Evaluating a Dental Practice for Purchase or Associateship

Private dental practice can be achieved through either outright ownership or an associateship in conjunction with senior dentists; the decision depends on personal and professional objectives and goals. Once a decision is made, the time and effort required to identify an appropriate practice, negotiate the terms of purchase or associateship, and transition to the new practice can be daunting. This article reviews the process and provides an overview of the general steps involved in the evaluation of a dental practice for purchase or associateship. With appropriate knowledge and preparation, due diligence, and ethical and sensitive behavior, transitioning to private practice can be successful and lead to professional and personal fulfillment.

The decision to set up an independent practice or become an associate in an existing practice is one that every dentist faces at some point. Each decision is unique, balanced by individual professional goals and personal needs, and is generally based on multiple considerations. Although this fork in the road is not easy to navigate, it can be successful and very fulfilling if accompanied by adequate preparation, methodical progress, and support of appropriate professional advisors or consultants. The goal of this article is to review the various factors that should be considered, particularly evaluation of a dental practice for purchase or associateship.

General considerations

The decision about where and how to practice can affect a dentist’s life. Reviewing personal and professional needs and goals is an important first step. Dentists must decide where they want to practice, what type of practice is appropriate for their personality, and what fits their current life situation and future life goals. Once these issues have been clarified, dentists should review staff and operating privileges, and available resources for continuing education in the preferred geographic area. These criteria are important in establishing and sustaining any new practice, and critical to professional development.

Another basic issue to consider is whether ownership or associateship would be appropriate. Although both require investing time and energy in research and preparation before proceeding, each may be appropriate for different reasons and circumstances, based largely on personality, comfort level, and overall goals. If ownership is preferred, the option of setting up a brand new practice should be weighed against buying an established practice. Both options are available for anyone wanting to establish a solo practice.

Purchasing an established practice is a good option if the right practice can be found in the preferred geographic area. However some pros and cons must be considered.

In an established practice, people and systems are already in place and a referral base and an experienced and trained staff are available. These factors can assure a shorter time to begin operating the new practice. However, the condition of existing equipment and furniture must be determined and the cost of any refurbishment incorporated in the assessment. Furthermore, the need for a transition process for the practice, staff, and patients and the sensitivities involved must be considered to assure a successful conversion from the previous ownership and establish one’s position in the new practice. Management professionals and transition coaches can assist and offer guidance in this process.

If opening a new practice is preferred, then research on the demographics and dental needs in the new area, the cost of purchasing a new site or repurposing an existing one, hiring of new staff, and establishing vendor relations are additional responsibilities that should be considered.

However, if an associateship is the initial choice, current opportunities and future options must be considered, such as an option to buy, which may be important in the longer term. Regardless of the choice, all licensing requirements must be researched and compliance guaranteed.

Once the decision is made, multiple practices should be evaluated before the choice is finalized. Creating an advisory team may be worthwhile to help guide the initial decision-making process and subsequent establishment and ongoing management. Table 1 provides a list of professionals that can assist in the valuation of a practice and assure that appropriate professional advice and guidance are obtained for various legal, financial, or management issues.

Table 1
Advisory team professionals and their functions
Professionals Function
Financial consultant/accounting firm Practice valuation
Tax implications advise
Preparing cash flow and break-even projections
Payroll setup and management
Filing of taxes
Attorney/legal services Negotiating purchase contracts
Reviewing lease or rental agreements
Licensure and other compliance
Liability matters
Claims management
Reviewing and negotiating associateship contracts
Management consultants Transition management
Coordinating advisors
Staff communications
Staffing, scheduling, policy development
Writing manuals/policies
Risk management
Marketing and promotional activities
Daily operational activities
Insurance specialists Assisting in buying/selling of insurance
Medical malpractice and liability insurance
Billing errors and omissions insurance
Employment practice liability
Worker’s compensation
Disability insurance
Health insurance for self and employees
Other insurance matters (business policy, life insurance, long-term care)
Banker Mortgage processing
Loan and credit facilitation (provide accessible funds for the business venture)
Realtor Finding suitable office and housing
Financial planner Helping with savings and investments
Preparing retirement proposals
Protecting against business loss
Developing succession strategies
Others Architect or interior designer
Contractor to remodel or construct office

Valuation: establishing and evaluating the economic aspects of a practice

The Guide for Dentists published by the American Dental Association (ADA) notes that a dental practice’s value should be viewed as fair market value (FMV) . FMV may be defined as the cash or cash-equivalent value of a viable operating identity (ie, the practice) and is the most likely price on which a typical and rational buyer and seller will agree. The FMV assumes prevailing economic and market conditions and is calculated based on multiple factors, including practice characteristics such as location, area demographics, referral base, and cost of operations or overhead; cost of physical site and business and dental equipment; cost of software and related licenses (including transfer of existing licenses); costs related to maintenance and lease contracts (including transfer or renegotiation of existing contracts); profitability; and market considerations. It also considers other reasonable assumptions of practice performance based on the current dentist’s patient records, longevity of practice, and goodwill , which may be broadly defined as professional reputation, contacts, and relationships. Thus, valuation is a process through which a purchase price is allocated to various tangible and intangible assets, such as equipment, supplies, leasehold improvements, noncompete covenant, patient records, and goodwill.

In addition to the FMV of the practice, other considerations may impact a decision to purchase.

Cash and accounts receivable

Case and accounts receivable are distinct from FMV and are properties of the seller that can be negotiated for separately. Accounts receivable refers to outstanding collections owed to the buyer at the time of purchase and is typically discounted based on industry standards on aging of past-due accounts and estimation of reasonably collectible value.

Outstanding liabilities

Outstanding liabilities include accounts and taxes payable at the time of purchase. It is important to confirm that the current owner will settle all liabilities before the transfer. If not, these liabilities must be deducted from purchase price.

Automobiles or other vehicles

Automobiles or other vehicles belonging to the owner, if available for purchase, are not typically included in FMV assessments and must be negotiated independently.

Personal effects

Certain personal effects, such as artwork, decorative items, and music CDs, may be additional assets that will not be included in FMV assessments and require independent decisions to purchase in whole or part.

A valuation consultant or accounting firm can help prepare a valuation report. The report is typically commissioned by the practice owner’s representative or appraiser and is useful to sellers and buyers. It helps the seller establish an asking price for the practice, and helps the buyer establish a bidding price for the practice and provides valid documentation in securing financing for the purchase. Box 1 lists the components and benefits of establishing an FMV.

Box 1

  • Components of valuation

  • Fair market value

    • Referral history and base

    • Procedure fees

    • Reasonable estimation of earnings

    • Lease/purchase cost for physical site

    • Cost of tangible and intangible assets

    • Overhead/operating costs

    • Wages, taxes, benefits

    • Insurance costs

    • Equipment lease/rentals/current costs

    • Cost of maintenance and license agreements

    • Depreciation and amortization

    • Continuing education

  • Other factors

    • Working capital

    • Acquisition cost

    • Debt servicing

    • Benefits to the seller

    • Helps establish selling price

    • May be used as marketing tool when selling the practice

    • Helps assure financial solvency of the practice

    • Benefits to the buyer

    • Provides the basis for buy/no-buy decision

    • Establishes realistic framework to ascertain whether he/she can cover expenses, have a reasonable income and/or profit, and be able to repay loans in a reasonable period of time

    • Provides documentation for loan applications and improves chances of acquiring financing for the purchase

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Oct 29, 2016 | Posted by in General Dentistry | Comments Off on Evaluating a Dental Practice for Purchase or Associateship
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