Are you considering buying an existing dental practice? The journey to owning a practice is exciting and challenging, with many complex aspects that require careful consideration. In this guide, we’re thrilled to provide you with all the information and techniques you need to embark on this journey with confidence and effectively achieve your goals.
Let’s start by asking ourselves a basic question: Is it really worth pursuing an acquisition? Buying an established practice comes with many advantages. You’ll get a loyal patient base and experienced staff, which can lead to immediate profitability. However, there are also risks involved, like patient and staff turnover, unexpected expenses, and the reputation of the previous owner. It’s essential to fully understand these details before making a decision.
To help you with this task, we created a complete checklist with all the steps you should take when acquiring a dental practice:
Find your ideal location:
Conduct an in-depth analysis of demographics and competitors to identify the best location for your practice. Too many existing dentists can make it harder to build a patient base. Research the competition in your desired area in local business associations. Remember, you want an area with patients who need your services but not one that’s already saturated.
It’s also important to analyze the age and demographics of the community as it will influence the type of dentistry you can offer. If you specialize in pediatric dentistry, for example, an area with a high concentration of young families would be ideal.
Find a practice you want to purchase:
Once you have a good idea of your preferred location, you can begin your search for practice through your network or online listings. You can talk to colleagues, attend industry events, and connect with dental practice brokers. They can connect you with potential practices for sale and offer valuable insights.
You can also look for industry-specific websites or platforms that list dental practices for sale, like dental practice broker websites and industry associations.
Get expert guidance:
Consider hiring a team of advisors to ensure a smooth and successful transaction. Dental CPAs are essential partners in this group. With their expertise in the dental industry and accounting knowledge, they can help you understand your practice’s financial health, identify potential tax advantages or risks, and assist with the due diligence process.
Investigate the practice:
Acquiring a dental practice is an exciting step, but be cautious about the information from the seller (dentist or broker), and don’t take it as absolute truth. Sometimes, those numbers and claims can be misleading. Do NOT believe everything the selling dentist tells you.
To protect yourself, investigate the story behind the sale:
- Scrutinize the motivations of the selling dentist. Why are they selling? Are there any underlying reasons that could affect the practice’s future success?
- Assess the reputation of the practice within the community. Talk to colleagues, patients (with their permission), and local dental societies. This can reveal valuable insights that might not be readily apparent in financial statements.
Get a Financial Due Diligence:
The seller will share financial information, but it’s important to analyze it in detail. Your team of experts, including dental CPA’s and attorneys, will help evaluate and understand important metrics like:
- Financial Statements: Recent profit and loss statements and balance sheets offer a snapshot of the practice’s profitability and financial position.
- Tax Returns (3+ Years): Analyzing income tax returns provides valuable insights into historical performance and potential tax liabilities.
- Fee Schedule: Compare the practice’s fee schedule to industry norms and insurance reimbursements to identify potential discrepancies.
- Overhead Costs: Understanding the percentage of revenue dedicated to overhead helps assess efficiency.
- Employee Expenses: A detailed breakdown of employee salaries, benefits, and payroll taxes provides a clear picture of staffing costs.
- Revenue by Procedure: This data reveals the practice’s service mix and can inform future growth strategies.
- Production and Collection Reports: Individual reports for dentists and hygienists shed light on productivity and patient collections.
If you want to know more about the due diligence process, read our post, Dental Practice Transitions: A Due Diligence Guide.
Appraise the facility:
Just like the healthy financial picture, a dental practice’s physical state is equally important. Schedule a thorough walk-through to evaluate the layout, functionality, and overall condition of the space. Is it welcoming to patients? Does it meet accessibility standards? Carefully analyze the lease agreement to check if the rent is affordable for the long term. Are there limitations on renovations or expansions? Does the lease offer an option to purchase the property in the future? You should also analyze all the equipment. Assess its age, functionality, and maintenance needs. Are there any potential upcoming replacements that could impact your budget?
Create a solid transition plan:
A successful purchase is just the beginning. To ensure a smooth handover and minimize disruption for patients, a well-defined transition plan is essential. This plan should address key factors such as the transition length, patient continuity, communication strategy, and staff integration.
Determine the ideal handover timeline. Some people prefer that the selling dentist remains involved for a period to facilitate patient introductions and staff training. It’s also essential to define your communication and marketing strategy to make sure patients feel comfortable and confident with the change in ownership.
Secure financing:
Acquiring a dental practice is an investment, and financing plays a crucial role. Work with your financial advisor or a dental lending specialist to explore various financing options. This could include traditional loans, SBA loans, or seller financing. Consider not only the purchase price but also potential renovation costs, equipment upgrades, and working capital needs.
And remember: don’t settle for the first offer. Compare interest rates, terms, and repayment structures to secure financing that aligns with your long-term business goals.
Negotiate your purchase offer:
Once you’ve completed your due diligence and are confident this is the practice for you, it’s time to make your offer. However, this isn’t a simple price tag. You need to approach negotiations strategically. Rely on your team of experts, including dental CPAs and appraisers, to determine the practice’s true value based on its financial health, equipment, and overall condition.
Don’t underestimate the power of future projections. What does the practice’s growth potential look like? Consider these projections when crafting your offer. With a solid understanding of the practice’s value and your financial capabilities, your advisors can help you negotiate a fair purchase price. Remember, reaching an agreement on price is just one step. The details will be formalized in the Practice Sale Agreement, which we’ll discuss next.
Sign the practice sale agreement and lease:
Now it’s time to finalize the legal details with two key documents: the Practice Sale Agreement and the Lease Agreement.
Practice Sale Agreement: This comprehensive document outlines the terms of the sale, including:
- Warranties from both buyer and seller
- Allocation of the purchase price for tax purposes
- A clear list of assets included in the sale
- Patient record custodianship procedures
- Transition details (e.g., the seller’s continued involvement for a period)
- Non-Compete agreements (if applicable)
While the agreement itself might be simple, having a qualified attorney review it is vital. Their expertise ensures clarity, protects your interests, and avoids any hidden surprises. As a general guideline, legal fees for reviewing a Practice Sale Agreement typically fall within the $1,000 range.
Lease Agreement: Whether the existing lease is assignable or a new lease needs to be negotiated; it is also important to ensure clear lease terms. This includes details on rent, duration, renewal options, and any potential purchase opportunities associated with the property.
By working closely with your attorney and communicating openly with the seller, you can confidently finalize these key agreements and officially take ownership of your new dental practice.
Congratulations! You’re on your path to dental practice ownership!
Acquiring a dental practice is an exciting step and a chance to build your dream and serve your community. This guide has equipped you with a roadmap for success, highlighting the key steps and the invaluable role of your professional team. With careful planning, strategic decisions, and the support of trusted advisors, you’re well on your way to a thriving dental practice and a fulfilling career.
Dental CPA California: Your Trusted Advisors
At Dental CPA California, led by dental practice expert Fazel Mostashari, we understand the complexities of dental practice acquisition and the importance of diligent planning and execution. With over a decade of experience serving the dental industry, we are committed to providing you with the expertise and support needed for a successful practice transition. To get advice about your specific case, set up a consultation with Fazel.
