Finding your Ideal Practice (A guide for new buyers)

Drew Phillips, CPA | CFO Advisor

 

You have waited a long time to realize your dreams of practice ownership. You have read everything you can get your hands on, listened to countless podcasts, met with mentors and dental classmates that have already taken the plunge into ownership, all to hopefully gain a leg up in the buying process. The more you read and listen the more you begin to realize there is to learn and the feeling of being overwhelmed or uneasy about the buying process may start to ensue, but there is light at the end of the tunnel, and I’m here to help!

I may be a bit biased, but step one in the buying process is to find someone like PracticeCFO to be in your corner. A great Dental CPA not only knows the financial aspects but understands the entire transition process from each angle and will be your trusted sounding board throughout. The invaluable Dental CPA is there for you no matter the day or time, because your mind doesn’t stop moving when business hours end. Especially during a time when you’re constantly presented with new information.

To find the right practice, you need to define what the right practice looks like for you. A few of the key things to figure out for yourself when defining the right practice:

  1. Where do you want to live?
  2. Where do you want to practice?
  3. What patient demographic do you relate with most?
  4. What dental procedures are you comfortable doing now?
  5. How much are you willing and able to produce a year? (Think doctor production only)
  6. How many equipped/plumbed operatories do you want?
  7. What is your personal budget now?
  8. What do you want your personal budget to be in the future?
    1. How much does your dream home cost?
    2. How many kids do you want?
    3. What hobbies do you want to pursue?
  9. When do you want to be an owner?
    1. Give yourself a timeline to adhere.
  10. Do you want to partner or be the sole owner?

 

You’ve defined your ideal practice, and now the hunt begins. To have the highest chance of finding your ideal practice you need to extend your reach by sharing what you’re looking for with dental CPA’s, brokers, dental-specific bankers, other dentists in your network, dental societies, and anyone else that can potentially connect you with a seller.

Some of the best opportunities I’ve seen were created by knocking on doors. The process is simple you select the area you want to practice and live and you create a database, in excel or even on a piece of paper, of every dentist in the area. Next, you narrow down your list to those dentists that are at or near retirement age. Lastly, solicit them with the idea of purchasing their practice.  Talk about creating your own destiny!

  1. Always practice professional skepticism when taking advice from anyone, including me! The dental industry is not exempt from poor business practices, and in the early stages of your career, finding the right people to be on your team is critical. Understanding the monetary incentives of the people that you’re considering for your team is essential.Brokers – We love brokers, in fact we have one of the best in the industry here at PracticeCFO, John Hale, and you’ll have to chat with John to see how we’re shaking up brokerage for the better. Traditional dental practice brokers earn a percentage of the final sales price. Therefore, their monetary incentive is to sell practices for the highest price. The highest price isn’t always the fair price, and their reports of the practice should be taken at face value and researched by you and your Dental CPA independently. Brokers are also not a fiduciary to you, meaning they can accept contingent based fees, referral incentives, etc. The referral incentives can be a main source of revenue for traditional brokerage houses, a fact that you’ll want to consider when understanding why they referred you to one person over another.
  2. Bankers – Bankers are great people, we work with them every day, and they are ultimately the ones who are going to help you finance your practice. Similar to brokers, bankers are also paid as a percentage of the purchase price or loan amount. However, bankers, unlike brokers, have to make sure that the practice isn’t at risk of defaulting on the loan, which keeps their monetary incentives relatively in line with your success. Bankers and their underwriting departments aren’t the best at sifting through the noise of practices financials to understand the long-term prospects of the practice, this disconnect can potentially leave buyers in a practice that may cash flow well enough to pay the loan but has limited upside potential.
  3. Dental CPA’s – Hey, I’m one, and I like us too! CPA’s are compensated on set predetermined prices that aren’t contingent on the purchase price amount, or the deal closing. Each Dental CPA firm will have their own fee schedules, but the nature in how they charge fees are the same. CPA’s have a fiduciary responsibility to their clients, which ethically bounds them to act in their client’s best interests. At PracticeCFO, we do initial valuations of practices for buyers for free, we do this so you can compare and contrast various practices before making the crucial decision to move forward with purchasing.
  4. Dental Lawyers – There are a lot of great lawyers in the dental space. Lawyers in the dental space traditionally charge flat fees, similar to CPA’s, that aren’t contingent on the purchase price or the deal closing. However, you may find some lawyers that charge by the hour, typically this equates to a higher price overall.
  5. Practice Management Consultants – PMC’s are super helpful for diving into practice management data and helping you identify areas of opportunity and/or risk. PMC’s can also be an important team member post-close, especially if you’re purchasing an insurance dominant practice where getting credentialed with numerous insurance companies is in your future. PMC’s are paid hourly, or by a flat fee negotiated up front. PMC’s don’t have a fiduciary responsibility, which doesn’t preclude them from earning referral incentives.
  6. Commercial Real Estate Agent – You may potentially need to hire a commercial real estate agent to help you with lease negotiations. The transition process is a great opportunity for landlords to prey on new owners by putting large year over year rent escalations in the lease contract, raising rent day one by a large amount, and/or including other language that puts the leasee at risk for large repair bills. The commercial real estate agent is usually the cheapest person on your team, because the landlord is the one paying their fee, which is usually a percentage of the total lease value. Some landlords will concede unfavorable terms at the thought of you having a commercial real estate agent on your team because their fee alone could outweigh everything the landlords added to the lease contract.

 

Next issue: In part 2 of this article, you will learn more about ideal practice performance metrics, specific legal documents that you’ll encounter, and a general overview of the timeline of purchasing a practice.

 

 

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