Purchasing a Dental Practice
After practicing as a dentist associate for a number of years,many dentists begin thinking of purchasing their own dental practice. The search often begins by contacting the companies that appraise dental practices. There are at least five active companies that appraise dental practices. Each company has their own methodologies on valuating the practice, which consists of valuating the hard assets (dental equipment, leasehold improvements, computer equipment and software, instruments) and goodwill (patient charts). The goodwill can be valuated based on production, cash flowor future projections. In the current dental industry, it appears to be a seller’s market, and as a result practices are being sold for prices higher than appraised value. The purchaser should engage a team of professionals (banker, lawyer and accountant) as soon as possible. Once the dentist identifies a potential target, they should contact the professionals and book an appointment for a viewing. The accountantwould reviewthe appraisal and advise on the financial information that is pertinent to the practice being reviewed. Most practices being sold, are selling shares versus assets of a dental practice. This benefits the vendor however, since it is a seller’s market, for most transactions the purchaser does not have any room for negotiation in this area. The normalized cash flow represents the cash flow the practice generates from practice expenses only. This amount is usually 45% of the total production of the practice. You must deduct the bank loan payments and corporate income tax from this amount, to arrive at what you can expect to be available for your own income. The production income and number of active patients should be reviewed carefully. The production per active patient can average $600 per patient and higher. Hygiene production can range from 30 – 40% of the total production of the practice. Depending on the amount of dental production, you may need to pay an associate to assist at the practice. It is important to review the dental procedures being done to ensure you can continue performing these procedures. In addition, if there are procedures being referred to specialists that you could perform yourself thiswould be a benefit to you. The number of operatories available and square feet of the practice will determine the potential for growth in the future. Most dentists are looking for at least 4 operatories. The employees provide valuable goodwill to the practice. The rates of pay, employee benefits and years of service should be reviewed carefully since they are transferred to the purchaser. You want to determine how they compare to market rates and your obligations if employees need to be terminated when purchased. Determine the current employment of the office to see if it is anticipated that there would be any short term terminations required. The cost of wages and benefits average 25% of the production of the practice. Typically, if the vendor were to agree to share the cost of termination of employees, it would be 50% of the costs, if an employee were terminated up to 6 months from the date of purchase of the practice. The lease of the premises is another important factor to the purchase. There should be at least 10 years available to lease in order to at least cover the term length of the bank loan. The monthly rent will usually average 6% of the total production of the practice and consists of base rent, TMI and HST. It is important to review the lease for exclusivity, demolition clause, tenant restrictions in plaza,right to relocate tenant,wheelchair access etc. It is not uncommon for dental practices to have multiple offers and therefore the purchase prices can range from 10% over the appraised value and higher. The dentist should contact the bank to determine if and howthe bankwill finance the amount over appraised value. It is also important to reviewthe offer pricewith the accountant prior to signing a formal offer. In conclusion, there are many steps required prior to making a formal offer to purchase a practice. This is why it is advisable to speak to a team of professionals to help with the process of the purchase.