will be a problem, based on your credit and the target practice. The better the target’s cash flow, the easier the financing.

8. Put together an asset purchase agreement. The broker, attorney, and accountant will construct it. The agreement will most likely be an asset purchase rather than a stock purchase (advisable for reasons beyond this series’ scope). The breakdown between goodwill and hard assets has significant tax consequences: the seller wants more goodwill for capital gains, the buyer wants more hard-asset allocation for quicker depreciation — there’s room to negotiate here, and your CPA should ensure it’s done correctly. The attorney and lender will conduct a lien search on the assets being purchased. Confirm what is and isn’t included in the sale (is that favorite desk — or that Andy Warhol print — part of the deal?).

How is accounts receivable handled? It’s usually better to borrow some extra working capital and let the seller keep the receivables — many dentists borrow three to four weeks of collections as working capital, with a time limit on collection and a designated staff member tracking it.

9. Review the seller details. Look at the seller’s restrictive covenant — to be enforceable it must be reasonable (your attorney will advise). Understand why the seller is leaving and their future intent: will they stay awhile, and how will they be compensated? It’s common for a seller to be paid a bit better than an associate since they’re also helping transfer patients to you. Also work out how restoration redos will be handled once the seller leaves.

10. Agree on the letter to patients. Approve the seller’s letter to existing patients explaining the transition — essentially a letter of recommendation for you. Patients are typically attached to a practice; if the seller recommends you, that’s usually enough, since people are busy and this removes a decision for them. Keep providing good service and most patients will stay (there are always exceptions, like the seller’s college roommate who drives seventy miles). It helps if most of the same friendly staff remain to welcome them.

11. Establish your new business entity. Have your accountant and attorney help set it up — also a good time to look into business and property insurance.

12. Set up an accounting process. Establish a bank account, payroll service, and bill-paying software. (I like ADP for payroll and have had a good experience with QuickBooks Online — cloud-based, with downloadable expense reports for monitoring your ratios anytime. Your CPA should weigh in on this decision.)

Next up: in Part 6, advanced tips on reading production reports, hiring and keeping great staff, negotiating with the cap rate — and my own (occasionally chaotic) story of buying my first practice.