Purchasers of a dental practice should consider the following traps prior to buying a dental practice:
- What is the average revenue per patient being generated by the vendor? Consider that the average revenue generated by a dentist in Ontario ranges between $600-700 per patient. Where the vendor generates above $1,000 revenues per patient, will you, the purchaser, be able to sustain this revenue level?
- Is the vendor collecting co-payments? If you purchase this practice and enforce collection of co-payments where the vendor has not been collecting same, then likely a significant portion of the patient base will leave your practice.
- How many active patient charts are present? Ensure you do a chart count to verify the number of active patient charts, observing the following:Are treatment plans provided by the vendor consistent with your clinical philosophy?
– Are there opportunities to serve patients more comprehensively? Example: Are complete oral exams, panoramic x-rays or full mouth series etc., being performed on a frequency consistent with your clinical approach?
– I consider a patient chart to be active where the patient has been to the practice during the past 12 months and shows a recurring pattern of coming to the practice.
- Can you afford to repay the loan and feed yourself and family? Ensure that a cash flow forecast on a monthly basis is prepared, which should answer the following questions:
– How much money will you need to not only purchase the practice but operate the practice after you have purchased it?
– How much cash will you have at the end of each month?
– How much profit will you generate each month? Note: the amount of profit generated could be significantly different than the amount of cash in your bank, since the loan repayment is not an expense and therefore does not reduce profit, but yet reduces the amount of cash in your bank account.
– How long will it take you to repay the loan that you have borrowed to buy the practice? If you need more than seven years to repay the loan, then question the profitability and affordability of this practice.In certain parts of Ontario, where bidding wars for practices occur, ensure that you are able to repay the loan and feed yourself and your family after.
- Do the numbers presented by the vendor make sense? Ensure that your advisors perform due diligence, identifying any unusual items/exceptions as well as any opportunities for the purchaser.
- Can the landlord terminate your lease? If your premises lease contains a demolition/relocation clause, this could be a warning signal. A demolition clause/relocation clause in a premises lease means that the landlord can terminate your lease upon providing the notice outlined in the lease or force you to relocate to another location within the plaza/building. Relocation can be disruptive to your business and this renovation/relocation cost could be a hidden unanticipated cost to you.
- How long do you have the lease premises for? If the remaining premises lease term and options to renew is not at least five years, (and preferably at least seven), then you will have difficulty securing a loan as your banker will require you to have a remaining premises lease term and options to renew for at least as many years as the banker is lending you the money to buy the practice. This should be addressed by your lawyer.
- Can you assign or transfer the premises lease to another buyer? If you cannot assign or transfer the lease to another buyer then the value of the practice that you are buying could be significantly reduced/impaired.
- Who is responsible for employee severance/termination costs? Note: the employees are a significant part of the goodwill inherent in the practice that you are purchasing. However, sometimes purchasers do terminate/sever staff and if so, who will bear the severance/termination expense? This should be addressed by your lawyer.
- Will the purchaser retain all of the vendor’s patients? In many cases where an effective transition plan is implemented, purchasers retain 90 per cent or more of the patients. Note: in many appraisals, the appraisal assumes 100 per cent patient retention although it is usually lower. Therefore, when preparing your forecast, please account for or incorporate into the forecast, some loss of patients inherent in any transition from vendor to purchaser.