Posted on Dec 12, 2011
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Posted on Dec 12, 2011
By Rod Johnston, MBA, CMA of Omni Practice Group
I meet over 150 dentists each year who are looking to buy an existing dental practice. Of those, I would estimate that 30% have done any research on what is involved in buying a practice. Of those 30%, none of them know the beginning-to-end process of buying a practice. While I can’t cover all the steps in this article, I can give you some guidance on where to start and what steps to take before buying a dental practice. The very first recommendation I have is that you should be at least two years out of dental school. I have seen dentists buy a practice right out of school, but I’ve seen the majority of them struggle for two years until they finally figured things out. Now that I’ve got that out of the way, here are your steps:
1. Contact a bank that finances dental practice acquisitions and make sure you can qualify for a good loan. The days of just having a D.D.S. or D.M.D. and being qualified are gone. Banks now require decent credit scores, cash in the bank, and in some cases a current associateship. Try to avoid SBA loans if you can as they can be expensive with early payment penalties.
2. The next step is to understand a little bit about a dental practice valuation. You don’t want to go into a sale not knowing if the practice is worth the price listed or not. A “rule of thumb” is that a practice is typically worth between 65% and 75% of its last 12 months’ production. Remember, that’s a rule of thumb. I’ve seen practices go for as high as 110% of production and as low as 50% of production. For a book on Dental Practice Valuations, contact Omni Practice Group and I’ll send it to you.
3. Think about where you want to practice. You’re probably going to be there a while, so you might as well like the area. Also, research demographics. There are excellent demographic sites that sell great dental demographic information for about $500. It will tell you where the best locations are to practice.
4. Put together a good team. Get referrals for a good dental attorney, a dental practice broker and a good accountant. They’ll help you find a practice, analyze its worth, and do the legal work.
5. Study up on practice management and dental financial ratios. You should know that lab fees should not be any higher than 10% of the practice production. Or, that staff expense should be between 20% to 25% of production.
6. Be prepared for your due diligence. You need to know what to look for when you do get to the point of buying a practice. Is it an older dentist selling that hasn’t done much treatment in the last five years? (Buyer beware.) Or is it a conveyor belt dentist that has done every spec of dentistry, and then some, on all the patients, so there’s none left for you? Know how to spot these things.
7. Finally, spend some time with a dental practice broker before you go look at the practice. Understand what the practice you are looking at is all about. Does the dental practice broker think it’s honestly a good practice? Why? Once you’re comfortable with the numbers, then go take a look at the practice.
By being an informed buyer, you will avoid a lot of headaches and potential problems down the road. There are practices that are gold mines and practices that you should not touch. Being educated and knowing the difference is critical in your dental practice acquisition success. Qualified support from dental practice brokers who have engaged all these steps countless times before make for the best partners.