Buyer Beware: Numbers Can Lie in Dental Practice Acquisitions

By: Dr. David Rice

In the world of dental practice acquisitions, potential buyers often find themselves navigating through a sea of financial data and performance metrics. The numbers presented can be a powerful tool in decision-making, but they can also be deceiving.

As a new dentist buyer, it’s crucial to understand the web of factors behind the numbers that can significantly impact the true value and what you should actually be willing to pay. 

The Temptation of the Numbers Game 

If you’re anything like I was back in the day, there’s a good chance you’re going to bring emotion and fall in love with a practice before you know it’s deserving. From there, you’ll likely be drawn to financial figures that promise profitability and growth.

Revenue, profit margins, patient numbers, and collections are among the key metrics that play a pivotal role in the decision-making process. Yes, you need to know them. Before you put a ring on it, know relying solely on these numbers can be a risky endeavor. 

The Surface vs. the Substance 

Numbers on financial statements may present a rosy picture on the surface, but it is essential to dive deeper. A high revenue figure might mask underlying issues such as an over-reliance on a small patient base or unsustainable marketing expenses. Profit margins may be artificially inflated due to cost-cutting measures that compromise the quality of patient care. 

Buyers must recognize the importance of looking beyond the numbers to understand the substance of a dental practice. This involves conducting a thorough due diligence process that includes evaluating operational efficiency, staff satisfaction, patient retention rates, and the overall health of the practice. 

💡 Remember, we all put our best foot forward. Engage your lender. Lenders like Provide may have questions for you to consider. While they can’t offer direct advice, they will share any concerns with you. It puts them at risk too. 

The Pitfalls of Overvaluation 

One common trap for buyers is falling victim to overvalued practices. Sellers may strategically present financial metrics in a way that inflates the perceived value of the practice. While a practice may appear to be a lucrative investment on paper, the actual operational and market conditions may not align with the presented figures.

💡 Remember also, you will have costs the seller simply no longer has. Those added costs must be factored in to give you a true assessment of true value. 

Adjustments and Realities 

Buyers should be cautious about relying solely on reported earnings before interest, taxes, depreciation, and amortization (EBITDA). Adjustments may be necessary to account for discretionary expenses, owner perks, or one-time events that distort the true financial health of the practice. A thorough examination of the financial statements, tax returns, and practice management software is essential to identify and understand these adjustments. 

Moreover, buyers should be aware of the external factors that could impact the valuation of a dental practice, such as changes in market dynamics, shifts in the payer mix, and evolving industry trends. Overlooking these realities can lead to an overestimation of the practice’s worth. 

💡 Remember, what worked to build the machine 30 years ago, may no longer work today. When one unplugs the person everyone was willing to stay with, the risk may ensue. 

Uncovering Hidden Liabilities 

In the pursuit of a dental practice acquisition, it is crucial for buyers to be vigilant in uncovering hidden liabilities that may not be immediately apparent in the financial statements. These liabilities can manifest in various forms, including legal issues, pending malpractice claims, or deferred maintenance on equipment and facilities. 

💡 An amazing CPA can help you understand equipment depreciation. 

Legal Due Diligence 

Legal due diligence is a critical component of the acquisition process. Buyers should scrutinize contracts, leases, and employment agreements to identify any potential legal entanglements. Undisclosed legal issues can have severe financial implications and may even jeopardize the viability of the practice. 

Buyers should also pay attention to the reputation of the practice within the community. Negative reviews, unresolved patient complaints, or regulatory violations can tarnish the image of the practice and impact future patient acquisition. 

The Importance of a Comprehensive Transition Plan 

To navigate the potential pitfalls of dental practice acquisitions, buyers need to develop a comprehensive transition plan. This plan should encompass financial considerations, operational improvements, and a strategy for maintaining and growing the patient base.

Engaging with experienced professionals such as lenders, accountants, and legal advisors is crucial for a successful transition. These professionals can provide valuable insights and expertise to ensure that the buyer is well-informed and protected throughout the process. 

Buyers should also prioritize communication with the existing team and stakeholders. A transparent and collaborative approach fosters a smooth transition and helps in building a positive foundation for the future success of the practice. 

💡 When you need help finding the best team to help you, CLICK HERE. We both know you have a target on your back and everyone wants your money. We’ve vetted our lenders and team hard. AKA, there are multiple reasons we work with them ourselves. We’ll introduce you. Then take the time to interview them and see who you like best. 

Conclusion 

In the complex landscape of dental practice acquisitions, the adage “buyer beware” holds true. Numbers can be powerful indicators, but they can also be manipulated or present an incomplete picture. As a buyer, it is imperative to approach acquisitions with a critical mindset, conduct thorough due diligence, and recognize that the true value of a practice goes beyond the financial statements. 

Be vigilant, uncover hidden liabilities, and develop a comprehensive transition plan with the right team and you will sprint out of the gate with massive success.

Photo by Mikhail Nilov