Purchasing a General Dental Practice: 5 Factors to Consider

Dental PracticeA dentist asked me recently what the five most important factors were to consider when purchasing a dental practice.  I had to admit that while I have helped many dentists analyze practices they were considering purchasing, I had never synthesized all the information into the 5 most important factors.  After a little thought, though, here they are.

Overall Performance

Healthy practices tend to operate within typical ranges.  One of the easiest to calculate and most helpful is the ratio of profit to revenue.  In a healthy general practice profit hovers around 35% of revenue.  If it’s much higher or lower, be sure to take some time to figure out why.

If it’s much higher than 35%, perhaps the selling dentist is doing his or her own hygiene.  This could be a personal preference or an indication of a patient count too low to support hygiene salaries.

If profit is much lower than 35% of revenue, look for business inefficiencies or seller personal expenses mixed in to the business financials.

Location and Demographics

One dentist we work with spends 3 times more on marketing than any of the others.  She runs a high-grossing, profitable practice, but it never grows.  Her practice is located in a high turnover neighborhood inhabited by apartment dwellers and college and technical school students.  If she slacks on the marketing, the practice may wither and die.

When choosing a practice to purchase, look for a mature neighborhood with a stable population.  One trick is to use real-estate software or to ask your local title company to analyze the rental vs. owner occupied ratio of homes.  The ideal is to serve your patients, their kids, grandkids, and so on, over the long haul.

Age of Equipment and Facilities

Much has changed in the dental world.  In-office technology is dramatically different from the way it was ten, twenty, or thirty years ago when the seller purchased or last updated the practice.  As sellers near retirement and wind down, they may put off facility and equipment upgrades.  Be aware that to bring the practice up to your technological, functional, and/or aesthetic comfort level, you may have to make a substantial investment of time and money.

If purchasing a dated practice, make sure to take this into account in your price negotiations and to budget for these expenses.  When purchasing, starting, or making major changes in any business, there are always unexpected costs.  This is a big one you don’t want to miss.

Size and Future Opportunity

My dentist runs a two operatory practice and does all his own hygiene.  He’s very well liked, his patient schedule is full six months out, and he works long hours, many days a week.  He loves his patients and they love him.  That’s just his style.

Other dentists serve four operatories with the help of two hygienists.  Others go bigger with the help of associates.  Some want to connect with patients.  Others want to run and grow the business, adding more patients, more ops, or more practices.

Make sure the practice you are buying fits your style.  Make sure it’s not so small that you can’t grow, or too big that it overwhelms you.  If you want to grow, consider a building with some existing but unused operatories.  It is common to find them plumbed, and sometimes even ready to go.

For maximum flexibility, consider purchasing the building.  At the very least, have an experienced dental business attorney like Robert Sanders (www.dentalpracticelaw.com) review your lease with you to make sure its terms work for you and accommodate your future plans.

Cash flow, Lifestyle and Budget

Don’t buy a dental practice that won’t support your lifestyle.  Some dentists have a reputation for being great dentists and lousy business people.  Don’t be one of them.  Prepare a personal budget. It should include items such as student loan debt pay-down, income taxes, housing, living expenses, travel, etc.  Then make sure the practice will produce enough cash flow (after paying all operating expenses and the practice purchase debt service payments) for you to maintain your current or desired lifestyle.  Don’t get caught short-handed.  It is hard enough to serve your own patients and run your own practice without having to add an extra day working as an associate for someone else.

Conclusion

One final consideration that is important right now has to do with the changes in Delta Dental’s reimbursement rates.  If you are buying a “Premier” practice in which much of the revenue generated comes from Delta Dental Premier Plan patients, take this into consideration as well.  PPO reimbursement rates are about 30% lower.  For new dentists coming in to the field, the whole ballfield has changed, and the business you build today may need to be based more on volume and staff leverage than the prior dentist’s business.  Obviously, there are many more than five important considerations when purchasing a practice, but these five (or six) are critical.

Ben Anders, CPA