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