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OUR PURPOSE

Utilizing over 25 years of experience in serving the dental community, we provide our clients with transition and consulting services to help them achieve their goals.  Through maintaining the highest level of ethical, professional conduct and personalized service, a commitment to excellence, and dedication to continual professional development, our objective is to ensure your transition is successful.

The Importance of a Good Fit in a Dental Practice Transition

Individual dentists have greatly increased their productivity over the last decade, thanks to increasingly sophisticated technology and expanded duty staff. Adding annual increases in billing rates to this, it’s no wonder that a large number of single-dentist practices now generate over $1 million in collections and that an even larger number generate over $675,000.

When owners decide to sell a dental practice of this size, the two biggest questions on prospective buyers’ minds and asked in anticipation of a successful dental practice transition are:

  • Can I produce what the seller is producing?
  • Can I afford this dental practice acquisition opportunity?

For those dentists desiring to sell a dental practice it is critical that they understand that an answer of YES to BOTH questions is NECESSARY in order for a practice a successful dental practice transition to occur.

To address these questions, a buyer needs to dissect the seller’s current production and collections and evaluate his or her relative capacity and level of skill, as well as investigate the practice’s cash flow as it relates to his or her own personal income needs and the price being asked for the practice. Consider the following EXAMPLE:

A general dentistry has decided to sell a dental practice at a price of $675,000, or 75% of its $900,000 annual gross collections. The practice’s hygienist generates 20% of collections or $180,000 per annum, and the remainder is generated by the sole owner/operator general dentist (the equivalent of roughly $66,000 in monthly production). The typical buyer will secure 100% financing for the purchase price plus an additional $100,000 for working capital and transactional costs (since the typical buyer does not purchase the historical accounts receivable of the seller).

 

Can I Produce What the Seller Is Producing?

Assuming the buyer for this practice plans to work five days a week and 48 weeks a year, the total dentist work days per annum would be 240. Dividing the seller’s $720,000 in annual collections for dental services rendered by 240 days equals daily collections of $3,000. Dividing this daily collections result by the practice’s collections on production rate of 95% reveals a daily production rate of $3,158. This figure alone can be very helpful to buyers as they compare their daily production experience with that required by the practice in question.

 

Yet another figure can be derived that will greatly assist buyers in the evaluation of the practice’s historical production relative to their own capabilities and interests. The average production per patient per annum for the typical general dentistry practice is $375. By dividing this figure into the daily production rate for the practice it can be generally determined that the dentist is seeing an average of 8.4 patients per day.

 

This last exercise in evaluating the seller production can be very revealing. Take for example a not uncommon situation where the buyer has divided the seller’s production by $375 and determined that the seller must be seeing 20 patients per day, but the seller only reports seeing an average of 12. What typically ends up solving this mystery is the discovery that, although the seller has reported the production of an even mix of usual and customary dental services, he has in fact generated a great deal more crown and bridge revenue relative to that generated from all other work than he realized. The prospective buyer can then increase the production per patient figure to $650 for instance, and the resulting daily patient count is reduced to a more realistic figure. Without breaking down the seller’s daily production to per-patient units, this realization would have never been made and thus a critical bit of information in the buyer’s determination of his or her fit with the practice would have gone unnoticed. Had the dental practice transition occurred, and the buyer not had the persuasive or speed of crown and bridge delivery abilities of the seller, a significant shrinkage of daily production would have taken place.

 

Can I Afford This Practice?

After closing on the acquisition of a general dentistry practice, the new owner will need, first and foremost, to do three things to stay afloat:

  • Pay the practice expenses necessary in the production of dental revenues (rent, lab, dental supplies, staff wages, etc.)
  • Pay the monthly principal and interest due on the practice acquisition loan
  • Pay himself or herself a wage sufficient to meet the base living expense needs

 

To do this consistently each month there must be sufficient cash flow to meet these costs plus provide some cushion for the inevitable fluctuations in monthly collections and expenses.

 

While the practice being considered generates total collections per annum of $900,000, it also generates expenses, not including the compensation of the owner/producer dentists, equal to 60% of collections or $540,000. (The typical general dentistry practice will experience an overhead rate of between 60% and 65% of collections.) This leaves $360,000 to meet the annual living expense needs of the new owner and his or her annual payment requirement on the practice acquisition loan. Subtracting the $146,113 in annual principal and interest paid on the practice acquisition loan leaves $213,887 for the new owner to cover personal living expense needs. Ideally, these living expense needs will not exceed $180,000 as a cushion of cash flow is necessary to ensure smooth bill paying each month.

 

A prospective buyer has any number of factors to consider when evaluating a dental practice, but let us emphasize again that two clear hurdles must be overcome before any other factors are relevant. The first is that the monthly production, number of patients seen per day, and mix of care delivered by the seller must correlate with the experience and expertise of the prospective buyer. The second is that the buyer’s annual personal income needs must be a fit with the funds available for that purpose. Again, the answers to both “Can I produce what the seller is producing?” and “Can I afford this practice?” must be “yes” before a buyer can even think of closing on a dental practice acquisition transaction.

 

This article is brought to you by McLerran & Associates specializing in Dental Practice Transitions in Texas.

© 2014 McLerran & Associates

In a Dental Practice Transition, the Numbers Count – How Fees Affect Dental Practice Value

Many dentists claim they don’t have time to apply sufficient attention to business matters such as overhead expenses, supplies and a marketing plan even before a dental practice transition occurs. Others just admit that they have a hard time getting motivated to give business matters the attention needed. The fact remains, dentists should do everything in their power to make time to maintain the business side of the practice especially if they want to sell a dental practice in the future.

Every day, dentists all over the country will call their accountants or other advisers and say, “I feel I’m not doing well.” When these same dentists are subsequently asked about the status of their practice’s production, collections, overhead, new patient visits, total patient visits and recall activity, the response most often given is, “I don’t know.” Not knowing the numbers leads to feelings of helplessness and frustration. It will ultimately result in dental Sell A Dental Practicepractice owners making uninformed decisions based on subjective judgment.

Taking X-rays of a patient’s mouth in order to carefully identify problems and craft the most effective clinical treatment plan is fundamental to the practice of clinical dentistry. No less should be done in the identification and development of the most effective means of solving business problems.

Whether it’s a clinical or business situation, diagnosing the problem and planning possible future courses of action is, in and of itself, a comforting exercise. The equivalent diagnostic tool of an X-ray in the business setting is the practice’s numbers. A good handle on the numbers and what they indicate as to the health and opportunities of a practice allow one to take the most effective business steps in matters of staffing, facility enlargement, moving the practice, adding an associate or selling a dental practice.

Some dentists feel that business statistics and numbers are incompatible with a service orientation toward patients, but just the opposite is true. Data is vital in assisting dentists in achieving their visions and goals for their practices. For example, if the 25 new patients per month do not share the dentist’s philosophy of care, then this number doesn’t reflect progress toward the dentist’s goals. However, the number of new patients fitting the profile the dentist has targeted would be helpful to know.

Fees and Practice Value in a Dental Practice Transition

Despite the obviously positive implications for practice profitability and value, many dentists are reluctant to raise fees in the years leading up to the sale of their dental practice. Most of these prospective sellers are winding down their careers, and thus believe themselves to be financially sound, and are reluctant to “burden” their patients with fee increases. However, a dentist who has not raised fees for 36 months passes on a need for a 9% fee increase if the buyer is to make up ground lost to inflation alone.

“Who cares what the former owner did or didn’t do with the fee levels of the practice? The buyer can fix that problem!” Unfortunately, it’s not that simple. Even in instances where buyers increase fees as a necessary act to cover ground lost by the seller to inflation, the mere act of increasing fees is often viewed by the patients and staff of the practice as a negative act rather than the appropriate adjustment to market. As a result, buyers will rarely purchase a dental practice with fee increases as a key element of their transition plan. Rather, they will make a discounted offer for the practice such that the fee structure in place is justified, by the price paid for the practice. In other words, dentists who have been reluctant to keep the level of their fees in line with the quality and method of their approach to dental care delivery, and in line with inflationary increases, end up paying for this lack of vigilance twice — once in the reduced practice income while they operated it, and the second time in the form of the reduced price for which the dental practice is sold.

Dental practices netting 40% or more before compensation for professional dental services are in highest demand. These practices are most likely to ensure compensation of 28% to 30% for the doctor and leave 13% to 15% for debt service and capital improvements. Very often practices put up for sale net less than 40% because their fees are below market for their area. Most buyers are not interested in purchasing a seller’s problems. Therefore, sellers need to correct over-staffing, as well as staff compensation and fee schedule problems before they sell a dental practice. The alternative, as previously noted, is for sellers to accept significantly discounted values for their practices.

Some sellers think that patients will leave if fees are increased. In fact, less than 10% of patients will even notice a fee increase from $650 to $710. The same fee increase made by the seller will result in less than 1% of the patients making an issue of the increase, while the same very reasonable and appropriate change made by the buyer typically creates a real sense of outrage and confusion for a majority of both the staff and patients of the practice.

This article is brought to you by McLerran & Associates specializing in Dental Practice Transitions in Texas.

© 2014 McLerran & Associates

Communication is the Key to a Successful Dental Practice Transition

Dental Practice Transition As a dental practice broker, we are often asked “What is the most important factor in facilitating a successful dental practice transition?”  The simple answer is: Communication.  While it is imperative for the buying doctor to build a strong team of advisors, complete their due diligence on the practice, secure financing, and navigate the closing process, all else could be lost if there is not effective communication between the buyer and seller during and following the transition of ownership. Read More »

Hiring the Right Dental Practice Broker (Part 2 of 2)

Dental Practice Broker (part 2 of 2)

In Part I of this article, we discussed how to go about choosing the RIGHT dental practice broker to represent you in the sale of your practice.  Part II of this article provides a couple of additional questions you can use to qualify a dental practice broker prior to signing a listing agreement:   Read More »

Hiring the Right Dental Practice Broker (Part 1 of 2)

Dental Practice Broker Selling a dental practice is a huge life event for a practice owner and will have a significant impact on their quality of life after the sale.  In previous articles, we discussed the reasons for hiring a dental practice broker and their role in the transition process.  While it is important to understand the role of a broker and the importance of utilizing their services, it is also imperative that you hire the RIGHT dental practice broker to represent you in the sale and facilitate a smooth transition.  When selecting a dental practice broker, consider asking the following questions before signing a listing agreement:Read More »