Focusing on the Details: Blind Spots to Avoid When Buying a Dental Practice

Focusing on the Details: Blind Spots to Avoid When Buying a Dental Practice | Credit: © BalanceFormCreative - stock.adobe.com

Buying a dental practice can be a complicated, daunting process. With so many things to consider, it can be easy to overlook critical numbers or find yourself floundering as you slog through metrics. Plus, what about all the things you haven’t even considered?

Factors like financials, patient attrition rates, and accounts receivables are all critical to examine during the practice acquisition process, but the considerations when buying a practice go beyond the numbers. There are other blind spots that buyers often overlook that can cause big problems in the long run.

“It’s probably the biggest investment of your life,” says Bruce Bryen, CPA, CVA, a dental practice valuation analyst at Baratz & Associates, P.A.“You want to be sure you do it right, and are thorough in your process. The decisions that you make in the acquisition period could affect your practice for years to come.”

What blind spots should buyers avoid to prevent making the wrong decisions? There are a few things to keep in mind.

Assemble the Right Team

Before the sale even gets off the ground, there are pitfalls for buyers to fall in to. A big one is not assembling the correct support cast to assist with the process. This includes a broker or practice-transition consultant, dental CPA, experienced dental evaluator, and a good attorney. A dental-experienced lender can also streamline the process, as they will have a better understanding of goodwill than a general lending.

While you may think you know what you’re doing, having a team of experts like this behind you can ensure you get the most for your money.

“Get the best dental evaluator you can get,” Bryen recommends. “Get the best dental CPA you can get. And get the best attorney who knows something about dental. It's rare to find an attorney who has experience with dental, but it can make a big difference. You don’t want to use someone who is not informed on dental. Maybe you use an attorney who might be a good divorce attorney, or a personal injury attorney, but they don’t have experience with dental practices. This is a mistake. Why wouldn’t you use the person who has the expertise?”

There are of course upfront costs that come with recruiting legal or valuation assistance, but it’s worth the money. While the numbers may seem daunting at first, it is important to remember that over the course of your practice tenure, these costs will be insignificant—and could end up paying dividends in the future.

“I think a mistake people make is that they don't want to spend the money,” Bryen says. “They want to get an evaluator that charges the lowest amount, which is less than what a good dental practice evaluator would charge. While the upfront cost can be intimidating, it you amortize it over the time you have the practice, it’s nothing. And it could save you a lot of money in the future if you have it done correctly at the beginning.”

Collaborating with a dental CPA also has benefits. They will know which red flags to look for before a buyer signs an agreement, and may even know more about what to look for in said agreement than the attorney.

“One example is work in progress,” Bryen says. “That is such a big deal and it is often overlooked, especially by an attorney that doesn’t have dental orientation. It is one of the biggest problems. Work in progress, the accounts receivable, how slow they are coming in, existing staff, infrastructure, etc. Is anyone going to leave due to the change? These are all important things that need to be examined.”

Hiring a consultant to evaluate the practice processes, staff, and systems, and perform audits can also be beneficial. Consultants like these can also be helpful after the due diligence period and through the post-sale transition. They can give advice on where changes can be made to make the practice run more efficiently, suggest staffing adjustments, and help adjust protocols to meet your preferences.

Evaluators Matter

Even if you take steps to assemble a team, not choosing the right evaluator—or not doing your own valuation at all—can be a blind spot that can really backfire. The buyer should always get their own valuation of the practice. After all, if you purchase a house, you don’t solely rely on the seller’s valuation.

“Everyone is going to think their house or their business is worth more than an appraiser will say it is,” Bryen says. “If you are buying a house, you’re not going to listen to the seller; you are going to get your own appraisal. The same thing goes for buying a dental practice. The person that is paying gets the advantage, so you want to bring in an independent party.”

Once you bring in an evaluator, you need to ensure you’re getting the information you need. A quick look at the books is not a sufficient evaluation of a practice.

“A good valuation should be 25, maybe 30 pages,” Bryen says. “It shouldn’t be a 1-page valuation. You want it to be thorough. You should have an evaluator that is detail-oriented and has a realistic amount that the dental practice is worth—not just what the seller or a general business evaluator says. Then you’re off to a good start.”

Finding an evaluator that can give you these things means taking the time to do some research, so that you know you are getting one that will be effective. After all, this is the person that will put a number on the business.

“Picking the right evaluator is really important,” Bryen says.“If you choose a general business evaluator, you’re making a terrible mistake. That person is not going to understand that a dental practice is primarily goodwill.”

Bryen recommends interviewing 2 or 3 evaluators to learn about their experience, such as how many dental practice valuations they have prepared, how many years they’ve been doing it, and how many critiques of other valuations they’ve completed. It’s also important to determine if an evaluator is willing to go to court if it comes to it, and how many times they’ve had to do that.

“You want an evaluator that is going to support you if something happens,” Bryen says. “You want someone that will go all the way. If the answer is no, they won’t go to court, then you want to pick someone else. You may not think you will end up in court, but these situations happen, and you want the evaluator to support you.”

In these situations, having an evaluator becomes even more important. Even experienced buyers should not go at it alone. For example, say a second-time buyer that used an evaluator for their first purchase decides not to use a practice evaluator for the second practice acquisition. They go through the first valuation and try to follow it step by step. But then an issue arises and it goes to court. The judge may not accept the valuation or opinion of value, because the buyer is not independent.

“You know more as a dentist about the practice, but you have a problem,” Bryen says. “Your word is not going to be accepted by a court because you’re not independent or impartial. They want someone who is independent, and will probably be more conservative than you. So, you need to have someone that will go all the way with you, just in case.”

Inspect, Inspect, Inspect

While combing through the financials and understanding the numbers is important, it’s also critical to evaluate the value and state of the physical building, equipment and inventory. If something goes wrong in these areas after a sale, it can end up costing the dentist a lot of time and money, which hurts the investment.

One example Bryen gives is that of a buyer who purchased a practice, and discovered after taking over that the air conditioning didn’t work. They then learned that it hadn’t worked for a long time, and nobody was made aware. They ended up going to court over the nondisclosure, which was time consuming and costly for everyone involved.

“It’s like buying a house in that you want to get a physical inspection,” Bryen says. “You don’t want to get stuck with problems that should have come up before the purchase, because it’s going to cause a lot of issues on the other side.”

Inspections should also go beyond the physical structure. Inventory should be evaluated (including small tools and instruments), and equipment and software carefully examined. Inheriting outdated or malfunctioning tools means hefty investments right out of the gate.

“Evaluate the condition of the equipment,” Bryen says. “What sort of shape is it in? How old is it? It can be older if it’s in good shape and there is a contract or warranty covering it and someone comes out to keep it updated. But if you don’t know the state of the equipment, the buyer might have to sink $100,000 to $200,000 into new equipment after closing. That’s going to add many more years before you start seeing any payback on purchasing the practice.”

Buyers will also want to consider if the technology in the practice is compatible with their preferred practice-management software. If you will be transitioning the practice’s current software to another platform, ensure that existing hardware such as digital imaging tools will integrate with the new software. Digital sensors alone can cost up to $10,000 (before hidden fees), and CBCT price tags reach into six digits, so replacing this equipment would be expensive. Some platforms and hardware don’t play nice together, and investing in software that isn’t compatible will result in additional necessary purchases.

If significant technology purchases are necessary immediately, the financial projections established during the purchase will no longer apply, leading to cash flow issues for the dentist.

“The income generated is going to be enough to amortize what was borrowed to buy the practice, but now you have to borrow a second time for the equipment,” Bryen says. “Your projection of the amount needed to amortize the debt changes when you take out a second loan. That money to pay that loan is going to come out of what the dentist planned to live on. Having someone that can give you a clean bill of health on equipment is an important thing that cannot be overlooked.”

A Good Relationship

You may have found what seems like the perfect practice to purchase, but the seller needs to be the right fit as well. While ideally every seller would be honest, upfront, and agreeable, that isn’t always the case.

Be wary of sellers that rush you to close quickly, or go without your own valuation. This scenario is often indicative that they are trying to hide something, or wrap up the contract before a dealbreaker comes to light. Don’t allow yourself to be rushed by a seller, no matter how eager and persuasive they may be. If the seller seems pushy, you may want to look even closer at their records and finances.

The seller should also be open to providing you whatever documents you request, such as financial records. While they may be hesitant to reveal confidential information, it is your right to know what you’re getting into. They may ask that you sign a non-disclosure agreement, but they should be forthcoming with the information. If you are provided with projections, remember that they are not guarantees. Likewise, a patient count might include all patients, including inactive ones, so be sure you are getting counts of only active patients, rather than ones that are just padding the statistics.

In addition to being forthcoming, the seller should also be supportive of the process. A responsible seller should introduce you to the staff, and give you access to employment histories and payroll. If there has been high staff turnover in recent years, explore why that has happened. Is it a culture clash with the departing dentist? Is the team being paid competitively enough? Determining the problems that are causing people to leave can help establish if there are adjustments that can be made to retain staff, or if the practice is a sinking ship.

The seller should also be willing to inform patients of upcoming changes, to help smooth the transition to the new owner. Patients build relationships with their dentist, and will trust the seller’s recommendations, if they are given enthusiastically. If there is a sudden switch to a new dentist with no endorsement or explanation from the prior clinician, the chances of patient attrition are high.

“You want to work with a seller that is collaborative and supportive,” Bryen says. “An introduction from the seller is a critical thing. A letter should go out about the sale, introducing the buyer. If it's not enthusiastic, it can cost you a lot of patients. You want the acknowledgement and blessing of the seller to go out to the patients, to build trust with them. The seller should be hyping the buyer.”

Moving Forward

Ultimately, there are lots of factors to consider when deciding to purchase a practice, and it’s important to be sure you cover your bases. Assembling a strong advisory team, being thorough in your evaluations, performing the proper inspections, and entering into a positive relationship with a seller can make the process a success.