Start or Buy A Dental Practice In California

How To Buy A Dental Practice: The Due Diligence Process and Procedures!

Your success in dentistry business for many years to come is decided by how well you start/buy!

Way over half of all practices I have reviewed (Over 250 in 2019) carried substantial risks for buyers.

Get a Due Diligence Report and BUY WELL:

SOME OF TOP REASONS:

  • Sellers knowingly or unknowingly were not disclosing material facts.
  • Practice could not produce enough income to pay for loan and buyer’s income
  • Buyer overpaid for practice
  • Buyer did not know what information to ask for and review
  • Buyer did not engage any consultants and dealt with seller and broker on his/her own.
  • Buyer oversaw substantial expenses
  • Buyer took over bad staff, bad working culture or overpaid staff.

There are just a few. I have observed 100s more.

We recommend our clients to perform different kinds of reviews before deciding to remove the financial contingency and move forward with the transaction.

  1. Financial Review: Performed by a Dental CPA
  2. Operational Review: Performed by a Practice Consultant
  3. Contract and Lease Review: Performed by an Attorney
  4. Charts Audit: Performed primarily by DDS/DMD
  5. Equipment and IT review by Specialists.
  6. Field Examination: performed by all to review any source document as deemed necessary like:
  • Open Day Sheets and trace to individual accounts, payments
  • Review Invoices
  • Review Schedule and compare to Day Sheets
  • Walk through the office
  • Test equipment
  1. Also I always recommend to engage a reputable escrow company.

Depending on initial assessment, we ask for some very basic financial information to start due diligence for office on Buyer’s behalf.   The procedures will/might be expanded to include additional tests of details in case areas of concerns are discovered that need further analysis. These are very basic source documents to verify details and compile a dental practice due diligence report to Buyer. The Practice Consultant will perform additional reviews of Seller’s computer system and practice software to compile and verify operations. The information provided below is just a sample.

  • Bank statements for all Business Checking, Credit Card and Line of Credit if any.
  • Seller’s bio. What is the seller’s reason to sell? What are the plans after transition? Does he/she own any other offices? How many corporations does she own? Is spouse a dental professional as well?
  • Payroll: Forms W-3, W-2s and DE9s, and employees’ seniority, wage, When did they get last raise? Please provide a description of staff background, training and compensation.
  • 1099s from insurance companies
  • List of all referring GPs and number of referrals and sources by month.
  • Review of lease and computation of payments:
  • Tax Returns and financial statements including balance sheet and profit & loss and general ledger.
  • Disclosure of current lawsuit or punitive actions pursued by local, state, federal or private parties.
  • A production and collections report and a breakdown by each dentist and hygienist for the past three years and year to date. Did any of associates leave the office in the past years? Please provide all 1099 paid to associates.
  • All production report broken down by ADA codes.
  • A summary with percentages of services by Diagnostic, Preventive, Restorative, Endo, Perio, Maxillofacial Prosthetic, Implant Services, Prosthodontics Fixed, Oral and Maxiollofacial Surgery, Orthodontics, Adjunctive General Services
  • A breakdown of payroll, retirement benefits, employee benefits, bonus system, medical reimbursement. Is anyone salaried?
  • A list of all insurances with amounts collected from- Is seller a delta premiere provider?
  • All merchant services statements.
  • A report to document payments by its source (e.g. cash, CC, Insurance, check).
  • list of all adjustments and write offs. Does Seller collect/waive all copayments? What is the write off policy if any?
  • Fee schedule
  • List of contractual monthly services/products that will be taken over by buyer.
  • Number of new patients each month.
  • Credit and AR balance YTD.
  • Description of marketing efforts and marketing budget.
  • Practice profile

I understand that there are many transitions going on where there is none of the above procedures are performed. Some do not even involve a broker. Many times only ONE Broker that represents the seller is involved. I meet many Buyers and Seller that are totally unhappy after selling/buying a practice. The main reason is that they did not perform simplest review and were advised insufficiently.

Buying or selling a dental practice might be the single biggest decision of your professional career. This task requires a mix of financial and non-financial information such as local customs.

As a husband of a dentist and a financial professional, I have been constantly improving my technics, asking buyers, sellers, brokers, banks and other lenders, CPAs and any other person I find, how (they) to value a practice and related questions. I have also studied business valuation technics and taken formal education and exams to sharpen my skills and technics such as the ABV (Accredited in Business Valuation Exam) review course offered by AICPA and I was able to find my own methods and ways. Also I have additional training as a Forensic Accountant as Certified Fraud Examiner and Certified Internal Auditor.

First, I want to tell you about some misinformation and biases commonly spread in the dental community in regards to Due Diligence and Dental Office Valuation. We will explain some of these in our blogs, but I want to let you know that there is no one fixed way to approach it. It’s always a mix of methodologies and procedures to be more beyond doubts that the practice contains value and passes due diligence, evaluation and valuation, and it’s no easy task.

  1. Bank approved financing. Must be a good deal!
  2. Seller’s Broker said it’s a great office with huge potential!
  3. It’s always seller’s market.
  4. My friend did not use any due diligence and did well, so I won’t need it.

As Dental CPAs in California, we also see what is happening to the office performances years after the transition. Unfortunately some of the deal go bad due to some of the following reasons below.

  • Sellers knowingly or unknowingly were not disclosing material facts.
    • Practice could not produce enough income to pay for loan and buyer’s income.
    • Buyer overpaid for practice.
    • Buyer did not know what information to ask for and review.
    • Buyer did not engage any consultants and dealt with seller and broker on his/her own.
    • Buyer oversaw substantial expenses.
    • Buyer took over bad staff, bad working culture or overpaid staff.

It’s important to note, that Sellers are much advantaged when it comes to selling their practices. They usually have done it, seen it and are in a better financial situation to retain brokers, CPAs and consultants to sell their office. On average they are more experienced in the dental industry and dental business. They hire a Broker to protect their interests and sell their offices. Usually, a Broker’s commission is between 8% to 12 % of selling price. Also they know their business very well.

Buyers on their other side are a bit disadvantaged.

  • They have usually no brokers to represent them.
  • New dentists have not the experience and financial means to add professionals to their team.
  • They have a limited time to go through the process and have to take care of many issues. It might be very overwhelming.

All stakeholders benefit when a practice gets sold. The seller gets his money. The broker gets his commission. Consultants get paid. Bank makes a loan. The only person who might lose a lot is the buyer. He/she might be stuck with a bad practice and big loan.

Well, one more thing I can add at this point is, I helped my clients walk away from 100s of bad deals. I assist my clients to search for months/years until they find a suitable practice. The more you know going into the sale/purchase of your practice, the better off you’ll be both financially and personally.

Now let’s go to the process and define the task. My concentration is on the buyer’s side of the deal since the majority of the people I represent are buyers.

The main services we provide at this stage are as follows:

  • Practice Selection
  • Practice Assessment
  • Comprehensive Financial Review
  • Comprehensive Practice Evaluation
  • Practice Valuation

Our due diligence starts with an evaluation of the information that the sellers and brokers are willing to provide before an offer is made. We take a look at the location, revenues, insurance revenues and types, expenses, procedures that are provided, rent, selling doctor’s profile and all and any other items and public information that can be evaluated. This process already eliminates most offices before even a further step is made. We try to find out if the production and expenses can be duplicated, will decrease or if our Buyer is able to expand and add additional services.  In some of the practices, there might not be much dentistry left to be done on the current patients. Some might not have any room to grow due to seller already providing all specialty services, especially if the Buyer does not personally provide these dental services.

Additionally, a good office lease is critical. Before any offer is made, it’s evaluated if annual rent expenses would even allow building a profitable office. Rent Expenses should be preferably about 5-7% of annual revenues and not exceed 10-12%. Later after the offer is accepted and Buyer goes through its due diligence, an attorney should defiantly be retained to take a much thorough review of all lease terms.

There are many other factors that must also be considered, such as location, equipment, appearance, staff, longevity, reputation and reviews, patient mix, procedures performed, growth trend, parking, visibility, and any and all available information. The main question is if the production and profitability will be continuing for the buyer.

WHAT SOME OF OUR CLIENTS SAY:

-I have worked with Fazel from the very beginning of my first dental practice search when I literally knew NOTHING on how and where to start. He not only guided me on my journey, he taught me EVERYTHING I needed to know to evaluate office statistics, financials, and steps involved in practice acquisition. Having Fazel on my team was honestly the best decision I made in my professional career. His genuine and humble nature and expertise in the dental field is sometimes difficult to find in today’s dental industry. Fortunately, with him by my side, we were able to find a great practice with tremendous potential to grow. I look forward to continue our journey together to strive for practice and professional success. Dr. K. DDS

“Working with Fazel has been a great experience for me– he’s simplified the process of practice acquisition and made the whole procedure much less daunting! Buying a practice is a huge investment, it pays to have someone like Fazel on your side!- Dr. C. DMD”

I started looking to buy a practice just before getting to know Fazel and I was very confused, didn’t know where to start and what to look for. Fazel told me it’s going to take 2-3 months to find a practice that is suitable for me. We talked and he got the idea of a suitable practice for me. I travelled to Southern California to meet with him. After having the informative sessions with Fazel, I was very confident and knew exactly what to do. I had an action plan in hand and a good support to rely on. I started looking just at the broker’s descriptions and I was crystal clear to go and see the office or not even bother to see it. In 2 months, I chose three offices, I talked to Fazel, picked 2 out of 3, visited the 2 and bought one. I am not saying that I didn’t get lucky to find the place that I liked but I am saying to have him by my side, was like having a full time support. He is very caring, very knowledgeable, and very attentive and really more than an advisor, he is a good friend.  Buying a practice, especially for the first time is challenging, with Fazel and his knowledge, the whole process is much easier.  I definitely recommend his service for buying a practice.  You don’t want to make a decision for life without knowing what you are getting into. -Dr. L., DDS

As part of our activities in the dental community, we regularly present education on events and conventions. Please see our EVENT page to RSVP for the next event to discuss the ins and outs of starting or purchasing a dental practice.

Our seminar is great for:

  • doctors that are actively looking for a practice;
  • associates who want to buy a practice in the future and want to familiarize themselves with the process;
  • doctors that are actively looking to sell their practices in near future.

In addition to our lecture, we will have ample time to meet one on one with doctors to answer any questions you may have. If any of your colleagues might benefit from the talk, please pass on this email.

LEARN MORE ABOUT:

  • Steps needed to get ready to buy/start a practice
  • Process of buying/ selling your dental practice
  • Valuation of dental practices
  • Practice Sales and Purchases
  • Understand the key elements of a practice agreement
  • Tax consequences
  • Exit strategies
  • Financing Issues
  • Lease issues which can destroy your investment
  • Pitfalls in the purchase agreement.

Fazel Mostashari, CPA/PFS, MBT, CFE, CFP

DentalCPA and Forensic Accountant

Practice Selection& Assessment,

Comprehensive Financial Review

Is a DentalCPA assisting dental professional in all areas of tax, accounting, consulting, financial and business matters. He also specializes in startups, acquisitions, financial due diligence, valuation and transitions of dental practices.

Next Steps…

We offer a FREE initial consultation for Dental Professionals.

Call 1 (818) 884-2549 today for a free, confidential consultation and ask for Fazel Mostashari.

We provide assistance throughout the entire process; from goal-setting and building key value drivers to negotiating deal terms. Our team of DentalCPAs can also help with a range of situations, such as Practice sales, acquisitions, and mergers, formation, and dissolution of partnerships, associate buy-in’s, and litigation support. Allow our Dental CPAs to lead you through a successful transition with: Exit planning, gifting, and estate tax issues, transaction advisory, negotiation assistance.
DentalCPAs are here to answer all your start-up questions and assist you throughout the entire process. We offer an extensive list of the necessary resources to build your practice’s foundation for future success. Our Dental CPA start-up services include the following: Business modeling, feasibility study, demographic analysis, long-term strategy, tax planning, office accounting set-up, tracking and monitoring productivity.
Buying or selling a dental practice might be the single biggest decision of your professional career. This task requires a mix of financial and non-financial information such as local customs.

Next Steps…

We offer a FREE initial CONSULTATION for dental Professionals. Call 1 (818) 884-2549 today for a free, confidential consultation and ask for Fazel Mostashari.

    Dental CPA In California. Tax Planning Strategies. Dental Office Accounting Set-Up & Support.

    ADDRESS

    22201 Ventura Blvd
    Suite 205 Woodland Hills, CA 91364

    PHONE

    818-884-2549

    EMAIL

    Cal.Dental.Cpa@Gmail.com