Dental Practices

Secrets for Successfully Buying a Dental Practice aka

Secrets of Successfully Selling a Dental Practice.

 This section is dedicated to the doctors who own and the doctors who aspire to own a  

DENTAL PRACTICE

The following is an education on how to sell a dental practice and how to buy a dental practice. The fact of the matter is that both buyers and sellers need and want the same things, a successful an beneficial transaction and relationship. When all involved parties wrap their heads around the fact that we are here to create ongoing success, the tone of the transition becomes relationship based as it should be. There is a high level of trust that exists between buyers and sellers of successful transactions, rapport and team work is a must. Much like the doctor patient relationship, the patient is not there to compete and dicker with the recommendations of the doctor, these two seek each other's presence to form a union and achieve success together. This is very much a hand shake, not a head butt. Now that you understand who the players are and what the game is, please read the following information from the point of view of the transaction.

So you are about to leave a salaried associate ship position & want to own your own practice, or maybe you already own a small to mid-size practice and would like to expand by buying a complimentary business or practice in another location, either way, you are not alone.

Over 2 million businesses in the USA change hands every year. Most of these are small to mid-size businesses and professional practices of various types, such as dental, vision, chiropractic, medical, physical therapy, veterinarian, law and tax preparation services, to mention just a few. Most are being purchased by a first-time business owner or those seeking to expand an existing practice. If you are considering the purchase of a dental practice, you probably realize that this process is very daunting and intimidating. In fact, you'll probably have a lot of legal and financial questions. 

I started my own practice in 1994 from scratch, built it to one of the largest single operator practices in the Northwest and, due to a collection of events, sold (or gave away) my practice several years ago. I say gave away, because the "professional representation" I had was interested ONLY in getting it sold as fast as possible. They were not interested in:

1.       Securing the best buyer for my patient’s sake or

2.       Acquiring the best price for my sake,

But were interested in the best commission for their sake.   

This inspired me to seek out the oldest and most successful firm in the world of professional business sales. VR is that company.  

We have brought the very best in international business sales to the dental practice sales market. Read this overview and get some education into successfully navigating your way through the complicated process of buying a dental practice. 

For those of you selling a dental practice, find out what buyers are looking for which important decisions you will need to make, & what type of key action steps will ensure you have a successful transaction. 

Whether you choose to handle the purchase on your own or you plan to work with lawyers, accountants, and a qualified intermediary, you should know:

VR Has Sold More Businesses in the World than Anyone, and

VR is committed to being a valuable resource for our clients.

 In keeping with this commitment, we want you to consistently grow and improve. Enjoy and profit from the following information.

Why are you buying a dental practice?

 Doctors who are thinking about buying a practice fall into three basic categories. While different buyer’s needs and goals are not the same, the process of buying a dental practice, especially the legal procedures, is surprisingly constant. So, whichever category you fit into, this information will help you accomplish your goal of a successful practice purchase.

Let us look at the three types of buyers.

1.       Some look to buy a JOB. They buy a practice, where they intend to work each day with the expectation that the practice will provide a steady source of income. The typical scenario for this buyer would begin by making a down payment of between ten and thirty percent of the sales price. Then, as the new owner/doctor pay the seller the balance of the sales price in monthly installments spread over a number of years. The buyer, of course, will have other bills to pay each month, which include rent, employee paychecks, utilities, insurance, and business taxes. Whatever is left over is income for the new owner, Doctor or Therapist. Most prudent business owners keep some money in reserve to help them ride through the slow periods.           

2.       Some buy a dental practice to expand their current enterprise. Profits can be increased by standardizing policies and procedures plus combining costs, as well as the possibility of dominating a local market. Such people are often called strategic buyers, because they are carrying out a larger business strategy. Some of those who look to expand may be in the market for the same kind of business they own. There are enormous advantages to this strategy. The biggest being that the buyer already knows a great deal about the business and can value it appropriately during the purchase process and can easily operate it after the purchase is complete. Another advantage to buying the same type of business is the profitable effect of consolidation. Oftentimes, both businesses can be run from the same location and/or under the same back office, administration, and accounting operations. So, when additional sales from the newly purchased business are recorded, the overall profitability of the recorded companies are increased − quite often significantly!

3.       Some doctors buy another unrelated business or another type of dental practice to round out their business portfolios. These buyers have no intention of taking an active part in the business and will often spend a good bit of their profits hiring highly dependable associate doctors or a general manager. Their focus is on asset growth and taking advantage of additional tax benefits. This strategy, of course, is only available to those with significant assets.

What type of practice do you really want?

You have to spend a considerable amount of time and money on your training. 

Now, you can be the master of your own destiny and
design your life, rather than accept your life by default!! 

If you decide you would like to own a dental practice, buying an existing one isn't the only way to accomplish your goal. You could start a practice from scratch, I did.

The drawbacks of starting a dental practice from scratch include:

      1.     greater risk,

      2.     difficult fund-raising in today's tight lending environment,

      3.      trial and error process in decision making,

      4.      lack of initial cash flow,

      5.      challenge of finding a suitable location,

      6.       no systems, employees or suppliers in place,

      7.       struggle to find and train competent employees, and

      8.       no existing base of loyal customers or clients.

Leaping into the greater unknown carries greater risk than buying an existing practice with a good track record. In the beginning, you will engage in experiments to determine if your concepts will work. Even if patients flock to your new practice, you will have to deal with loads of issues; such as pricing, hiring employees, setting up business systems, and so on.

These issues and many others would have already been addressed, if you purchased an existing practice.

You may have a hard time finding a bank or lender to give you the funds you need for a business start-up. Lenders are leery of brand new doctors starting new enterprises.

You will need to make important business decisions without any experience of your own and without the benefits of an existing business structure or the wisdom of a former owner/doctor. For example, how should you price your services, what type of inventory should you maintain, what type of advertising will work best? This is the flip side of the positive element of having total control. Being responsible for all the decisions means you have to figure everything out yourself. 

A practice management group would be valuable, but even the best ones will not be in your office everyday or have a vested interest in your success.

No existing base of loyal patients or clients. You will need to find ways to let people know you are around. Then, you need to work at converting them into loyal patients, who will not only return to you for your services, but will also tell others about you.

Location, Location, Location!! This is always important to dental practices. You need to be in a high visibility, high traffic location, so you will have to exert time and effort in finding just the right place to rent. Then, comes the chore of negotiating a favorable lease and possibly the expense of renovating the premises to suit your needs. 

You will have to set up all your operational systems, including the bookkeeping and accounting system. How difficult this task is depends on your experience and comfort with tasks like these. Unless you are going to be a one doctor office, you will to have to find and train competent employees, which is a more demanding task than you might imagine. With no established relationships, you will also need to seek out reliable and cost effective suppliers, which can be a tedious and frustrating process. Despite the long list of negatives, many entrepreneurial doctors still choose to get themselves into a business by starting from scratch.

What about BUYING a dental practice?

Buying an existing practice has its own set of positive and negative features.  The positives include an already working system, an existing patient base, immediate cash flow, potential seller financing, an existing location, existing vendor contracts, and potential ongoing counsel from the owner/doctor. An existing dental practice has a history and a track record, so you can more easily determine if the business concepts are sound and profitable.

1.       An existing patient base. This is the hardest part of establishing a dental practice. Be sure to confirm the bright picture the seller/doctor is likely to paint of how happy and loyal the existing patients are.

We will instruct and coach you through the proper transition strategy to minimize the attrition. You should be prepared for 10 - 30%. 

2. Acquiring a healthy practice usually means there is money flying in from the get go. In the best case scenario, these funds will cover your expenses and leave enough to pay you for the time and effort of being a doctor.

A dental business valuation will assure that this is so, as the math MUST be feasible to justify the purchase to the lender. You probably will not have to scrounge around for funds, other than for the down payment and a modest cash reserve. This is because most small business sellers will let you pay the bulk of the sales price over a period of three to five or, as much as, seven years.

Perhaps the biggest positive factor is that statistics show established practices

are far more likely to succeed than practices starting from scratch.

There are also a few potential negatives about buying a dental practice.

1.       Having to operate someone else's business concept,

2.       overpaying for the good will estimate, and

3.       the potential for hidden problems.

When you purchase a dental practice you are, by definition, paying for someone else's business concept.

To get the benefits of buying an existing business, you have to pay something beyond the value of the intangible business assets. The intangible asset called good will. You can look at this as the price you will pay to reduce the risk inerrant in the startup.  The definition of good will is simply the excess of the purchase price over the fair market value of an asset. This can occur because of prime location, happy workforce, loyal customers, long standing good reputation in the community, as well as other non-measurable intangibles. The chances are excellent you will receive enough solid information that you can sensibly evaluate the goodwill portion and yet there is still the possibility that a shady seller will distort or withhold key facts you would not know until it was too late.

By working with us, VR Dental Practice Sales, our intermediaries will greatly diminish or eliminate the chances of getting fooled by a seller’s dishonesty. 

Overall, buying an existing dental practice is one of the best ways of eliminating the negatives of a long startup phase and reducing the time you spend on the road to profitability.

What is the process of buying a dental practice?

Before we get into all the details there are four basic principles that can help you buy a sound business at a decent price and become a happy and prosperous business owner.          

First, understand all the steps in the purchase process. Armed with this information you can confidently take action on all aspects of buying a practice. Find one that fits your needs, find out what it is worth and negotiate the price in payment terms, structure the deal so you can save on taxes and protect your legal rights, and find and use dentals to provide advice and review key documents. You can avoid many pitfalls that are likely to trip up the naive or the poorly informed buyer.           

Second, be aware of your own personality, strengths and weaknesses. If you have never owned a practice before, you need to think about whether you are temperamentally suited to be a business owner. Much of your personality will come out during a good associate ship or internship. A structured buyout will be another good option, where you buy in over time.

Third, be patient at each stage of the purchase process. You want time on your side. Finding the right practice to buy can take many months. If you try to rush the process, you will almost surely end up buying a substandard practice, paying too much for it, or having the terms of the purchase not turn out to be a win-win situation. Even when you find the practice of your dreams, you still face the meticulous work of thoroughly investigating the doctor and the practice and then, negotiating the terms of your purchase. You cannot accomplish these critical tasks overnight. Again, if you act impulsively and without adequate preparation, you are likely to make costly mistakes. 

Fourth, budget wisely. You want to avoid the discomfort of extreme financial pressures that can lead to bad business decisions and cause hardship for you and your family. So, you need to think carefully, and not just about the purchase price, but also the payment terms. You probably will end up buying a practice on an installment basis and make payments to the seller. Keep the down payment as low as possible? A low down payment will mean high monthly payments. Will you be able to make that payment month after month, pay all the other expenses of doing business, and wind up with enough left over to provide an adequate income for your family? To give yourself a little cushion, it is best not to sink every last penny into the practice. Even, if that means buying a less ambitious enterprise.

What happens if you encounter unexpected expenses or if the business goes through a slow period or a law suit or other unexpected problems adds to your expenses? You need to keep some money in reserve to ride out such times. To buy a dental practice with attractive terms you must thoroughly understand and aggressively deal with a myriad of practical and financial details. Understandable, if you have never bought a business before, thinking of all these tasks may be overwhelming. But, don't worry. Each one of these steps and more can be sensibly understood when taken one at a time.

How do I come up with a budget?

No matter how eager you are to buy a dental practice, you must first take stock of your overall financial picture.  You should plan to deal in dollar and sense realities right from the start. You need to figure out where you will get the down payment. Let's say you plan to take it from savings, do you really want to put every last cent of your savings into the business? That is probably a bad idea!.

You will have your back to the wall, if you drain your savings. As we have already said, it is far better to have a comfortable reserve so you can deal with emergency expenses and not be forced to search frantically for money to meet unexpected bills. Remember you will need to pay back the lender and you will need to be making these payments at the same time as the monthly installment payments to the seller. Where will all this money come from? Looking beyond the down payment and installment payment, you will need to expect the unexpected. Business expenses, ironically, seem to crop up in periods when practice income is low.

How will you deal with such expenses, will you wind up deeper in debt? You also need to be clear about whether or not you are counting on the practice to produce profits you can use to pay for personal expenses; for example, the mortgage on your home, the lease payments on your car, the grocery bills.  If there is a second earner in your household or you are getting checks from a trust fund or have substantial savings, this will not be a problem. 

If you are expecting the practice to immediately give you the wherewithal to cover personal living expenses, you need to consider the possibility that the income from the practice may not be as substantial as you think it will be. If you are young and have no dependents and have little or no debt, you can afford to take on more risk. If loved ones are looking to you for steady income, you may need to be a lot more cautious. This may translate into buying a less expensive practice. Perhaps you are not accustomed to thinking in broad financial terms. In that case, you can pay to talk matters over with us, we are the ones who can help you assess the pros and cons.

As an entrepreneur you cannot be wholly adverse to risk and you do need a dose of financial realism to avoid putting yourself in a painful financial bind.

How do I find the dental practice of my dreams?

The most time consuming and frustrating part of buying a practice may be your search for the right practice to buy. You can quickly buy a bad or merely average one. Buying an excellent one takes more time. Don't get discouraged if an attractive dental practice does not pop up on your radar right away. Above all don't let your impatience cause you to make a poor decision.  In searching for a practice to buy, it is essential to know what you want early in the game.  

You have heard the saying, "If you don't know where you are going, you probably won't get there."  

You will need to sit down and write out your own personal goals and desires for the dental practice of your dreams. No different than goal setting, be as detailed as possible and then, when the right practice comes along, you will recognize it right away. Trust your intuition here. Only you can know exactly what that looks like; then, we can help you make it happen.  

Realistically how can you afford to invest in a dental practice and what resources do you have available to get more money? It is important to have a clear estimate of how much you can comfortably afford to invest in a practice and you don't want to let this amount totally dictate the size of practice you can afford, because businesses are bought largely or at least substantially on credit. You may be able to afford a bigger practice than you might think. Dental practices and doctors are in an unusual time right now, as smaller local banks are stronger than the national lenders, and therefore are more likely to make a loan based upon the relationship of the parties as a substantial factor. You may be able to make a ten percent down payment and pay the balance of installments over a five to ten year period using the profits of the business.

How do I examine the seller’s information?

Even when you find a practice that appears to have all the right ingredients, you need to learn about the history of the business and the doctor before making a commitment to buy.  

One of the many things we do to bring you peace of mind is thoroughly screen and interview all of our sellers, which enables us to tell you that the practice is sellable. Once you have written an offer and put down an earnest money deposit, you will be allowed to examine the financial books and records of the business. This allows you to examine the seller’s financial data, tax returns, and balance sheets with one of our VR dental intermediary team members, who can help you better understand these numbers. [I WOULD OMIT SAYING WE SCREEN AND INTERVIEW ALL OF OUR SELLERS. SELLERS WANT TO KNOW THAT WE SCREEEN AND INTERVIEW BUYERS TO ASCERTAIN THEY ARE QUALIFIED TO BUY AND WE WORK FOR THE SELLERS–ANYHOW, THIS SEEMS AWKWARD.]

How do I determine the value of a business?

If a valuation report completed by a certified appraiser has not already been done, request that the seller provide one to validate the price of the practice. Valuing a business in any industry is both an art and a science. Depending on the type of business involved there are several text book methods used − valuing the assets, basing the price on comparable sales, calculating the return on investment, or using an industry formula based on sales or units. This report should be 60 - 100 pages with reverse math to justify the cost and be admissible under certain circumstances to lenders for approval. Due to recent changes in the SBA rules and regulations, this report will HAVE to be done at the time of lending anyway. The advantage in having it done earlier is that both parties can be satisfied the price is fair and reasonable. If you wait until lending and the value comes back higher than the price agreed on, the seller will be unhappy; if the value comes back lower, then the buyer will be unhappy; a lose-lose situation.

How do I negotiate the deal?

When you find a practice and you and the seller seem to come to a quick and enthusiastic meeting of the minds, there will still be plenty of chances for the deal to fall apart as the details are worked out. For one thing, you will be digging deeper into the business practices and learning more about the dozens of nitty gritty operations issues.

You will probably want an agreement that you can pay the price in installments, you will also need to convince the seller that you are credit worthy and have the entrepreneurial skills and personal attributes to make a success of the purchase. Obviously, it will take time to take these steps. In addition, there will be many other legal and practical details to be worked out.

You will need to determine the structure of the sale, this is where the thinking really starts!

   Ø Will you be buying the business entity (corporate structure) or its assets?

   Ø Will the seller keep some assets that are currently part of the business, such as accounts receivable or high tech equipment?

   Ø How much will you put down? 
   

   Ø What payment and interest rates will the seller agree to?

   Ø What kind of security interest will you give the seller in case you stop making payments? 

   Ø Will you agree to give the seller a lien on your home as well as the business assets?

   Ø If the seller misrepresents important details or fails to take care of existing business debts as promised, what legal recourse will you have to unwind the deal and get fair compensation?

   Ø What warranties will the seller make about the condition of the business or its assets?       

   Ø Will the seller guarantee that no environmental hazards lurk within the business premises?

   Ø If hazards are found, will the seller be able to pay the costs of the cleanup?

   Ø What warranties will you make?

   Ø Until the seller has been paid off will you be asked to agree to keep the business equipment in good shape, to maintain inventory at pre-sale levels, and to continue operate from the current location?

   Ø How will you and the seller handle current business debts? 

   Ø Will responsibility from some debts and even potential law suits be transferred to you? Will the seller agree to stay liable for all the pre-sale obligations?

   Ø Will you be adequately protected from future debts and lawsuits?

   Ø Will the seller perform any services for the business in the future? If so, for how long?  How will the seller be compensated?

   Ø Will the seller be an employee or an independent contractor?

   Ø Will the seller be allowed to immediately invest in, own, or work for a similar business? 

   Ø Will the seller be restricted and how stringent will the restrictions be?

   Ø How long will they last?         

   Ø What if the seller wants to stay active in a similar business or perhaps sell even just a part of the practice, a negotiating right to compete issues will be a critical part of striking a deal!

These are all key questions that will be very important in your negotiations and this is just a basic overview. As the dental intermediary in the transaction, we have answered these questions and many more over 1000 times here in Washington. We have it all handled fairly, so everyone gets what they need and want.

Who drafts the sales agreement and how is that done?

The most important legal document used in the acquisition of a business is the purchase and sale agreement.

Drafted correctly this legal contract should capture all the details of the sale. This in turn allows the seller to transfer the business entity or its assets to you smoothly on a specified date called the closing. If a dispute arises before or after the closing, the clear terms of your closing will be the first place you will look in an effort to resolve it.

What happens at the Closing?

After the sales agreement has been signed there is actually one more step before the practice is transferred to you. This takes place at a meeting called the closing at which you pay the sales price or at least the agreed upon down payment and sign the documents; such as a promissory note, and security agreement, or a bill of sale for the business assets, if an asset sale. Plus all the other paperwork needed to turn ownership over to you. In exchange the seller signs stock certificates, corporate documents, if an entity sale.  

Congratulations! You have made it through a complex process and you are in business for yourself.  Now, the fun begins. You are in business and the captain of your own destiny.

While it may be hard to envision yourself in the position of finally having completed this long and arduous series of decisions and action items, you can get through it all very easily and successfully when you enlist our help. As your local VR Business Intermediary, we are there throughout the entire process to make sure the transaction closes; Your Success is Our Success!!

Call us 888-400-VRBB.