Buying or selling a practice? Avoid these 3 pitfalls

2015 12 22 21 23 38 81 Croft Dan 200

The decision to purchase or sell a dental practice not only shapes your professional life, but has impacts to your personal life as well. Buying a practice as a young professional and juggling student loan debt can be daunting, while dentists selling out at retirement want to ensure they get top value for their practice to help fund a nest egg. Proper planning, preparation, and execution are essential to ensure a successful sale and transition to avoid delays or interruptions in the process and allow you -- or your successor -- to focus on patient care.

Here are the top three pitfalls to avoid during when purchasing a dental practice:

1. Not getting an accurate practice appraisal of fair market value

Dan Croft is head of the Healthcare Practice Solutions Group at TD Bank.Dan Croft is head of the Healthcare Practice Solutions Group at TD Bank.

When buying or selling a practice, having an accurate picture of its fair market value (FMV) is essential. Fair market value is not just tied to a percentage of gross annual revenues, but involves factors such as practice location, marketability, net income margins, number of active patient records, number of new patients monthly, and collection sources.

Dentists seeking an appraisal should hire a qualified dental transition consultant specialist to conduct a detailed practice evaluation. A general business appraiser or personal advisor to physicians will lack proper dental training and practice sales experience to provide an accurate and specialized dental assessment. An industry expert dental appraiser will know what specific factors influence practice value and use their local sales market knowledge to reflect FMV.

2. Lacking a clear picture of cash flow or a transition plan

Like any business, a practice needs to show a clear picture of its income, debt, and assets when seeking any type of financing. A practice's cash flow is one of the most important analytical tools that certified transition analysts, banks, and certified public accountants (CPAs) use to measure a practice's ability to repay the business' debt, feasibility to finance the practice purchase, and the compensation needed by the buyer to support his or her lifestyle and personal financial needs.

In addition, dentists need to create a realistic transition plan for what will occur after the sale. An effective "future state" plan that accounts for all providers and their production levels and also financial projections is critical to validating the practice's capability to produce adequate revenues, maintain sufficient cash flow, and cover debts.

Consider if the seller will stay on in the practice as an associate and for how long, how much will he or she produce, and what will be the dentist's compensation, as all these decisions will impact cash flow, especially if the practice previously did not carry associates or a partner. Often the cash flow needed to underwrite financing dictates that the seller or associates will be limited to part-time hours to meet the global debt service coverage ratio required to obtain funding. A future state analysis may also account for potential rent increases or changes in the seller's discretionary income, as lenders can take those adjustments into consideration when determining practice acquisition lending limits.

3. Misrepresenting or not understanding production levels

Potential practice buyers, associates, and hygiene production must be able to match or exceed historical practice revenues when considering a purchase. The buyer's work experience, clinical skills, procedures, and speed will all be evaluated by a lender to determine the new dentist's ability to replace the seller's production levels.

“Working just one day per week while searching for a practice to purchase sends the wrong message to the bank.”

Financial institutions assessing a practice purchase like to see that the buyer is working full time and establishing a track record of production levels and proven clinical skills. A potential lender often requests practice production reports or day sheets to validate production levels and procedure mix during the application process to ensure a buyer matches the seller's clinical profile.

Be aware that a lender takes into account your ability to perform and perceived commitment to making the practice a successful business. Working just one day per week while searching for a practice to purchase sends the wrong message to the bank and often limits your ability to obtain financing for your dream dental practice, because you may not have the production history or income levels to support this type of practice financing.

Many dentists will purchase or sell a practice just once during their career, so it is imperative to work with professional advisors who understand the marketplace and the dental industry when making such a major investment. Through comprehensive due diligence, quantitative and qualitative analysis of the practice, and a partnership with an expert in the field, dentists can feel confident in their transaction and ensure a successful transition for both the buyer and seller.

Dan Croft is the head of the Healthcare Practice Solutions Group at TD Bank.

Disclaimer: The comments in this article are not meant to be taken as financial advice. The author and recommend that you always consult with your financial planner before making any significant changes in your financial situation.

The comments and observations expressed herein do not necessarily reflect the opinions of, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.

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