Let's Buy a Dental Practice

[suarez 7]

Hey Talon, I got a few questions

1) If you are interested in purchasing an existing practice in an area that already has a supply of dentists, what are some big things you should look for in order to determine if that practice is financially worth buying?

2) What are the key differences in buying a practice through the seller only vs. through a broker?

3) If a dentist wants to scale back his hours or work days, is there a risk of losing a number of patients because of that?

Thanks for your input, again.

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[Talondriver]

Bigger is generally better. Smaller practices generally don't generate adequate new patient flow through referrals and don't generate enough cash to invest in advertising.

Get the Active Patient count. Dentrix and other software will show Active Patients, but all patients are "active" until inactivated. You want to know how many patients have been in the practice in the last 24 months. Run a Last Visit report using the last 24 months as the last visit window. Don't print the report, it will be a long list of names. Send it to preview and go to the last page. There will be a number at the bottom showing how many records are in the list.

It takes 300 active patients to fill a doctor-day each week. One dr working 4 days is 4 doctor-days, so you would need a minimum of 1200 Active Patients to keep that dr busy. That Active Patient count will tell you alot more too. A practice should have average potential of $500-800/Active Patient/year. So a practice with 2000 Active Patients has average potential of $1M to $1.6M. Doing that analysis will tell you if the practice is currently underperforming. If the owner doesn't do endo and you do, you can expect to add 8-10% to total collections by not referring out endo.

DIY sellers are only going to tell you what's good about their practice. They will insist their attorney writes the contracts. Your attorney will change them. This will go back and forth and the deal may die or the contracts may not protect you. Go to aftco.net and look for an article on do it yourself sales.

Brokers can be about the same since most only represent the seller. At aftco.net there are articles about dual representation where your analyst represents both you and the seller and has a fiduciary responsibility to each party. Contracts are drafted to be fair and complete.

Not sure about your question 3. Is this before sale or after sale? Let me know and I'll answer.

Sorry about not being on line. I've had a couple very busy months. Great questions
Talon

 

[suarez 7]

Bigger is generally better. Smaller practices generally don't generate adequate new patient flow through referrals and don't generate enough cash to invest in advertising.

Get the Active Patient count. Dentrix and other software will show Active Patients, but all patients are "active" until inactivated. You want to know how many patients have been in the practice in the last 24 months. Run a Last Visit report using the last 24 months as the last visit window. Don't print the report, it will be a long list of names. Send it to preview and go to the last page. There will be a number at the bottom showing how many records are in the list.

It takes 300 active patients to fill a doctor-day each week. One dr working 4 days is 4 doctor-days, so you would need a minimum of 1200 Active Patients to keep that dr busy. That Active Patient count will tell you alot more too. A practice should have average potential of $500-800/Active Patient/year. So a practice with 2000 Active Patients has average potential of $1M to $1.6M. Doing that analysis will tell you if the practice is currently underperforming. If the owner doesn't do endo and you do, you can expect to add 8-10% to total collections by not referring out endo.

DIY sellers are only going to tell you what's good about their practice. They will insist their attorney writes the contracts. Your attorney will change them. This will go back and forth and the deal may die or the contracts may not protect you. Go to aftco.net and look for an article on do it yourself sales.

Brokers can be about the same since most only represent the seller. At aftco.net there are articles about dual representation where your analyst represents both you and the seller and has a fiduciary responsibility to each party. Contracts are drafted to be fair and complete.

Not sure about your question 3. Is this before sale or after sale? Let me know and I'll answer.

Sorry about not being on line. I've had a couple very busy months. Great questions
Talon

Thanks for your reply. Glad you're back.

You said an active patient should generate between $500-800/yr, are we talking in a FFS practice, or a PPO-insurance patient? I'd imagine this would change things. Since FFS-only practices are hard to find nowadays because of the economy, are there any considerations or "red flags" when a dentist is looking to buy an insurance-driven practice (non-Medicaid)?
And my third question was just a generalization (nothing to do with transitions). If a middle-aged doc or retiring doc wants to cut back his work days, is there a risk of losing some of his patient base?

Thanks again

 

[Talondriver]

Thanks for your reply. Glad you're back.

You said an active patient should generate between $500-800/yr, are we talking in a FFS practice, or a PPO-insurance patient? I'd imagine this would change things. Since FFS-only practices are hard to find nowadays because of the economy, are there any considerations or "red flags" when a dentist is looking to buy an insurance-driven practice (non-Medicaid)?
And my third question was just a generalization (nothing to do with transitions). If a middle-aged doc or retiring doc wants to cut back his work days, is there a risk of losing some of his patient base?

Thanks again

FFS would be toward the $800 number and PPO mix somewhere in between.

As far as a middle aged doc slowing down: Generally speaking, they just tire of doing procedures. So they don't diagnose what can wait and only diagnose what they want to do now. So the patients are all still there, and the work is all still there. He does what he is motivated to do and handles the emergencies that arise from the work he's left "undiagnosed". When you consider that, what do you think about when you are looking at a practice where the seller is 65 and the practice collections are trending down over the last 3 years?

You are probably thinking the practice is dying and not worth anything. If you were buying a warehouse business, which would be more attractive? An empty warehouse or a full one? I expect it would make a difference if the produce were salable, but let's assume there is a demand for what's on the shelves of this "warehouse". I'm hoping you would see there is more value in the full warehouse because you wouldn't need to pay to get the product available to create your income. A practice where the patient are still there (active patient count) and the work has not been done (lower collections = product on the warehouse shelves) has more value.

It's important to take a hard look at the hygiene recare program. Hygiene capacity is VERY important. Many docs think their hygiene program is great because it's full. If a large practice had one hygienist working one day (1 hygiene day) and it was full, would that be a great hygiene program? Here's the analysis, it's easy: 70% of active patients should be in recare. Those patients need two hygiene appointments per year. New patients need 1.5 appointments per year (Jan-Jun need 2, Jul-Dec need 1).

So 70% X Active Patient count X 2 plus Annual New Patients X 1.5 = Number of annual hygiene appointments needed.

Annual hygiene appointments available: 50 weeks X hygiene days per week (2 hygienists working 3 days is 6 hygiene days) X number appointment in a hygiene day (normally 8-10) = total number of hygiene appointments available in a year.

Compare availability( capacity) to the demand. Most practices do not have enough capacity. Thus each new patient pushes out an active patient. Staff is not motivated to call the patient who've not been in and the doc is not motivated since the schedule is full. AFter 18 months the ADA says that patients no longer sees you as their dentist. You paid some one advertising dollars to bring in a new patient just to push an active patient out the back door. Make sense to you? Of course not.

Bottom lines:
Older docs slowing down generally makes a practice a better growth opportunity.
Active patient counts can tell you what the potential is
Hygiene capacity must be evaluated to determine further opportunities

It's not rocket science, you just need to think this through and work with someone who understands what you are looking at.

 

[suarez 7]

Thanks for that reply

I am curious to know your insight regarding the rising corporatization of dentistry. How badly will it affect solo practitioners? Are the days of solo practicing becoming less and less? How should dentists handle fellow corporate offices nearby?

 

[AAY]

I attended a CE course called something like "how to build your dream dental practice" last June. The speaker was extremely good. They said something along the lines of a majority of patients do not switch dentists because of price, they change dentists if they feel no connection with the dentist. Corporate dentistry or private practice can both fall into this. I suppose I don't really care which Starbucks I go to but I am picky about which mom and pop coffee shop I go to.

 

[Talondriver]

A agree about your association between loyalty and the dentist. There is a way to own multiple practices, branded individually, and profiting from "entrepreneurial dentistry". Go back to my remarks beginning on Feb 19 and you'll find a buildup to an explanation of one way to attack ownership of multiple practices we call Entrepreneurial Dentistry.

As for the "death of the solo practice", I don't believe any dentist should want to own a solo practice. When you are solo you lose money when you go on vacation. If you are sick, you have to hire a locum tenon to fill in. Solo ownership if fine, but a two dentist practice generates more income and keeps the practice going when you are sick or on vacation. It also spreads your fixed overhead costs over more patients, and more days and thus improves your bottom line.

How does this schedule sound: You work Thurs, Fri, Sat, Mon, Tues, Wed. Your associate works the next Thurs thru Wed while you are off. If you draw this schedule out on your calendar, you'll find yourself with 2 weeks off every month. It's not difficult finding a quality associate to work this schedule. An alternative is to schedule a 12 hour Wed that is split 6 and 6 and the practice is not open on Saturday.

So how do you get to a two dentist practice? You can purchase a larger one dentist existing practice that has ample active patients. If the seller wants to stay on as your associate for a year or two or more, great. Now you have a two dentist practice and you can run the schedule above. When the seller has had enough, replace him/her with an associate or a partner. Now, depending on the physical size of the practice, you may have a hub for entrepreneurial dentistry.

Another way to have a two dentist practice is to buy a solo practice and when you are ready (9+months), buy another practice and merge it into your facility. The seller comes along for 6-12 months to get the patients to the new location. Here's how the money works on a merger. The expenses that come along with the practice are: lab 8%, dental supplies 6%, office supplies 1%, staff salaries 22% (some staff might be shaved off eventually, but keep them all at the start), seller compensation 28% (pay him 40% of his hands on work which is only applied to the 70% patient collections that are non-hygiene, so 40% x 70% = 28%). So 8+6+1+22+28=65%. Now we need to add 10% for your debt payments to buy the practice for a total cost of 75%. So let's say you buy a modest practice collecting $400k for about $300k. The new staff and dentist do all the work on the "new" patients and you make a 25% profit on gross collections. Would you want to have a larger two dentist practice, the freedom to have 26 weeks off each year (with the schedule above) and make an additional $100k with no added work? The banks love these mergers as they are cash cows.

A couple thoughts about competing with a nearby corporate outfit: Try a curb A frame sign with something like "Our patients are pampered, not herded". Also, encourage your patients to refer their friends with a $25 credit on their next visit after a referral comes in. Make some referral business cards to give your patients. There will be a place for them to write in their name and when their friend brings it in, you put a credit on the referors account. That's marketing you only pay for when it works.

 

[Talondriver]

Demographics and dentists.

Dental schools are graduating about 7500 dentists per year in the US, while about 3500 dentists are retiring each year. At the rate our population is increasing (.7%), we need about 1460 added dentists each year for population growth. That means that our schools are producing about 2500 more dentists each year than retirement and growth would demand.

Why is this important to know? While that is the case for the US as a whole, there are both areas over-saturated with dentists and areas under-served. I suggest you do a little research before you settle somewhere to find out what you are getting into. Start ups are getting more difficult and thus more stressful. There are great opportunities to have a great lifestyle at an above average dental income, especially in rural areas. Do your homework, think outside the box, and seek some competent help.

 

[Shunwei]

Demographics and dentists.

Dental schools are graduating about 7500 dentists per year in the US, while about 3500 dentists are retiring each year. At the rate our population is increasing (.7%), we need about 1460 added dentists each year for population growth. That means that our schools are producing about 2500 more dentists each year than retirement and growth would demand.

Why is this important to know? While that is the case for the US as a whole, there are both areas over-saturated with dentists and areas under-served. I suggest you do a little research before you settle somewhere to find out what you are getting into. Start ups are getting more difficult and thus more stressful. There are great opportunities to have a great lifestyle at an above average dental income, especially in rural areas. Do your homework, think outside the box, and seek some competent help.

 

[Shunwei]

7500 new dentists a year? Are you sure it's that high? Last I heard before the new schools opened up it was more around 4400 per year, and even taking into account the new programs it's gotta be around 4800 or below 5000. I do agree that there will be saturation as more and more new grads come about, as well as the rural (or semi-rural) idea.

 

[Katzen7]

Shunwei is correct. Per the ADA, the graduating class of 2012 included 4,273 graduates in dental-related activities and 268 graduates in non-dental related activities. A FAR cry from 7500....

Source: American Dental Association, Health Policy Resources Center, 2012-13 Survey of Dental Education

 

[Talondriver]

I believe an apology is warranted. I took the 7500 number from a briefing I received from a national banking institution without validation. You are correct. According to the 2010-2011 report I just found, there were 4973 4th yr dental students enrolled. I stand corrected.

 

[IdahoDoc]

TalonDriver,

I know there are many finical benefits of buying a practice and being the sole owner, and these benefits don't translate to the associates. Is there a way to structure a partnership to get some if not all the benefits of being a solo owner? If so then what is the best way about setting that up, assuming your are going from a solo owner to a partner?

 

[Talondriver]

Having a partner can be great. Share the responsibility, share the decisions, share the work, cover for vacations, create a great schedule. All those are great reasons to have a partner. There are too many ways to get into a partnership to cover here. If you can imagine it, it can and has been done.

Here's the important part. Make sure you determine how it comes apart before you get in. Have multiple exit strategies in your written agreement because many partnerships do come apart for a variety of reasons. Younger buys out senior, one wants to relocate, you don't get along, you don't agree on growth, one of you disabled or dead, etc.

Put together a business plan in advance. Detail who has what responsibilities. Detail a budget for marketing (it can be in % if you've not found the right practice yet). Figure out how you will handle imbalances in CE, auto, travel, meals. What if you disagree on equipment? You need to account for each of you getting paid for your dentistry, paying all the bills, paying the debt service, and then splitting profits monthly or quarterly.

The SPOUSES. I put that in caps because you must all love being together. You must trust each other. If your spouses do not get along in advance, don't get into it. They will not learn to get along. Do not have either spouse working in the practice. Do not go into partnership with a dr of the other sex. It will cause pressure at home eventually.

Make sure you and partner have common growth strategy. I.E. will you be multiple practice owners? What if one of you wants multiple practices after a time, and the other does not?

Now that I've told you about all the land mines, keep in mind that lots of these partnerships work great. If you go in expecting trouble and address the problems in advance in the agreement, it can be great even if it comes apart since you'll have directions on how to take it apart. Imagine working Thurs, Fri, Sat, Mon, Tues, Wed and then not coming back until the Thursday a week later. Two weeks off every month. Think of the ball games, recitals, plays, teacher meetings, etc you will be able to attend. If you are home schooling, you can teach all the science and math for instance. Partnership is a goal worth striving for. Don't let me scare you away from it. It can be really great.

 

[Talondriver]

Negotiating the purchase of a dental practice:

80% of what you are investing in with the purchase of a dental practice is the goodwill between the dentist and the staff, and between the dentist and staff and the patients. That is a fairly fragile commodity and it is in your very best interest to ensure that the goodwill is fully transferred to you on and after the sale. So how do we make sure the seller makes his or her best efforts to pass on that goodwill?

The absolute best way to make sure your seller is "all in" with respect to making you a successful successor is to respect the seller and what the seller has invested years of effort to build. You do that by praising the seller and by giving the seller everything requested with respect to selling amount and terms. Now I'm sure there are some of you out there thinking I'm nuts. Others are thinking no one pays the "asking price" for any kind of business.

When you buy a home or a car, you don't have a post-sale relationship with that seller. Negotiate whatever and however you like. Walk away if you don't get your terms, there are many other homes and cars available. No problem. When you invest in a dental practice, you do have a post sale relationship, even if the seller is a "walk-away". That seller is close to the staff, thus close to the patients. If the seller believes "he's" been taken advantage of, "he" can and may "get even" by covertly saying something to the staff and/or patients, or even the community. Your friends and family will tell you to negotiate price with the seller. They do not understand the potential impact of negotiating. At this point, you are beginning to understand.

Here's what does work: Evaluate the practice as it is presented. Determine if it is the right opportunity as it is offered, not at some lower price just for the sake of getting a lower price. Respect the seller with every comment, even if you think the equipment is old and "he's" not running the practice the way you would. If it's not the right practice for you as offered, look for another opportunity. Don't disrespect the seller by offering less or talking down the practice.

Let's look at the impact of actually paying less. Since most of you don't have $500k under the sofa, you will need to finance the purchase. You will be able to borrow 100% of the purchase price plus working capital of another 10% or so. Let's say your loan is $500k($460k for practice and $40k for working capital). At todays rate of about 5.25% and 15 years, your monthly payment is $4020. WOW, that's huge isn't it? Well it's not. Your monthly lab bill on a practice that size is about $4600 (9% of gross collections is normal). So your debt service is lower than your lab bill. Did you know that?

So what happens if you convince the seller to take 10% less than the selling price? Your loan is now $3650/month, or $370 less per month, $4440 less per year. In exchange for that "discount" you have put 80% of the value of your practice at risk by showing a level of disrespect to the seller. Will the seller be "all in" to ensure you benefit from all of the goodwill? Maybe, maybe not. Why take that risk for an amount that is insignificant with respect to your total monthly expenses.

Now if you had two identical practices available at different prices, you would most likely select the one offered at the lower investment. That makes sense. However, there are never two identical practices available. There are always differences.

So if you are making say $150k at your associate position, and you are looking at a great (in your opinion) practice opportunity that cash flows $250k after all expenses including your bank payment, why would you want to put that opportunity at risk by negotiating price?

I know I didn't win all of you over to the bright side, but I am hopeful that many of you are beginning to think about a practice transition in a little different light.

 

[suarez 7]

Excellent point. I've always had the impression that you negotiate everything in life: cars, homes, etc.

How do you determine if a practice is priced appropriately? If you and your adviser determine that a practice for sale is grossly overpriced and clearly the owner is greedy, is it just better to walk away and try to find another similar practice?

Also you mention that if your loan is $500k for the practice, it comes to $4020/mo or $48,240 a year. Is it safe to say that if the owner dentist working in that office was making $200k/yr before taxes, your salary after taking that practice will be $151,760/yr before tax? If that's the case, why bother purchasing a practice in the first place? You mention that you could be making $150k as an associate or group practice, so why go through all the trouble and liability if the salary is similar?

 

[Talondriver]

The fair market value of a practice will be determined by some of the professionals you work with. Others will just let the seller set a price without an appraisal. A normal range for fair market values is 50-55% for rural, 60-75% for metro, and over 75% is some high demand areas. Most of the practices you will look at should be 69-75% of a years collections. If the price is higher than that, be sure there are other growth factors in your favor.

If you've read my blogs, you should know an active patient is any person in the practice in the last 24 months. It takes 300 active patients to fill one doctor day per week (so 1500 patients would keep a dr busy 5 days/wk). Take total collections divided by active patients. Average potential is $500-800/yr/active patient. If the practice is currently collecting $250 on average, the practice has the potential to grow 100-200%. If the seller is referring out endo, and you do endo, add another 8% to expected collections.

The dr who is making $200k before tax only has a practice collecting $400-$520k. It's a smaller practice and you cannot expect to make more than about $150k until you grow it. Hopefully, you wouldn't buy a practice that size unless you knew you could grow it (previous para). Each added $100k collections has only 15% expenses (lab, dental and office supplies), so adding collections kicks your bottom line and adds about $70k equity. Your $150k associate position will not add any equity if you do $100k more and you will only make $30k on that $100k. If you are balking at ownership, don't buy.

Yes, if you do find a practice that is significantly overpriced, it is better to walk away than mess with a seller who will most likely be unhappy with any outcome. He is looking for the needle in your dental haystack. He may find the buyer that just has to have that practice and is willing to pay that price. Remember though, that a fairly priced practice monthly payment is about the same as your lab bill.

Great questions.

 

[tbond5]

No one likes a double poster

 

[Shunwei]

Having a partner can be great. Share the responsibility, share the decisions, share the work, cover for vacations, create a great schedule. All those are great reasons to have a partner. There are too many ways to get into a partnership to cover here. If you can imagine it, it can and has been done.

Here's the important part. Make sure you determine how it comes apart before you get in. Have multiple exit strategies in your written agreement because many partnerships do come apart for a variety of reasons. Younger buys out senior, one wants to relocate, you don't get along, you don't agree on growth, one of you disabled or dead, etc.

Put together a business plan in advance. Detail who has what responsibilities. Detail a budget for marketing (it can be in % if you've not found the right practice yet). Figure out how you will handle imbalances in CE, auto, travel, meals. What if you disagree on equipment? You need to account for each of you getting paid for your dentistry, paying all the bills, paying the debt service, and then splitting profits monthly or quarterly.

The SPOUSES. I put that in caps because you must all love being together. You must trust each other. If your spouses do not get along in advance, don't get into it. They will not learn to get along. Do not have either spouse working in the practice. Do not go into partnership with a dr of the other sex. It will cause pressure at home eventually.

Make sure you and partner have common growth strategy. I.E. will you be multiple practice owners? What if one of you wants multiple practices after a time, and the other does not?

Now that I've told you about all the land mines, keep in mind that lots of these partnerships work great. If you go in expecting trouble and address the problems in advance in the agreement, it can be great even if it comes apart since you'll have directions on how to take it apart. Imagine working Thurs, Fri, Sat, Mon, Tues, Wed and then not coming back until the Thursday a week later. Two weeks off every month. Think of the ball games, recitals, plays, teacher meetings, etc you will be able to attend. If you are home schooling, you can teach all the science and math for instance. Partnership is a goal worth striving for. Don't let me scare you away from it. It can be really great.

Just to present a more balanced view here, partnerships can be very counterproductive as well. Since you share everything as you say, how do you fairly delegate responsibilities, pt flow, everything? You can basically forget about 50-50, it will almost always be one person pulling the train with the other guy(s) sitting on it. The only question is whether the person doing the majority of the work would be happy doing so continuously. If not (and at some point in time everyone will get tired of it), partnerships can end very badly. Do you buy out the other person, or can you walk away from what you helped to build? In my opinion, the only partnerships that can stand the test of time are those in which one partner is a 'silent' one. When you have multiple people trying to come to a consensus making common decisions, it's always a pain.

Yes, being a sole proprietor may lose a few days on vacations and not be able to lower the overhead beyond, say, 50%, but being able to get everything and not having to deal with another persons vagaries and idiosyncrasies is priceless.

 

[Talondriver]

Just to present a more balanced view here, partnerships can be very counterproductive as well. Since you share everything as you say, how do you fairly delegate responsibilities, pt flow, everything? You can basically forget about 50-50, it will almost always be one person pulling the train with the other guy(s) sitting on it. The only question is whether the person doing the majority of the work would be happy doing so continuously. If not (and at some point in time everyone will get tired of it), partnerships can end very badly. Do you buy out the other person, or can you walk away from what you helped to build? In my opinion, the only partnerships that can stand the test of time are those in which one partner is a 'silent' one. When you have multiple people trying to come to a consensus making common decisions, it's always a pain.

Yes, being a sole proprietor may lose a few days on vacations and not be able to lower the overhead beyond, say, 50%, but being able to get everything and not having to deal with another persons vagaries and idiosyncrasies is priceless.

To each his own. If you believe a partnership will be bad, it will probably be bad and you shouldn't go that route. Many partnerships work very well.

Each of you should get paid a % of your own work, and that includes management. If one partner does all the management, there should be compensation. Since each of you is paid for what you do, an off balance partnership will result in off balance compensation in favor of the "working" partner. Yes profits are split, but both partners carry financial risk.

Your agreement should be written so you know what the options are in taking it apart.

The bottom line is that each of us is different and we will not all fit into the same business structure. Find what suits you best.

 

[Shunwei]

To each his own. If you believe a partnership will be bad, it will probably be bad and you shouldn't go that route. Many partnerships work very well.

Each of you should get paid a % of your own work, and that includes management. If one partner does all the management, there should be compensation. Since each of you is paid for what you do, an off balance partnership will result in off balance compensation in favor of the "working" partner. Yes profits are split, but both partners carry financial risk.

Your agreement should be written so you know what the options are in taking it apart.

The bottom line is that each of us is different and we will not all fit into the same business structure. Find what suits you best.

I am just offering a balanced viewpoint, because your posts make it seem like partnerships is the best thing since sliced bread. It's not. In fact, I dare say that the great majority of partnerships that either I have participated in or observed others do almost invariably fail, usualy by years 5-7. Sure, you can write in the profit sharing and responsibilities into a contract, but you seem to be totally discounting the vagaries of human nature. Having someone do something on paper doesn't mean that they will necessarily do it well or do it on time. What if your partner is a procrastinator (and don't we all know some of these people) and trips up on getting certain things done on time, thereby jeopardizing the operations of the whole office. Do you criticize him and if you do, would he take it well and get his act together? Or do you jump in and do his job for him? This is just the tip of the iceberg.

And even the profit sharing is open to turmoil. Suppose you are really good at what you do and produce 80k/month, but your partner is not so good and produces only 40k/month. You don't think that over time, he might start to resent and get jealous of your success, or that you might start to resent the fact that he is subpar but still entitled to the profit sharing (which you are pulling the load) as written out in the contract?

And decision-making will always be a tug-of-war and a game of compromises. Suppose you want to run a marketing campaign and he wants a better website. Which one do you go to and if the end result is not satisfactory to either party, there will always be fingers pointing to the other guy. Repeat this for almost every decision and the strain can pull any partnership apart.

Now, it's easy to say "well you got to find the right person," but many times you don't really see the flaws in another person until after the fact or if you are blinded by your friendship with another person (this is why I am an opponent of mixing personal friendship with business). Truth is a business partnership is not much different than marriage, and why do you think the divorce rate is 50% with a significant % of the non-divorced in private agony?

In short, the only partnerships I can envision is either one party being a completely 'silent' one, or if there is an absolute need for a partner, like capital or technical expertise. If you are only getting a partner because you are afraid to venture out on your own or to just 'share' responsibilities, then I'd say it's inviting trouble down the line because human nature is what it is. You can't discount it.

 

[Ferneezy]

In short, the only partnerships I can envision is either one party being a completely 'silent' one, or if there is an absolute need for a partner, like capital or technical expertise.

to this end, would you advocate a partnership between a GP and specialist (such as GP/OMFS, or GP/ortho) over two or more practitioners of the same flavor?

 

[Shunwei]

to this end, would you advocate a partnership between a GP and specialist (such as GP/OMFS, or GP/ortho) over two or more practitioners of the same flavor?

I still wouldn't because if a specialist gets partnered with a GP my feeling is that it is bad for the specliast because you can count on other GPs as being less willing to refer patients over. If you were a GP, would you refer your pt to a specialist whose partner is another GP right down the hallway? What's to stop him from simply stealing your pt or have the pt jump ship? It's much easier to just hire a specliast than partnering with them. My dislike for partnerships has less to do with any particular technicalities than the fact that human nature is difficult to deal with already, so to permanently link yourself with someone else professionally is very, very risky from my experience. You just never know what people will do. I think Talondriver gives good overall info on practice purchasing but I think it would be very dangerous to simply glorify partnerships.

 

[bsp1013]

Monthly lab bill of $4600?!?

I would just buy a practice with cash if I was doing 40+ crowns/month.

 

[briansle]

Partnerships are risky because they require putting trust in another human being. Usually this mistrust is managed by hiring a third impartial party to mediate the finances or disputes, but obviously this weakens the partnership because more power is given to the third party than the original partners. This risk will be eliminated with the advent of decentralized autonomous organizations and smart contracts. There will be programs that you can code to tailor the partnership you desire, and will be executed autonomously. This will eliminate the need for third party oversight and execute trust between partners based on algorithms and code rather than human discretion. Read Vitalik Buterin's White Paper on github. I predict the ethereum platform and others like will be really change the way dentistry does business in the near future.

 

[Talondriver]

If you want to eliminate risk, just associate for your career or stay in the military or public dentistry. All of those have risks, just different risks at different levels. The biggest risk I see with those choices is that you could fail to reach financial security. But that's okay if you know and accept the financial limitations of those choices. As a dentist, you should be able to make an above average income no matter how you choose to practice dentistry. Reaching financial security mainly depends on living a lifestyle that costs less than what you make and putting the rest away for the future.

With respect to our discussion of partnerships, there are both good ones and bad ones and I would accept that every partnership has good and bad times along the way. If you like the idea of a two dentist practice but fear the potential problems with a partnership, just hire an associate instead of taking on a partner. There will be no split of profit, but you will most likely have turnover. Some dentists never want to own and they can make great associates in your practice. Be sure to have a strong associate agreement in place with a restrictive covenant that kicks in at the six month point. I would suggest a restriction of 5 miles for 3 years and non solicitation/treatment of your patients at any distance with a per patient penalty.

A two doctor practice spreads the fixed overhead over more patients and thus increases profits. It keeps the practice open when you are on vacation, making your vacation a much more pleasant getaway. You should make money on every patient that sees your hygienist, and you should make a profit on each visit to your associate also.

Let's review the expenses associated with added dentistry in your practice:
Lab, dental and office supplies: 15%
Staff, non dentist: 22%
Associate at 30% of collections: 21% (remember you pay associate only for "hands on" which is 70% of that patients total collections, 30% are from hygiene. So 30%x70%=21%)
Total cost of added dentistry: 15+22+21=58%
Profit from added dentistry: 42% none of it from your hands

I've posted some ways to get into a two doctor practice, but here's a brief review:
Buy a practice where the seller is going to stay as your associate and then replace him/her at retirement. Make sure there are enough patients for all the dentistry the two of you want to do.
Buy a one doctor practice, and after 9+ months, buy and merge in another practice. Bring that seller and staff along for one year. The staff will attrit out to a needed level and the doctor could stay long term or retire.
Buy a two doctor practice from the beginning, keeping one or none after the sale.

Each of these will get you to the profitability and lifestyle a two doctor practice allows without a partner.

Each of you must decide what you like and dislike and examine your motivations for those feelings. Then you gather the facts and make decisions about how you choose to practice. Certainly don't head down some road that you dislike just because someone like me blogged that's the way it should be. Make your own decisions after gathering the facts as you see them. There are no limits to the ways to practice the business of dentistry. The intelligent and prepared entry into the ownership of a practice should provide you with financial rewards throughout your lifetime.

 

[ss4hitter]

Talon, going back to the model of a Hub along with AB,AC,AD practices etc. I understand the benefit that B gets from having A on as a partner, but should B feel shortchanged at all? I mean, it sounds like B will be at AB corp doing all the work, while A simply takes in 50% of the profit while not doing much at AB corp. From B's point of view, why would he want to partner with A when he will hardly be at practice AB? I guess I see how B would benefit, since he may not have the ability to buy AB and may need the help of A financially, but it just seems like A is taking advantage of B in this situation. From A's point of view, will it be tough to find B's who are willing to partner 50/50 with someone who is not planning to do much at the practice?

 

[Talondriver]

Good question. B is probably only 6-9 months out of school when B and A buy AB practice. The banks won't generally loan until the 2 year point unless there is high production as an associate.

So here are benefits to B:
Exposure to hub operations and how a practice should be run.
Early opportunity for ownership where income should be higher than associate pay and personal work benefits B's own equity position
Benefit from A's mentor ship and the hub as a training ground for staff
Generally the opportunity to buy out A as soon as the bank will lend the funds to B

It's not for everyone. But if you like the benefits above, it could be the right move right out of school.

I'm working with a B now who will be 50% owner, coming straight out of school, of a practice collecting $1.7M. He's got an exceptional A, but it can happen.

 

[tbond5]

Man I'm tempted to buy a whole fleet of those bad boys

 

[thirstyscholar]

Vigilantly watch your social media presence, especially among those scoundrels at Yelp

 

[Talondriver]

If you are 2+ years out of school and don't own a practice, why not? What's holding you back? I realize that there are dentists who do not wish to own. Many are women who want the flexibility to have children and cut back significantly while bringing up children. I am all in favor of that. But those of you who are delaying taking the leap into ownership, I'd like to know your reasons.

 

[suarez 7]

If you are 2+ years out of school and don't own a practice, why not? What's holding you back? I realize that there are dentists who do not wish to own. Many are women who want the flexibility to have children and cut back significantly while bringing up children. I am all in favor of that. But those of you who are delaying taking the leap into ownership, I'd like to know your reasons.

Perhaps 2 years out of school is not enough to learn many of the popular procedures done nowadays, i.e. implants, invisalign, cosmetics, etc, and want to build a good clinical foundation so one doesn't have to constantly refer out.

 

[Shunwei]

Perhaps 2 years out of school is not enough to learn many of the popular procedures done nowadays, i.e. implants, invisalign, cosmetics, etc, and want to build a good clinical foundation so one doesn't have to constantly refer out.

Actually two years should be enough to build a solid clinical foundation out of school. The procedures you mention are considered more of the elective types and not too many patients are will choose to have them, and in any case you can slowly expand your repertoire with CE classes. As for referring out, that has to do mainly with your confidence level and case selection to gain experience.

 

[Talondriver]

Great answer Shunwei. I agree completely. Generally speaking you will make $80-$150k more per year owning than associating early in ownership. That will pay for a great deal of hands on CE to add keys to your key ring.

 

[thirstyscholar]

Own a few procedures Market yourself wisely.

 

[wb1]

If you are 2+ years out of school and don't own a practice, why not? What's holding you back? I realize that there are dentists who do not wish to own. Many are women who want the flexibility to have children and cut back significantly while bringing up children. I am all in favor of that. But those of you who are delaying taking the leap into ownership, I'd like to know your reasons.

You do the valuation as well. Your posts are interesting. Thanks for sharing!

 

[In transition]

Can we talk a bit about after you have bought a practice?
Ok , so agreed on practice to buy and working on financing, how long after $ comes through can you anticipated taking over a practice. Previous DDS is anxious to be DONE, and wants a super short transition of a couple of weeks and wants to be GONE already. I am wondering the logistics of getting everything done that needs to be done before patients can be seen by new DDS. New Grad , taking boards, so could be licensed by June 1, .. Old DDS thinks New DDS can take over July 1, wondering if that is even possible?
Wondering how long it takes to get DEA license?
Does the new DDS have to contact dental insurance companies with information and be approved/cleared before can actually send in a claim For FFS dental insurance claims
?
Should you keep the phone under the OLD DDS name for awhile, so caller ID will show as a name the patients know?
How should staff answer phone, or say they are calling from when contacting patients?

Not using a broker or transition agent. Private sale.


Any recommendations ?

 

[Cold Front]

It would be great to have a thread that said "Let's build a practice". Most profitable dentists started from scratch, and mostly sell the practice to newbies who just want a turn-key office.

 

[Silent Cool]

Negotiating the purchase of a dental practice:

80% of what you are investing in with the purchase of a dental practice is the goodwill between the dentist and the staff, and between the dentist and staff and the patients. That is a fairly fragile commodity and it is in your very best interest to ensure that the goodwill is fully transferred to you on and after the sale. So how do we make sure the seller makes his or her best efforts to pass on that goodwill?

The absolute best way to make sure your seller is "all in" with respect to making you a successful successor is to respect the seller and what the seller has invested years of effort to build. You do that by praising the seller and by giving the seller everything requested with respect to selling amount and terms. Now I'm sure there are some of you out there thinking I'm nuts. Others are thinking no one pays the "asking price" for any kind of business.

When you buy a home or a car, you don't have a post-sale relationship with that seller. Negotiate whatever and however you like. Walk away if you don't get your terms, there are many other homes and cars available. No problem. When you invest in a dental practice, you do have a post sale relationship, even if the seller is a "walk-away". That seller is close to the staff, thus close to the patients. If the seller believes "he's" been taken advantage of, "he" can and may "get even" by covertly saying something to the staff and/or patients, or even the community. Your friends and family will tell you to negotiate price with the seller. They do not understand the potential impact of negotiating. At this point, you are beginning to understand.

Here's what does work: Evaluate the practice as it is presented. Determine if it is the right opportunity as it is offered, not at some lower price just for the sake of getting a lower price. Respect the seller with every comment, even if you think the equipment is old and "he's" not running the practice the way you would. If it's not the right practice for you as offered, look for another opportunity. Don't disrespect the seller by offering less or talking down the practice.

Let's look at the impact of actually paying less. Since most of you don't have $500k under the sofa, you will need to finance the purchase. You will be able to borrow 100% of the purchase price plus working capital of another 10% or so. Let's say your loan is $500k($460k for practice and $40k for working capital). At todays rate of about 5.25% and 15 years, your monthly payment is $4020. WOW, that's huge isn't it? Well it's not. Your monthly lab bill on a practice that size is about $4600 (9% of gross collections is normal). So your debt service is lower than your lab bill. Did you know that?

So what happens if you convince the seller to take 10% less than the selling price? Your loan is now $3650/month, or $370 less per month, $4440 less per year. In exchange for that "discount" you have put 80% of the value of your practice at risk by showing a level of disrespect to the seller. Will the seller be "all in" to ensure you benefit from all of the goodwill? Maybe, maybe not. Why take that risk for an amount that is insignificant with respect to your total monthly expenses.

Now if you had two identical practices available at different prices, you would most likely select the one offered at the lower investment. That makes sense. However, there are never two identical practices available. There are always differences.

So if you are making say $150k at your associate position, and you are looking at a great (in your opinion) practice opportunity that cash flows $250k after all expenses including your bank payment, why would you want to put that opportunity at risk by negotiating price?

I know I didn't win all of you over to the bright side, but I am hopeful that many of you are beginning to think about a practice transition in a little different light.

Talon,

Aren't practice loans typically 7 years?

 

[Faux]

Ever thought about writing a book? Obviously you're contributing to the community because you enjoy to, but theres nothing wrong with slapping all of this into a 100 page book and charging $10 for it. Seems like theres a book market for dental start ups.

 

[Cold Front]

Talon,

Aren't practice loans typically 7 years?

Bank of America has a product upto 20 years.

 

[Silent Cool]

Bank of America has a product upto 20 years.

Gotcha. Cold, for what period are your loans? What about those of most of your colleagues? What would you say is a typical interest rate? A friend of mine is looking for practices currently and I'm curious what your experience is.

thanx

 

[sed8nyank4u]

@Silent Cool I have not seen any deals at 7 years but a lot at 5, 10, and 15 years. Usually a five year rate will be the lowest but requires refi at the terms end.

 

[Silent Cool]

@Silent Cool I have not seen any deals at 7 years but a lot at 5, 10, and 15 years. Usually a five year rate will be the lowest but requires refi at the terms end.

OK, thanks. I've heard (somewhere on the grapevine) that the standard was 7 years for practice loans.

What is a typical interest rate for a 15-year loan? That seems like a much more reasonable loan period today given the absurd student loan balances that many graduates have.

thanx

 

[Cold Front]

Gotcha. Cold, for what period are your loans? What about those of most of your colleagues? What would you say is a typical interest rate? A friend of mine is looking for practices currently and I'm curious what your experience is.

thanx

5% for the 20 years. I had 3 different practice loans for all my 3 offices. WellsFargo at 8% for 10 yrs was the first as a new grad, PNC at 7% for 5 years, and Bank of America for my 3rd location and who took over the other loans and consolidated it all for 5% for 20 years. The consolidated monthly payment is about $3,000 a month for all 3 offices under 1 account. Each office pays it's share of about $1,000 towards the consolidated payment. The offices were all start-ups.

I don't think any lender offers anything under 6% rate these days. If they do, it would be for 5-7 year notes. You would be looking at 6%+ for 10+ years notes.

The best rates I have seen is for equipment financing only, not construction. EverBank is doing 3.4% (couple of months ago) for equipment financing upto $150k. Stay away from the so called non-dental healthcare financing banks, there are tons of them out there, some charge as high as 16% if you are desperate and don't have good credit for 10 years notes.

 

[Shunwei]

5% for the 20 years. I had 3 different practice loans for all my 3 offices. WellsFargo at 8% for 10 yrs was the first as a new grad, PNC at 7% for 5 years, and Bank of America for my 3rd location and who took over the other loans and consolidated it all for 5% for 20 years. The consolidated monthly payment is about $3,000 a month for all 3 offices under 1 account. Each office pays it's share of about $1,000 towards the consolidated payment. The offices were all start-ups.

I don't think any lender offers anything under 6% rate these days. If they do, it would be for 5-7 year notes. You would be looking at 6%+ for 10+ years notes.

No, not true. I got 4.9 % for 10 years from BoA. I had excellent credit and had East-West, Wells Fargo, and BoA all begging for me to sign. My plan is to pay off everything in 5 1/2.

 

[Silent Cool]

No, not true. I got 4.9 % for 10 years from BoA. I had excellent credit and had East-West, Wells Fargo, and BoA all begging for me to sign. My plan is to pay off everything in 5 1/2.

Shunwei,
How much was your practice? Also, when do you plan to buy a house?

 

[Shunwei]

I am

Shunwei,
How much was your practice? Also, when do you plan to buy a house?

I am not so eager to buy a house, even though mortgage rates are good right now. My plan is to pay off my loans as much as I can in a few years and evaluate at that time.

 

[Cold Front]

No, not true. I got 4.9 % for 10 years from BoA. I had excellent credit and had East-West, Wells Fargo, and BoA all begging for me to sign. My plan is to pay off everything in 5 1/2.

My information was based on 2012 and particular products my business needed. We are in 2014 now, so I guess if I was on the market today, the numbers might have gone up, unless banks are being more aggressive to dentists by lowering rates due to market climate. Was your 4.9% new project? Or buying existing office? Or just equipment? Mine was new construction, which is more risky than the other 2 - therefore slightly higher interest rate. Also, I started my first office right after I graduated... That's why they got me on the 8% rate, but now I'm down to 5% within 2 years. So its not apple to apple.

I too will no longer borrow any more debt from here on. At age 35, with 3 locations, married, 3 homes, I can't afford to put myself at more risk. I should pay everything off by age 40, all business and personal (tuition debt too). I might come back on these threads and talk about if all goes to plan by then.

You should not ignore buying a home, this maybe the last year or 2 before historic rates disappear for good. Of course is not just about rates, it's also about building asset. I bought 3 properties over last couple of years, 1 was foreclosed, the other 2 new. They are up in value about $100,000 between the 3 of them in 3 years, so I have more equity in them now than at the time of purchase. But why would you rent, considering its cheaper to carry a mortgage, plus the tax incentives a home-owner gets through the Feds? The only way I would rent is if I was single and saving the decision for marriage or completely have no confidence in living my city.

I suppose its all relative.

 

[tbond5]

My information was based on 2012 and particular products my business needed. We are in 2014 now, so I guess if I was on the market today, the numbers might have gone up, unless banks are being more aggressive to dentists by lowering rates due to market climate. Was your 4.9% new project? Or buying existing office? Or just equipment? Mine was new construction, which is more risky than the other 2 - therefore slightly higher interest rate. Also, I started my first office right after I graduated... That's why they got me on the 8% rate, but now I'm down to 5% within 2 years. So its not apple to apple.

I too will no longer borrow any more debt from here on. At age 35, with 3 locations, married, 3 homes, I can't afford to put myself at more risk. I should pay everything off by age 40, all business and personal (tuition debt too). I might come back on these threads and talk about if all goes to plan by then.

You should not ignore buying a home, this maybe the last year or 2 before historic rates disappear for good. Of course is not just about rates, it's also about building asset. I bought 3 properties over last couple of years, 1 was foreclosed, the other 2 new. They are up in value about $100,000 between the 3 of them in 3 years, so I have more equity in them now than at the time of purchase. But why would you rent, considering its cheaper to carry a mortgage, plus the tax incentives a home-owner gets through the Feds? The only way I would rent is if I was single and saving the decision for marriage or completely have no confidence in living my city.

I suppose its all relative.

I'm assuming you dont use all 3 homes. Do you rent those out?