Will 2017 be the year that you decide to purchase a dental practice? Whether the practice will be purchased using the services of a practice broker or if you find one through your own efforts, you will have to invest time and money in conducting proper due diligence prior to buying that practice. One of your first steps should be retaining an accountant, preferably someone with dental experience, to assist in reviewing the practice valuation report as well as any financial information of the practice you intend to purchase. The next step is retaining an attorney, again, preferably with dental experience. This is serious business, since purchasing a dental practice will be the largest investment that you will make in your dental career! So “pulling out all stops” is essential to ensure that you minimize errors that may cost you greatly and that may have a long-term financial impact. In fact, some purchasers will have a transition consultant to assist them in the due diligence process.
Here are several of the key areas that must be addressed in your due diligence process:
Active Patient Count
The size of the patient base that you will acquire is an extremely critical component. For those few dentists who have encountered financial problems when purchasing a practice, it is often related to a significantly lower active patient count than they assumed. So it is incumbent upon you to verify the true size of the active patient base. Determining a time-frame for a patient visit is the first step in conducting your patient count due diligence. The most common timeframe for a patient visit is between 12 to 18 months. We prefer 18 months as the timeframe when a patient has made at least one patient visit. The easiest way to determine an active patient count is to run a computer scan for the prescribed timeframe, requesting at least one patient visit over that measurement period.
Another way to determine the active patient count is to conduct a chart audit. A complete chart audit requires a review of every patient record. This is impractical as well as a very time-consuming process. A practical alternative to conducting a complete chart audit is to use sampling techniques. This can be done by taking a sample of 100 patients. The sample needs to be a continuous group of patients at any point in the alphabet. Within the sample size determine whether a patient has visited the practice within your selected timeframe at least once. There are guidelines to adhere to as to recording this review in the patient chart or in the electronic record. You should confer with your attorney as to appropriate protocol. Next, calculate the percentage of patients who visited the practice within your sample and multiply that percentage by the total patient count. This can give you a reasonable estimate of active patients in the practice.
If you want a better understanding about the composition of your patient base, it is wise to run a demographic analysis report. For example, if you are considering purchasing a practice in a small town, this will give you an idea of where the majority of patients reside. This can be useful information, especially if the owner has been practicing 30-plus years. Often, we see this type of practice having a good number of patients who are second- or possibly third-generation patients who may not live in the immediate area. They may have elected to travel considerable distance to visit their dentist of many years. However, if the distances are substantial and the seller is retiring immediately after the sale, there is a high probability of attrition, as many of these patients may decide to find a new dentist closer to home. This analysis, of course, is not as critical in urban or suburban communities, since many patients may travel from their business location to the practice rather than their residence. Also, knowing the age distribution of your patients may be useful based upon the type of services you are planning to provide.
New Patient Inflow
New patient inflow gives you a clear indicator of a practice’s vitality. In practices where the owner has been reducing clinical time and possibly not accepting new patients, it may be a real problem. For example, purchasing a practice that averages three to five new patients a month will require a substantial investment in internal and external marketing programs. Since patient attrition is a common occurrence in any practice as it can vary anywhere from 10 to 20 percent annually, based on the practice location. So consider purchasing a practice with a good patient inflow, for example, in the range of 20 to 30 new patients a month, would be preferable.
Clinical Production Analysis
Analyzing the last two years of clinical production is another important task in the due diligence process. For example, if the retiring dentist has been focusing for the last several years on providing complex restorative services, it won’t be surprising for you to see a 50 to 60 percent ratio of total seller production in that area. That may be a warning bell, particularly if the new patient inflow is minimal. It could be a harbinger of a slower or no growth practice. Reviewing all hygiene procedures is key to determining the potential for growth in the hygiene area. Determine the ratio of hygiene services to total practice production. It should at least be in the 25 to 30 percent range for a general practice. If less than this range, it may mean that there is room for improvement in the recare program. Next, calculate the ratio of perio procedures to overall hygiene production. This will give you an indication of the practice’s perio orientation. If this is a very low ratio, less than 5 percent, chances are that you may be able to see significant growth of perio services. You can learn a lot about the seller’s referral patterns by reviewing the production report. For example, a lack of endo procedures in a general practice bodes well for you as many of these procedures can be provided by you. Thus, another way to increase revenue!
Not all dental offices for sale have relatively new equipment and state-of-the-art technology. So it is critical that you retain the services of a dental equipment specialist from a dental supply company to perform an inspection of all major dental equipment items. You want to ensure that everything is in good working order and that no repairs are required. If there are problems they should be corrected before settlement. If the practice has an abundance of clinical technology devices and equipment, make sure that everything is functioning properly.
Finally, make sure that you have an equipment list inventory for each treatment room. This inventory should also be included as an attachment to your Practice Purchase Agreement. Unfortunately, we know of situations where certain pieces of critical equipment and/or technology that the purchaser understood was being purchased, mysteriously disappeared after the sale was completed … and before you begin your first day of operation!
As mentioned earlier, retaining an experienced accountant to assist in your due diligence is key to ensure that you are making a worthwhile investment. Many accountants will also prepare a cash flow analysis to illustrate a financial forecast protecting future income and expenses. Some accountants prefer reviewing bank statements to verify certain expenses as well as correlating them with tax returns. In some instances, accountants have discovered irregularities between seller’s production reports, insurance reports and financial statements. If there are irregularities, it may mean irregularities in insurance billing. That could be a potential problem, especially if there is a future insurance company audit. There have been instances where insurance carriers discover fraudulent practices of the former owner and although no longer with the practice, it may prohibit the new owner from participating as a provider with that company!
So, you can see purchasing a dental practice does require a lot of hard work on your part as well as your advisory team. However, if you take the time to conduct proper due diligence you are lowering the risk of future problems. Taking shortcuts and not investigating thoroughly some of the areas presented may end up costing you much more in the long run!