Chapter 6

Buying/Buying into a Practice

Nader A. Nadershahi and Stuart M. Spero

Business, more than any other occupation, is a continual dealing with the future; it is a continual calculation, an instinctive exercise in foresight.

Henry R. Luce

For most dentists, the choice of purchasing a practice is one of the top three largest decisions you will make in your life. This is true if you take the perspective of how it can affect your quality of life, finances, or professional satisfaction. This is exactly why it is important to spend the time necessary to make a well-informed decision based on a thorough evaluation of each opportunity.

In this chapter, we explore two of the most common paths of entry into dental practice. The first path we discuss is buying a dental practice where the owner sells the entire dental healthcare service business to the buyer. The second path is buying into a practice where the owner is selling a share of the business to the buyer, who will become a partner or shareholder.

Our learning objectives are that after reviewing this chapter, you should understand:

In modern business it is not the crook who is to be feared most, it is the honest man who doesn’t know what he is doing.

William Wordsworth

Choosing the Right Location

This section is intentionally placed first in the chapter because it is a critical part of the decision-making process in the purchase of a practice but is often overlooked. If you find the best opportunity in an area that does not provide the elements that will allow for a happy personal and professional life, it is not the right opportunity for you. Whether you decide to buy a practice or buy into a practice, the first decision should be to find the general area where you want to live and work.

Quality of Life

With some of the changes that are occurring in licensure in the United States, such as larger regional examinations and reciprocity between states, a doctor is not locked into one location as much as in the past. What you must do is to start globally and begin to narrow down the area where you want to establish your professional roots. There are many questions to consider as you make this quality-of-life decision.

These and many other questions pertaining to the quality of life you will have are critical in narrowing down your options of where you will start your search for a practice to buy or buy into.

Professional Environment

After you have decided on some specific areas and communities that meet your personal needs, it is time to consider the professional environment. A specialist will want to locate a practice in an area where there are sufficient general practitioners and an appropriate population to maintain a healthy referral practice. As a general dentist, you would like to ensure that there are other professionals that you can work with to create a provider team as necessary for your patients. For example, if you do not feel comfortable with doing any surgical procedures or choose not to have them as part of your practice, you should ensure that there are an adequate number of oral and maxillofacial surgeons or periodontists whom you can work with to complete the treatment needs of your patients.

You will also want to make sure that there is access to other professionals who may be valuable in the treatment of your patients or as a source of referral and support for your practice.

Business Environment

The next area of evaluation is the business environment. The environment in business can be divided into the internal and external business environments. We touch on the internal environment in other areas of the book as we discuss issues associated with employees, systems, and other internal aspects of a dental practice. The focus of this section is the external business environment.

When choosing the right location to practice, you should look at all of the stakeholders in the business environment that have some effect on the practice of dentistry. In Business and Its Environment, Baron (1996) describes the external environment as the “market environment” that would include effects on your production, relationship and response to your patients, innovation, and incorporation of new procedures and techniques into your practice. The “nonmarket environment” is the interaction with public institutions that are not driven by the private markets. Nonmarket influences have slowly increased in the demands they place on the management of a practice. Examples of nonmarket influences include environmental protection (EPA), health and safety (OSHA), other regulations (HIPAA, radiation safety, etc.), public responsibility, and ethics.

It is important to make sure that you have an idea of what regulations and forces would affect your dental practice and to ensure that there are no regulations or forces from the external environment that would make it difficult to succeed in your small business. For example, some cities or towns will be more welcoming of professional businesses, and others create regulatory obstacles and costs that would discourage you from maintaining a practice in that location.

Alignment with Goals

Finally, as you narrow down your decision of where to practice, you want to make sure that the location will allow for a practice that is aligned with your personal and professional goals. This step would arguably be the first to consider, but all of the items discussed in this section hold equal weight in the decision-making process.

As we discuss in chapter 2, planning and goal setting are key components of success. You may have heard someone describe a study conducted at Yale University on the class of 1953, where researchers surveyed the seniors and found that only 3% of them had specific written goals. After 20 years the researchers found that the 3% with specific goals had accumulated more financial wealth than the other 97% of the class combined. Now whether this story is true or not (most likely not, since several articles have been written challenging the veracity of this story including Tabak [1996/1997] in Fast Company), setting goals is an important step toward personal and business success.

If you have not done so already, you should consider having some goals that you set for yourself with both short- and long-term time horizons. These goals can be broken down into 1-year and 3-year ones and then separated into personal and professional.

Your personal goals may include health, family, retirement, travel, or recreation. Then the professional goals may include some quantitative items such as number of new patients seen, revenue, or size of staff. They may also include some qualitative goals such as practice image, range of services provided, how much time you will devote to providing care for the underserved in your community, or who your target market will be.

Choosing a location that will allow you to achieve as many of your personal and professional goals as possible will create a shorter path to a successful practice career. If you intend on providing care for pediatric patients, you should avoid areas that have a population demographic that shows a continued growth in the older age ranges with little growth of children, new families, and new schools. On the other hand, if you intend to have a practice that is geared toward comprehensive prosthodontics, implants, or aesthetic dentistry, you will need to make sure that all of the demographics and the professional environment will support such a practice.

Deciding to Buy out or Buy into a Practice

In this chapter we are assuming that you have chosen not to start a practice because of financial or personal reasons. Of course the alternative—starting from scratch—includes taking on more risk initially with a potential for much larger rewards in your ability to build a practice exactly how you want, and to grow the business and equity more quickly. Practice start-ups will be covered in more detail in chapter 7. Many individuals will choose the path of entering a business that is already a going concern so that there is a built-in cash flow on day 1, as opposed to starting from scratch and building the cash flow. That is what we focus on throughout the remainder of this chapter. There are several broader issues to consider in making your decision that we discuss initially and then compare and contrast some specifics about each type of transaction.

Opportunity Cost

Buying a practice, buying into a practice, and starting a practice from scratch are the three most common forms of practice entry. Practice valuations are discussed in chapter 4, and financing a practice in chapter 8. All of these discussions usually focus on the actual cost or how much we are paying out of pocket or through the attainment of a private, commercial, or federally backed small business loan. Another concept of cost that is commonly overlooked in the dental practice marketplace is opportunity cost. In the text Essentials of Corporate Finance, Ross et al. (1996) describe opportunity cost as “the most valuable alternative that is given up if a particular investment is undertaken.” In other words, when you are deciding to buy a practice, you should look at what other options you are giving up for that dollar amount. What other options exist in the marketplace for a buy-in or practice start-up for that same $500,000 that you are planning on paying for a practice purchase? Another example would be if you already have an established practice and are looking at another that is for sale. What is the cost of everything you are giving up in your existing practice? Will you choose to sell your practice, the equipment, and the patient charts, or move some of your assets to the new location? An understanding and assessment of opportunity cost will allow you to evaluate all other alternatives as you strive to make the most informed choice when selecting a buyout or buy-in transaction.

Solo Practitioner or Partner

Another very important decision to make early in your decision process has to do with the type of practice that you want. Do you want to work in an office by yourself as the only doctor, or do you want to be in a setting where there are other general practitioners and/or specialists? This decision should be made based on your personal style and professional interests.

A solo practitioner has the flexibility of making all of the decisions and serving as the leader in the practice. He or she will create the vision, mission, and goals for the practice, and then create an environment where those goals can be achieved. The solo practitioner also owns all of the responsibility when it comes to the management of staff, practice systems, finances, and all other aspects of the business operation.

A partnership or group practice will give a practitioner the ability to focus more on performing the dentistry and less on the management of the business operations. A partnership or group practice may also create a built-in professional support system for the practitioner. The business management responsibilities and leadership roles may be shared or divided in a way that allows for each individual to take advantage of his or her personal strengths and focus on what he or she is interested in doing in the practice. Being in a partnership or a group does, however, require that you come to a consensus or compromise about important business decisions such as major purchases or employee issues. There also need to be clearly delineated roles for each doctor to avoid confusion among the partners or the staff in the practice about how decisions are made and work is completed in the office.

Now that you have decided whether you choose to be a sole proprietorship or a partnership after the buying or buying-in transaction, you need to consider the type of business that already exists in the practice and what business entity you want to establish after consultation with your accountant and attorney team. The most common forms of business structure for a healthcare practice in the United States are as a sole proprietor, a partnership, a limited liability company, or a corporation. Details about these options are discussed further in chapter 9.

Transition Considerations

Your decision on which transition route to choose may have to do with your current situation or options. You may have the opportunity to become, or may already be working in a practice as, an associate, and this would lead to a partnership or a buyout. If this is the case, then you will need to have a clear understanding of what that transition period will look like. You and the current practice owner should discuss the details and create a written agreement or memorandum, with legal advice, that is attached to your employment contract. This memorandum will prevent any misunderstandings on the part of either party as time passes. Items to include in this memorandum include but are not limited to the length of time before a purchase option is available, how and when a value will be determined, details of how the purchase will be paid off, what the business entity will be after the transition (partnership, sole proprietor with or without an associate, corporation, etc.), and what the role of the selling doctor will be in the practice after the purchase has occurred.

Other Doctors Who Will Remain in the Practice

If the practice that you are considering buying or buying into has other doctors who work in the office, there are several questions that you will need to consider.

Additionally, you will need to ensure that there is an employment agreement with each associate or employee and that it is transferable to you as appropriate. For example, if you are paying for a practice with the production of associates used as part of the determination of a final price, you will lose equity immediately if the covenant not to compete does not transfer to you and the associates take their patients and production to another office.

Table 6.1. General comparison of employee vs. independent contractor.

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