What every Dentist should know about buying a practice
You’ve just graduated from dental school and are ready to hit the ground running. There are several options available to you:
(1) You can apply for a job working for a dental company such as Western Dental;
(2) you can apply for a job at a preexisting dental office;
(3) you can start your own dental practice from ground up; and
(4) you can buy an already existing dental practice.
All the options mentioned above are viable options; however in this blog I will address the entrepreneurs out there who want to have their own business, but would rather buy a preexisting dental practice.
Why buy a pre-existing practice?
In a few words – instant access to patients and immediate cash flow. Unlike starting your own practice from scratch, buying a pre-existing practice gives you the advantage of an already existing client base, pre-existing billing system, a trained and established staff, which in turn translates to instant cash flow. Although the idea of buying a practice can seem daunting, with the proper guidance you can purchase your business and begin creating your future.
It’s no secret that in dental school you are taught to be a dentist, to acquire the skills necessary to pass the board exams and work with patients. However, dental schools rarely if ever educate their dentists on the skills necessary to own and operate a business. As a dentist who owns a business, you are not just a dental specialist; you are also a business owner. Learning the skills necessary to purchase, operate and manage a business is necessary for your success. Below I will discuss the key elements necessary to acquiring a practice.
Location is key
When buying a practice, you want to make sure that the location is conducive for you and your family. Is this where you want to plant your roots? Is this where you want your children to go to school? These questions may not be important to you now, but as your family grows it is inevitable that you will want to address these points.
Building and working with your team of professionals
There are things in your life that you “know you know”. There are things in your life you “know you don’t know”. Then there are things in your life that you “don’t know you don’t know”. This third area is what we call the blind spot and generally blind spots in business are where things can go wrong. It is imperative that you work with professionals who are experienced with Dental Business Law and who can help you with the business purchase and transition. Following are some of the professionals that you should have on your team:
- Dental Business Attorney
- Creation of a new entity if necessary;
- Drafting business contracts;
- Drafting Re-treatment clause in your purchase agreement;
- Reviewing the current contracts to ensure full compliance;
- Drafting new agreement such as non compete.
- Dental CPA
- A CPA is necessary part of any dental practice to help you navigate the complicated financial issues. However, working with a CPA who specializes in dental practice is extremely important because they can help assist in analyzing the financial viability of the practice.
- Transition Consultant
- A transition consultant is more than just a “buyers agent”. Essentially a transition consultant will help in locating a practice, analyzing the practice and helping finalize the purchase of the practice.
Thorough Analysis of the practice
Once you have identified a practice that is for sale and one that you are interested in purchasing, the next step is conducting an initial analysis to determine the financial standing of your potential purchase.
Do the numbers make sense?
Based on the purchase price, and after making the necessary payments, would the cash flow allow for you to meet your financial needs?
If the answer to the above questions is yes, then the next step is to visit the practice and see firsthand how the business is run and whether the patient count matches what you have been told by the dentist. Interviewing and speaking with the seller on a few occasions will be necessary to get a true feel for the practice.
By this time you should have a good idea of what the seller is asking for, and you should have already been working with your transition consultant and CPA to calculate the numbers from the previous years. Conducting a thorough valuation should provide justification that the asking price is legitimate and can be supported by the financial numbers.
Making a Qualified Offer
Once your team has thoroughly reviewed the financials and is comfortable with the numbers, the next step is to make your offer. The offer should outline certain key sections such as:
- purchase price
- are you purchasing the real estate or leasing it
- are you purchasing the equipment, if so specify which ones you will purchase and which ones you will not;
This process can be scary for both the seller and buyer; therefore the more the parties can agree on earlier, the easier the transition to finalizing the sale.
Once you have submitted your offer, the next step is to apply for financing based on your purchase offer. Your team of professionals will be able to put you in contact with banks that deal with dentists and have a clear understanding of what is necessary during the process.
In order to apply for a loan you will likely need most of these documents:
- Buyers financials for the last 2 years
- Buyers credit check
- Buyers dental license
- Business valuation
- Income tax returns of the practice you are purchasing
- Business plan
- List of assets in the business that you will be purchasing
Drafting the Purchase Agreement
The agreement will clearly state the details of the sale. It is important to thoroughly review the document with your attorney to ensure that all the terms of the agreement have been stated. Some of the items that the agreement should outline are:
- Purchase price and the allocation of purchase price for tax purposes;
- Clearly identifying the assets being purchased;
- Warranties of the Seller and Buyer;
- Information regarding patient records;
- Covenant not to compete;
- How to handle patients who are returning to have work re-done
Once you have agreed to terms with the seller and the documents are being drafted, it is important to review the lease as well. Commercial leases are very different than residential leases and usually require the consent of the landlord before a new tenant can take over. Seller should notify the landlord that the business is being sold and the new landlord should be aware of the date that new buyer expects to take over the lease and should sign the lease. If the lease is at the end of its term, you can use that as a way to possibly renegotiate more favorable lease terms.
Take ownership and let the patients know
Once the documents have been signed and you have finally taken over ownership, a transition letter should be sent to all patients informing them that you will be taking over the practice. Use this opportunity to put the patients at ease by letting them know of your qualifications and informing them that the transition will be smooth and that it will not affect their level of care.
You are now ready to start your new practice. As expected, buying a new practice can be daunting but know that you don’t have go through it by yourself. Experienced professionals are available to guide you step by step during this process to ensure a smooth and painless transition. At the Law Office of Kris Mukherji, we pride ourselves on working hand in hand with our clients and ensuring a successful future. Call us at 858-442-5747 to discuss your new practice.