Posted on Jun 11, 2012
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Posted on Jun 11, 2012
By Larry Chatterley and Randon Jenson, CTC Associates
Evaluating a Dental Practice Transition Opportunity
First and foremost, when a practice opportunity presents itself, you should ask yourself, “Is this practice opportunity complementary to my goals and needs?” Goals and needs such as: “Does this practice opportunity address all my financial obligations? And is the philosophy similar enough to allow me to do the type of dentistry I want to do?” Establishing guidelines about your needs and goals will make it much easier to identify opportunities that are right for you.
When it comes to gathering the information required to make an educated decision, many doctors feel perplexed and overwhelmed. Obviously, a dental practice should not be purchased without first sufficiently studying the data. Nevertheless, enthusiasm frequently overrides objectivity, and many dentists decide to close a purchase prior to conducting the proper due diligence.
A good indicator of the future success of a dental practice is its track record. A practice that has demonstrated stable income over an extended period of time is likely to continue to do so. A productive history of active patients and referrals indicates satisfied consumers who are happy with the quality of care they have or are receiving. An extremely positive attribute is a good active patient base coupled with a healthy flow of new patients. Add to this a cooperative seller, good staff, and a profitable bottom line, and you have the ingredients for a successful practice.
Consequently, it is important that the purchaser conduct a patient chart audit. To accomplish this, pull every tenth chart and review the following:
Review these five areas and rate each patient (chart) on a scale of one to five (five being the best). For example, if the patient comes in every year for hygiene, has some restorative work done, has good insurance, and lives within a five-mile radius of the practice, then he or she is probably a five. However, if the patient visits infrequently and has poor insurance coverage, he or she might be rated around a one or a two.
If after you review 100 charts the composite score is less than 200, you may need to re-evaluate the intangible value of the practice. A healthy dental practice should have 250 to 350+ active patients (patients of record seen in the past 18-24 months) and 30 or more new patients for every $100,000.00 of gross, annual revenue. The number of active good patients and the number of new patients is critical to the degree of success achievable in the practice.
As a buyer of a dental practice, you are purchasing a future stream of income. The most important part of the income stream is what remains after paying all necessary overhead expenses and debt related to the purchase of the practice. This is referred to as the pretax, economic earnings, or pretax profits. This figure should be around 25% (or more) of gross collected revenue. If you are unable to make a reasonable income (at least 25% of your gross production after overhead expenses and debt service in the first year), then either an adjustment should be made to the purchase price and/or terms or you should continue looking for another opportunity.
In addition to reviewing the patient profile of a practice, there are several other items you should investigate such as the reasons the seller has for selling a dental practice, the seller’s philosophy in treating patients, the price and terms, the location, the current status of the local economy, profit and loss statements for the last three years, the condition of the equipment, the staff profile, a fee schedule, the type and prevalence of insurance plans, the terms of the office lease, and the level of OSHA compliance in the office. These are several of the numerous criteria for evaluating an opportunity.
As you can see, it can be a costly mistake to undertake researching a practice opportunity alone. Seek professional help in this area. It may be the best decision you make in planning your career and will ensure that you “do it right the first time.”