Practice Management

Caveat Emptor: Buyer Beware the Importance of Due Diligence in the Purchase of a Dental Practice

By

Ron Weintraub

on

September 15, 2015

September 15, 2015

Transition (buying or selling) of existing ongoing dental entities seems to have significantly increased in the last few years. Many factors have influenced the heightened levels of purchases and sales. Among them are the following:1. The increased evaluation prices attached to practices with a decent patient count.2. The large numerical disparity between potential sellers and purchasers found in the market.3. Extraordinarily low interest rates and the desire of financial institutions to attract dental clients by offering complete financing, often below prime.4. The number of “Investor Dentists” who desire to own a number of different practices situated in various locations.5. Corporate entities that have owned and run a significant number of offices purchased from transitioning dentists who remained in place for often up to five years to provide a level of continuity tend to drive up the “sticker price” on many practices.6. A large number of internationally trained dentists who have run successful practices in their country of origin and do not wish to follow the associate route are frequently represented in the purchasers pool, and7. The recent phenomena of Canadian dental faculties increasing their graduate numbers.

It is not unusual to see evaluations in the 1.4 to 1.8 K ranges for a practice in large urban areas having a reasonable patient base providing the potential of an ensuing bidding war. This type of scenario could raise the actual outlay by as much as 20 per cent over the evaluated asking price.

ASSESSING  THE EVALUATIONActive practice brokers accurately represent the numbers that reflect the performance of the practice as it currently exists based on the information provided; for example:1. Number of patients2. Variety of multiple procedure codes3. Number of actual patients of record that practitioners provide should reflect an honest opinion of the ongoing historical success of the practice. Practice brokers discharge their fiduciary responsibilities by reporting the data they have requested from the vendor dental office. The report can record only the data that has been provided to them, and they are not responsible for any deficiencies not made available. Production by departments, for example, hygiene department or denture therapy, is usually taken directly from computer reports, which may or may not accurately reflect reality.4. NOTE: Crucial information not provided by typical practice valuation is subjective and requires independent analysis by the purchaser.

EVALUATING A POTENTIALLY TRANSITIONING PATIENT BASEWhat do we need to know about the patient base, goodwill, and staff when evaluating possible change in the practice?

PATIENT BASE1. A demographic analysis of the patient base should indicate where patients are presently located in relationship to the office. Their proximity to the dental office is an indicator of their potential willingness to remain with the new owners of the office. Long-standing patients of the previous owner are at risk of leaving during the transition as they reassess their relationship to the new incumbent.2. How easily will a patient accept the possibility of a more proactive approach to diagnosing pathology and subsequent treatment recommendations that could vary from the approach of the “Let’s watch it” habit of the previous trusted practitioner?3. Is the practice philosophy of the purchaser compatible with what existing satisfied patients had become accustomed?4. How likely will extremely committed patients followthe vendor dentist if he/she sets up a new office even if it were just outside the territorial limits prescribed by the agreement of purchase and sale?5. Does the existing philosophy seem to e-xhibit the flexibility and growth potential to embrace the inevitable changes that the new owner wants to adopt in the office?6. Is the practice run on an insurance driven basis and may be hyper sensitive to attempt to diagnose a treatment plan for patients’ actual needs as opposed to what their coverage may be?7. Has the potential purchaser been given a breakdown of the type of insurance benefits of patients? For example, does the purchaser know the number of patients on the Ontario Disability Support Program or who are welfare recipients?

GOODWILLMany prospective purchasers look at the net profit displayed in the evaluation and forget to adjust for the fact that at least forty per cent of the dentist’s personal clinical production should be removed from the goodwill being purchased. This portion of the goodwill could be replaced by associate percentage fee allocation without having to pay for the privilege.In multi-provider practices, what is the status of long serving practice associates who may feel that part of the goodwill allocation attributable to them, but the vendor dentist has no legal obligation to compensate the associate in the event of the sale. That individual, who often has no contract, may decide to move to a nearby facility and most of his/her patients and records could follow.

STAFF1. How many of the long serving staff would have difficulty in transitioning their loyalty from the former owner to the new owner? For example, commiserating with patients who miss their previous relationship with their dentist can hinder a successful changeover.2. What is the predominant ethnic distribution within practice providers and patient population?These are only some of the areas that may not be fully dealt with by a typical practice valuation document. Many areas of the practice can be brought to light by intensive scrutiny during the due diligence phase. A number of professionals, if deemed necessary, could provide assistance during this crucial period. Many lawyers and accountants with dental knowledge, practice management groups, and perhaps dental supply personnel who are familiar with that particular practice would be able to smooth the way to a potentially successful conclusion for vendor and purchaser.

Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-five years of knowledge and experience in the practice of general dentistry to the Professional Advisory. Large companies such as Patterson Dental, Ash Temple Ltd, Henry Schein Arcona, & the former Canadian Dental Co. have benefited from his insight. As owner of Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buy-ins, and business mergers. Dr. Weintraub can be contacted at (905) 470-6222 Ext. 221 or drronips@rogers.com.