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Financial Considerations For Buying a Dental Practice
Buying a dental practice is the natural next step for many dental associates looking to advance their career.
Working for someone else is part of the journey, but it’s usually not the end goal.
If you want to build a thriving business, invest in your future, and have control over your time and money – then buying a dental practice is a great solution.
However, the purchase process is quite complex. In this article, we’ve outlined what’s involved in buying a dental practice.
Before Buying a Dental Practice
Before you buy a dental practice, it’s important to think about whether you actually want to own a practice. Are you willing to shoulder management responsibilities?
When buying a dental practice, it’s also important to consider your goals. Then you can determine the best type of dental practice to invest in – considering the type of patients and procedures that match your skills and interests.
Financing Options
The first step is to investigate financing options to buy your dental practice.
Bank loans: lenders evaluate your loan application based on your credit score, your industry experience, your personal finances, and the finances of the target practice. We can introduce you to dental-specific lenders.
SBA loans: SBA-backed loans are available for small businesses. This reduces lender risk, making it easier for small businesses to get approved funding.
Seller financing: This is where the seller offers financing to the buyer. In this case, you would pay off the business over time with interest, similar to a bank loan.
Analyzing a Dental Practice
Finding the Right Dental Practice
Finding the right dental practice can be difficult and time-consuming. You can reach out to dentists directly, or join industry associations to network with other dentists. You can also speak to dental product reps, or a reputable dental broker.
Here at DrillDown we have a large network of dental practice sellers that we can connect you with.
Choosing a Specialized Accountant and Attorney
When buying a dental practice, it’s important to choose an accountant and attorney that specialize in dental practice transitions.
There are many nuances and complexities that are specific to the dental industry. If missed, it could end up costing you a lot more money.
Examining the Practice’s Financial Statements and Tax Returns
When buying a dental practice, it’s important to review the financial data, specifically – financial reports, tax returns and patient management system data. Make note of any large discrepancies in income, expenses, profit margins, or tax debts.
Understanding Key Financial Metrics
Next, you’ll want to review specific business metrics, including asset values, active patients, scheduling, overhead percentage, procedure counts, production by procedures, salary levels, pricing and more.
This will give you insight into the dental practice’s financial performance and health.
Identifying Potential Red Flags
When reviewing the dental practice data, it’s important to check for any red flags or warning signs.
Common red flags are low patient retention rates, declining sales, overdue tax returns, large recurring expenses, high-pressure sales tactics, lease terms, staff turnover, and outdated equipment.
Understanding the Practice Valuation
When buying a dental practice, the valuation can be calculated in various ways.
Although rules of thumb are common, the most reliable is the Capitalization of Earnings method and the Discounted Cash Flow method. Both of these are based on net earnings and future cash flows.
Submitting the Letter of Intent
A letter of intent is the next step in buying a dental practice. It outlines the terms and conditions of the agreement between the buyer and the seller.
In the LOI, you can request what you need from the seller to perform due diligence, before moving forward with the official contract.
Buyer Due Diligence
Due diligence is where you review all the information about the dental business, and check that it’s accurate.
If you uncover any problems or concerns, you can address them with the seller at this stage, before proceeding further.
The seller may also have questions for you as a buyer.
Negotiating the Price
Have your dental CPA or valuation specialist review the purchase price for reasonableness.
You may be able to request concessions from the seller, including seller financing, term of seller transition, responsibility for rework, and lease terms, all of which influence the price.
Execute the Purchase
What Happens After the LOI is Signed?
After the LOI is signed and due diligence has been performed, the next step is to negotiate the final terms of the purchase agreement. This is the formal contract, and any non-compete clauses or consulting agreements should be discussed.
Common Purchase Mistakes and How to Avoid Them
- Not having enough cash to operate the business. In addition to purchasing the dental practice, you’ll need a surplus of cash to pay ongoing expenses like staff wages and rent.
- Not using specialized advisors – which can lead to contractual mistakes, or overpaying on the purchase price. This is where a specialized dental CPA and attorney can assist.
- Rushing through the purchase process without performing due diligence. Take your time to review all the sale information, review patient files, and understand the seller’s reason for selling.
Tax Considerations When Buying a Dental Practice
Choosing the right business structure for tax and liability purposes will help you save money, and protect you as a business owner.
Common structures include: sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs). There are advantages and disadvantages to each.
The business purchase price is allocated based on assets, liabilities and goodwill. This breakdown determines what you can claim as tax deductions.
A specialized dental CPA can help you maximize tax deductions now and in the future with tax planning.
You’re an Owner – What’s Next?
Now it’s time to hire a great accountant. By using a dental CPA, you can ensure you’re in the best tax and financial position, and ready for the future.
In the beginning, we recommend keeping the existing systems in place if possible. That way, you can see what works and what doesn’t work, and then make changes.
We also recommend protecting yourself legally and financially from liability. You can do this by making sure you are current in all of your tax obligations, business insurances, and selecting a business structure with limited liability.
Once you’re up and running – you can set up an investment plan for your dental profits.
If you start with one dental practice, with time, you can expand to multiple practices.
Conclusion
As you can see, buying a dental practice is a complex process. It’s important to work with a specialized dental CPA and other key advisors that you can trust. That way, you can ensure you buy the right dental practice.
If you’re ready to take the next step and buy a thriving dental practice, we’re here to help.
Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
