May 1, 2020

A guide to buying a dental practice

Speed, Price, Criteria - pick 2

Know what is important to you and understand how that influences the rest of your search. The first executive decision you will make as CEO is how to tradeoff between factors that matter to you. The process of finding a firm to buy is a tradeoff between three variables: speed, price, and criteria. You can only prioritize two of those variables. The more narrow your search criteria (i.e. location, practice size, specialty, insurance mix, etc.) the fewer practices will match those criteria and the more it will impact either the amount of time it takes for you to find a practice or how much you have to pay to buy the perfect practice. 

Start your search with trust.

Once you’ve made a decision about how to prioritize the variables of your search you can start engaging with the dental-buyer community. 

The most important decision you can make at this stage is finding an advisor you trust and someone aligned with your interests. There is a big community of experts who can help you understand which practices are available. These folks include dental CPAs, bankers, lawyers, consultants, and buyers representatives (or brokers). These folks are highly networked with one another and with the seller community. They have a good sense of which practices are for sale or might be coming up for sale and can help you connect with the right partners.

This is where your search will feel daunting. You have to manage relationships with a dozen different brokers, bankers, accountants, and attorneys to try to uncover insights about the practices that are for sale. I spoke with one buyer who checked each broker’s website 3 times a day to make sure he wasn’t missing any practices that might have been posted. I talked to a different dentist who visited the offices of 38 dentists to try to understand who was interested in selling.

Legacy (thelegacymarketplace.com) is your technology partner through this process. Think of Legacy as a cross between LinkedIn, Zillow, and KellyBlueBook. We’ll help you get connected to the right people in the industry, we’ll help you understand the market and see what’s available, and we’ll help you understand how different features of a practice influence the cost. 

Shopping around

Think of buying a dental practice like buying a house. You check out the details online and if it seems compelling you will visit to get a feel for the flow of the house, the neighborhood, and to picture yourself in that space for years.

The goal of all this activity is to find a practice that meets your criteria and to feel comfortable delivering a letter of intent.

Searcher turned buyer

The transition from searching to buying all starts with an LOI (letter of intent). This is a formal letter that says you intend to buy someone’s practice contingent on the underlying details of the practice matching what they’ve told you. Read more about a letter of intent here.

This is where diligence begins. Conceptually, you can break diligence into two types: financial and dental. The goal of financial diligence is to make sure the practice is reasonably worth the price you will pay. Your banker (and CPA) are important advisors for this exercise. They will help review the details of the practice, tax returns, billing, insurance payments, and analyzing collection patterns, etc. At the end of the financial diligence process, you should feel confident that the practice is worth the price you’ll pay.

The goal of dental diligence is to understand and evaluate the patient population and treatment patterns of the practice. You’ll have an opportunity to complete an audit of patient charts and notes. This exercise will help you understand the type, patterns, and frequency of dentistry performed, allow you to ensure a fit between dentistry performed and your interests, and help you better predict your production in the first few years of transition. Consultants can help you with this process. At the end of dental diligence, you should feel comfortable serving the patient population and that there is sufficient production for you.

Close

You’ll need to make sure you’ve done all the work necessary to function as a business once the transaction closes. These include things like: filing for tax IDs, filing permits with state agencies, getting insurance, opening bank accounts, and opening merchant/supplier accounts. 

Closing the deal is the culmination of all the work you’ve put into planning, evaluation, and negotiation prior to this point. It is also the point where all the little details take shape, it is important to stay in close contact with your advisors (especially your banker) at this stage. Ultimately, your bank will fund your loan, the money will go into escrow, you’ll sign all the transition documents, you’ll take possession of the practice and the seller will get paid. 

Transition

Now that you’re the owner it is time to start operating the business. The first step is rehiring all the staff as employees of your practice. You’ll also want to announce the details of the transition and change of ownership to patients. Depending on how you structured the distribution of accounts receivable and account payable you’ll also need to manage those inflows over the coming weeks and months. 

That’s it - it’s time to start practicing dentistry!

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