(Continued from prior article Buying a Dental Practice: How One Decision Saved My A** and Likely, My Career)
As a dentist, it’s one of the most important decisions you will make in your career, yet most will not have a transition advisor when buying a dental practice. I get it; you’re paying an attorney and a CPA and feel they have you covered. They will certainly provide you with legal and accounting advice and you may be advised as to reports you should review.
How will you know whether the reports are accurate? There’s no way to know for sure unless you have a well-qualified transition advisor represent you.
Most selling dentists assume the practice management reports speak for themselves. The fact is, the more PPOs or managed care accepted, the more likely the production to collection percentages are inaccurate. Many practices with a large PPO or managed care patient base bill at the PPO fee, rather than the practice’s normal fee schedule. Chances are, the practice owner doesn’t truly know how the data is entered and under what parameters. It’s easy to understand how they would take their numbers at face value.
An example: Dr. Smith’s year-end report shows production was $960,000.00 and collections were $949,000.00. This puts their collection to production percentage at 99%. Looks great!
In looking further, I note that the practice participates in 5 PPO plans and immediately realize that something is off. The average PPO adjustment is over 30%. This practice participates in 5 PPO plans, so there’s no way they’re truly collecting 99% of what they’ve produced. Unless…they are billing patients via the insurance plan’s fee schedule, rather than the practice’s fee schedule.
There are multiple problems with billing insurance and your patient based on an insurance company’s reimbursement rates. This is one that most don’t realize: Unless an insurance company is billed at your normal fee schedule, the practice will not receive a raise in reimbursement rates unless you hire a PPO fee negotiator. Why would an insurance company pay you more than the fee you billed? They won’t.
In this case, it does no good to review the normal practice fee schedule when trying to determine the potential of the practice and what the production to collection percentage really is. A purchaser will need to review the practice fee schedule in addition to each participating PPO fee schedule. Keep in mind that if the seller is a premier provider for Delta, they are likely compensated at a higher rate than you will be. Check your state plan.
You may wonder why the true production numbers matter. These numbers matter because you incur a majority of your expenses based on your production. You can’t produce without employees, equipment, supplies, lab fees, electricity, etc. You need to know the true production numbers.
Other important considerations for an advisor:
You need someone who not only knows what reports and documents need to be reviewed but also where and how to find them.
Your advisor should have a great understanding of the practice’s cash flow, and an understanding of the profit and loss report is essential.
Know your lenders. There are options out there. I am a fan of dental-specific lending institutions as they typically make the loan process less daunting and loan 100% of the sales price plus working capital. It’s a good idea to obtain pre-approval for a loan.
In summary, hire someone who understands the ins and outs of a dental practice transition. Every practice is different. No two teams are the same. It’s unlikely that two philosophies will be the same. There will always be variables. Having a personal transition advisor will give you a huge advantage.
Regardless of how you transition into or out of dentistry, surrounding yourself with people of integrity is a decision you won’t regret.
You need an advisor who can help you stand your ground on the practice A/R. If you don’t want to pay an employee to collect the seller’s A/R after the transition, you can make an offer to purchase the A/R. There’s a simple formula to which most buyers and sellers gladly agree.
Other issues that require advice following the acceptance of an offer:
- What to do about work in progress
- How are remakes handled?
- Lease or real estate purchase negotiations
- Proration of employee benefits
- Credits on patient accounts
- Letter to patients announcing new ownership
- How and when to tell the team about the practice sale
What I’ve listed above are just a few of the things with which an advisor will help you during a transition, and these are just a few of the decisions you will make during the transitions process.