Here’s Why You Should Not Ignore the Red Flags
By: Dr. David Rice
So you want to buy a dental practice and you’re worried you’re looking at the wrong practice.
- First, Acquisition or Start-Up? BIG fan of ownership over here!
- Second, let’s talk about the 101 questions I’d highly recommend you get answers to so you can avoid making that mistake.
- Third, make sure you are pre-approved for your practice loan BEFORE you go practice hunting.
7 Red Flags You’re Looking at the Wrong Practice to Buy
1. How Many Active Patients Are There?
Talk to ten people and you’ll get ten different answers – especially if you ask the seller’s side, so let me be clear.
An active patient is any patient who has been in on recare in the last 18 months.
It’s not that 2 years rule people out, it is, however, that 2 years is too long to say they’re coming back.
Considering everyone who’s been in the last 2 years as active is padding the stats.
- The once-every-5-year patient who came in for pain or swelling doesn’t count
- The recare patient who randomly came in 2 years back doesn’t count.
💡 Tip: This is easily discovered in any practice management software AND – I’m going to add a layer of trust – but verify. You or your team if you’ve hired one (and I would highly recommend hiring one) would be well served to do a random chart audit and make sure what you read in those charts – lines up with what the software pulls.
2. Who is Winning in the Moment, Buyers or Sellers?
Okay, if you’re buying right now, you’re not going to love this, if you’re selling, you’re welcome.
The fact is, at this moment, in late 2023, we are amidst a seller’s market.
Translation, if you’re buying, you’re going to pay a bit more, per my “make sure you get pre-approved prior to the practice hunt” above, please make that happen.
You don’t want to lose a deal because the other buyer did, here’s an easy link to get it done.
And, Don’t Sweat it!
Paying a little more for the right opportunity amounts to pennies on the loan dollar you’re taking out.
Focus on the practice being the right opportunity. Meaning, that it has great people; it has great process; it has great production – OR – it has an easy path to all of them.
3. How’s the Location?
Visibility makes a difference as the new kid on the block.
So – if you’re not purchasing the real estate (that’s pretty common FYI) – have a team member with the right skill set get eyes on the lease you plan to sign.
You’ll want to know exactly what that lease locks you into – or doesn’t guarantee you.
I’ve seen perfect locations and new owners get bitten by a lease that doesn’t transfer to them after they’ve signed to buy – YIKES!
I’ve seen issues with terms that lock new owners into a location that isn’t ideal.
4. Is There Really Goodwill?
This is another one of those talk to ten people and get ten different answers.
I’m going to share my view because it keeps things safe for you as a new buyer.
You might want to give a little on some of it as it’s a seller’s market. I don’t want you to give in on the front end.
If nothing else, it will help you immensely as you negotiate, aka, the more logical pieces of the puzzle you nicely argue for, the more they’ll have to say no.
Second, aka, the more you’ll get as saying no too often will kill a deal and buyer market or not. Sellers want to sell when they want to sell.
First, know the seller’s game plan after the sale.
Ideally, the practice can support you full-time and the seller at least part-time for 6 months. You’ll get a lot of people telling you that’s not necessary. It’s not, but, it is almost a guarantee that almost all the patients will stay when you get it agreement.
Now, if the practice can’t support that, try and negotiate the seller staying on X number of days per week to anoint you as the buyer they’ve been waiting for.
Second, if the above isn’t rock solid, I want you to be able to meet the team.
Again – buyers market – so oftentimes the seller will push back. I get it. They’re worried the deal won’t happen and the team will walk (which lowers their sell number).
They, however, need to understand this is the largest purchase of your life to date, and date analogy in play, most of us wouldn’t get married without a bunch of dates.
Third, yet related to the above. There’s a sweet spot when it comes to the experience and commitment from that seller’s team.
When teams turn over frequently, there’s little goodwill; when a team’s been with the seller their entire career (30 years) – there’s little goodwill as they’re going to retire with or shortly after the doc.
5. How’s the Last Year’s Production Compared to Prior Years?
Nothing makes me chuckle more than the seller who cranks out all the dentistry the year prior to selling.
So when you see it, ask how it happened.
- If they haven’t added new procedures that can trend with you too …
- If they haven’t improved processes…
- If they haven’t fill in the blank…
Then understand that they have likely artificially inflated the value and looking back 2-4 more years becomes absolutely essential.
6. Who’s Paying for Re-Dos?
Again, caveat, seller’s market. That said, buy yourself a window of time to protect against dentistry that needs to be re-done.
Oh, and don’t just assume the money will be there, agree to an escrow account you can pull the money from for 6 months.
If the seller’s dentist walks their talk, they get their money back. If for some reason, there’s more re-do dentistry than they let on, you’ve covered your backside.
7. Does the Math Make Sense?
Here’s what you want as a buyer, a certified valuation. Here’s what you want to do next. Verify the certified valuation!
Aka – know they built the number off of real math. That statement is going to upset some people who are honest in their valuation – so if you’re reading this as that individual – the above doesn’t apply to you.
That said – not all people are honest – numbers can lie – and as the buyer – you need your own team who can assess:
- Tax returns
- Cash flow today and after closing
- Accounts receivable
- Employment agreements (it’s wise to fire and rehire the team FYI)
- Lease agreements (on the property and if equipment if there are any)
- Insurance agreements (and terms and timeline you can expect)
Are You Looking at the Wrong Practice to Buy?
So you want to buy a dental practice and you’re not sure where to begin or are afraid you are looking at the wrong practice?
Here are two next steps if the above helped:
- Build your team of experts and if you need help: Ask Here
- Know your timelines. There’s a 10-step success process to buying a practice – GO HERE when you need help
Photo by olia danilevich
