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    5 Replies Latest reply on Mar 11, 2010 9:46 AM by KidsDoc

    Purchasing an Existing Dental Practice

    KidsDoc Newbie

      I am in the process of talking to an existing dental practice about purchasing their business. The existing practice is rather old but generates substantial revenue. Furthermore, the facilities are outdated and physical assets are all but written down. I have been provided with professional valuations, supplied by the seller, of course. I don't believe the figures but I am not sure how to place a value on the practice. Yes, I am purchasing existing assets, but I am also buying patient charts and a business operation. So while there is little value in the existing assets (book value), there is still value in the operations.

      Does anyone have concrete advice that they could share to best help me value the practice?

       

      KidsDoc
        • Re: Purchasing an Existing Dental Practice
          Bridge Navigator
          Get professional help on your side of the table. In your case, specifically a busines broker who specializes in healthcare. Aside from the valuation issues, there are mant transactional issues you will need help on.

          Greg Dupuis
          1 of 1 people found this helpful
            • Re: Purchasing an Existing Dental Practice
              KidsDoc Newbie
              I agree that I will need professional help on my side of the table. I definitely need help on the transactional items, when/if we get to that point. However, I am still in the early stages and I need to determine whether this is a business that I should even consider, prior to bringing a broker into the mix. I'd like to do some due dilligence on my own to determine how serious I should be about this opportunity.

              The practice is valued at slightly less than 1x of annual gross revenues. I know I will need to make heavy investments in property upfit, equipment and technology. Do I discount the valuation price by the capital outlay I would need to make in order to bring this practice up-to-date?

              KidsDoc
            • Re: Purchasing an Existing Dental Practice
              UncleLeon Scout
              According to data on the sales of Dental Practices from "Business Brokers of Florida"; Dental offices do not bring a very high sale price, relative to the cash flow they generate.

              In the area where I live, (Florida), Dental Practices with an adjusted cash flow between 1/4 milllion and 1/2 million have generally been selling for .75 to 1.25 adjusted cash flow.

              Whether the assets have been "written down", or not, should have little bearing on the value of the practice. However, the cost of replacing outdated or inadequate equipment should be considered in any purchase offer you make.

              A non-compete clause is also important. Obviously, you don't want the seller re-establishing a practice 5 miles away and having the patients all follow the previous dentist to a new location.

              What you are really buying is the hope that the patients will continue to come to the practice after you purchase it. Some won't. Some will once or twice, then go someplace else. You still must "Woo" them to continue to ome to you.
              1 of 1 people found this helpful
              • Re: Purchasing an Existing Dental Practice
                dublincpa Scout

                A business broker is one way to go. An additional option is that there are many CPA practices that focus on Medical/Dental practices. They usually have significant experience with practice valuation. Regardless of whom you choose to employ, be sure that their interests line up with yours. Make sure that their compensation is not contingent on price or even the fact of a closing.

                Engaging a professional whose interests don't conflict with yours to assist you sooner than later will likely save you time and money in the long run.

                You will also NEED a good transaction attorney. Either a specialized broker or CPA will be able to direct you to one. There will be non-disclosure agreements to sign prior to due diligence. You need professional help to avoid signing an overly restrictive agreement. I have seen NDA's that try to preclude you from operating within a specific distance for a specific time, usually short enough to be enforceable, but long enough to be a nuisance.

                 

                Many professionals try to value practices based on Revenue. The other common method mentioned by Uncle Leon is Cash Flow driven. Which one is more appropriate depends largely on the characteristics of the operation. Do they have adjusted margins that are above or below market? Are there non-owner key employees? If so, what agreements do they have in place?

                 


                You will want to start with whatever CPA prepared financials are available as well as the tax returns of the entity and any shareholders.

                 


                The more common methods are related to adjusted gross profit if there is an opportunity for a substantial overhead reduction or to adjusted EBITDA. The latter being the most common and seemingly relevant to your situation.

                Add net owners comp and benefits back to EBITDA then subtract a reasonable amount that it would cost to have an unrelated party run it. Be sure to include add backs and subtractions for family members that are paid more or less than market wages and benefits as well as an adjustment for rent if the property is owned by the entity or related company and rent is paid above or below market.

                 


                If the real estate is not owned, what does the lease look like as well as renewal potential. This is true whether you want to stay or get a new location. If the lease expires after your purchase, will you be responsible for the cost of removing the equipment and improvement and restoring the space to a warm shell or some other status?

                 

                Are you paying cash? Will there be bank or seller financing? Will there be a price adjustment written into the agreement?

                 


                Feel free to contact me if you need more help.

                  • Re: Purchasing an Existing Dental Practice
                    KidsDoc Newbie
                    Thanks all for the really great advice! In fact, I was also able to locate a book by the ADA that talks through practice valuation that provides a lot of insight. Much of which is in synch with what I I have learned already from this community. Although, I think there is more insight here. :-)

                    I do have copies of the practices income statement and tax filings. The seller's broker based their valuation on figures that are consistent with tax filings and my husband is helping me sort through the financials. He is an MBA, but with limited experience in dental practice valuations. I plan to get a broker to help me valuate and conduct the transaction.

                    Given the state of the equipment and practice, I am no longer thinking in terms of buying the tangible assets of the practice, but rather the business operations that generates a stream of income. I will need to see if my personality and work methods are going to greatly conflict with the existing doctor. If they do, it is probably an indication of risk to future revenue streams and I would need to offer a price that takes that into consideration, right?

                    I am trying to think of what other details may be pertinent. This transaction will be financed and I would retain the retiring dentist for a period of time to transition the patients. The real estate is not owned, it is leased. And I am debating whether a new location is warranted but I'd rather make that move after I have established myself and can use retained earnings from the practice to re-invest in the business.

                    Any other things I should be thinking about?

                    KidsDoc