How To Buy A Dental Practice

Navigating How to Buy A Dental Practice: Essential Tips and Strategies

Embarking on the journey of buying a dental practice is an exhilarating venture that can significantly shape your dentistry career. Whether purchasing an existing dental practice or starting a new one, understanding the intricacies of dental practice acquisitions is crucial. Here’s a comprehensive guide to help you navigate the process, ensuring a smooth transition and a successful investment. Making an informed decision as a potential buyer and new owner is a good idea. Our piece outlines the best practices when looking to buy your own practice.

When it comes to buying a dental practice, understanding its true value and the potential market is crucial. As a dental-focused financial advisor at Arch Financial Planning, I’ve assisted numerous dentists in navigating their practice transition goals. 

Steps to Take Before You Buy a Dental Practice

Step One: Find a Practice to Buy

Finding the right existing dental practice to purchase begins with extensive networking. Your first step should be connecting with practice owners in your area, as they might have insights or leads on available opportunities or might even be considering selling their practice. Additionally, representatives from dental service providers can be invaluable resources, as they often have deep industry connections and may know of practices that are not publicly listed for sale. Engaging with a specialized dental practice broker is also crucial. Brokers bring a wealth of listings to your attention and offer expertise in evaluating practices and negotiating terms. This initial networking will lay a strong foundation for identifying potential purchase opportunities, ultimately helping you find a practice that meets your specific needs and aspirations.

Step Two: Analyze the Practice

When analyzing a dental practice you’re considering purchasing, a thorough review of the practice’s financials is paramount. Begin by examining the profit and loss statements, the balance sheet, and the tax returns of the selling doctor. These documents will provide a clear picture of the financial health and profitability of the practice. Next, the existing patient base will be evaluated to understand its characteristics, such as loyalty and the proportion of fee-for-service versus insurance-based patients. This assessment will help you gauge potential revenue stability. Insurance-based practices are usually more valuable than fee-for-service practices because their employer’s insurance network ties the patient to your practice.

Additionally, the current equipment within the practice must be inspected. Determine if critical items, like scanners, are up-to-date or if substantial investments are needed soon. Lastly, consider the practice’s location. Check for factors such as accessibility, parking availability, and overall patient convenience. These elements combined will give you a comprehensive understanding of the practice’s potential and whether it aligns with your goals and expectations.

Related Reading: Average Dental Office Overhead

Step Three: Letter of Intent

Writing a letter of intent (LOI) to purchase a dental practice is crucial in the acquisition process. While the LOI is not legally binding, it is a formal proposal outlining your initial offer and intentions to the existing practice owner. This document should clearly state the cash considerations you are prepared to offer, reflecting your valuation of the practice based on thorough due diligence. Additionally, the LOI should include specific stipulations or conditions you expect the seller to meet. These might cover aspects such as transition terms, employee retainment, and any operational practices you wish to continue or modify. The LOI sets the stage for negotiations, showing the seller your serious commitment while providing a framework for the formal purchase agreement to follow. Crafting a well-thought-out LOI can help ensure clarity and alignment between both parties from the outset of the transaction.

Step Four: Secure Financing From a Bank

Securing financing from a bank to purchase a dental practice involves a detailed review of your financial standing by potential lenders. Not all banks understand the complexities of small dental practices. If you need a recommendation for a lender, we’d be happy to make an introduction.

Banks will closely examine several key aspects of your financial health, including the amount of cash you have on hand, your clinical production in relation to the practice you aim to purchase, and your current debt levels. Maintaining a robust cash reserve in the bank is crucial; typically, it is advisable for dentists to have at least $50,000 saved, although this amount may vary based on the size and scope of the practice you intend to buy. Additionally, managing your student loans through an income-driven repayment plan can be seen as favorable by banks, as it demonstrates financial prudence and stability. This thoughtful approach to managing your finances enhances your attractiveness as a borrower and positions you better for negotiating favorable loan terms.

Step Five: Due Diligence

Conducting due diligence is a pivotal phase when considering the purchase of a dental practice, as it lays the groundwork for a well-informed offer. Your accountant plays a critical role in this process, scrutinizing the practice’s financial statements to ensure their accuracy and identify any potential red flags that could affect the valuation. Concurrently, your attorney should be actively involved in crafting and negotiating the terms of your offer, ensuring that your interests are legally protected and that the contract provisions align with your expectations. As the buyer, your direct involvement is also crucial. It’s essential to visit the practice in person to assess the condition of the equipment, gauge the morale and competence of the staff, and evaluate the location’s suitability, including factors like accessibility and visibility. These collective efforts will help you understand the true value of the practice and shape a fair and compelling offer.

Related Reading: Dentist Compensation Models

Step Six: Hire Your Attorney

Hiring an attorney specialized in dental practice acquisitions is crucial when navigating the complex process of buying a dental practice. Such an attorney will possess the requisite expertise to meticulously review and negotiate the terms of your letter of intent and the purchase agreement, ensuring that all legal documents accurately reflect your interests and protect your rights. Additionally, if applicable, they can negotiate the terms of your lease and assist in establishing your practice entity, such as an LLC, which is essential for liability protection and tax considerations. A dental-specific attorney is preferred over a generalist because they understand the dental industry’s unique challenges and regulatory requirements. This specialized knowledge allows them to foresee potential issues and address them proactively, thereby facilitating a smoother transaction and helping to avoid costly legal pitfalls that might not be apparent to attorneys who work across multiple industries.

Step Seven: Review Our Checklist for Final Tasks

1. Secure your dental license in your state.
2. Work with your lender to secure your financing.
3. Increase or obtain term life and disability policies, which your lender typically requires to secure your loan.
4. Visit the practice and review every inch, from the first impression down to recent charts (Consider HIPAA)!
5. Hire a consultant to negotiate your insurance and credentialing.
6. Establish business checking accounts. Many times, your lender will require this to be through their bank.
7. Obtain malpractice & business overhead insurance policies.
8. Hire a dental CPA or EA to file your S-corp election (if applicable)
9. Set up payroll accounts and register with your state.
10. Sign up for other service providers like a credit card processor and marketing consultant.
11. Ensure everything possible is in writing and reviewed by your attorney. If not, neither party may be obligated.

Related Reading: Retirement Plans for Dentists

Key Considerations Before Dental Professionals Take the Next Step

Student Loan Debt Plan 

When considering the purchase of a dental practice, it’s important to approach student loan planning strategically. Many aspiring practice owners believe they need to pay off their student loans before taking on the financial responsibility of a practice. However, this isn’t always the best approach. A dental-specific lender will typically prefer that you maintain some liquidity, which means having cash reserves in the bank rather than funneling all your resources into paying off student loans quickly. As a practice owner, you’ll likely have a higher income than working as an associate dentist, which can facilitate easier and faster repayment of your loans. During your time as an associate, it’s more advantageous to utilize income-driven repayment plans. These plans adjust your monthly payments based on your income and offer significant financial flexibility, allowing you to save for the initial capital needed to purchase a practice.

Related Reading: Student Loan Advice for Dentists

Consider Taking CE & Learning From Other Practice Owners

Before purchasing a dental practice, enhancing your expertise in specialized areas such as endodontics and implants can significantly boost your practice’s value and appeal. Investing time in continuing education and attending relevant conferences deepens your technical knowledge and expands your professional network. At these conferences, you can engage with current practice owners who can provide insights and share their experiences regarding the complexities of running a dental practice. This knowledge can prove invaluable when you’re ready to make a purchase. Furthermore, acquiring proficiency in high-demand dental services like endo and implants allows you to diversify your treatments, potentially increasing your new practice’s revenue streams and attracting a broader patient base.

Building the Team of Advisors

Building the right team is essential when purchasing a dental practice, as each professional plays a critical role in ensuring a smooth and successful acquisition. At Arch Financial Planning, we specialize in coordinating the efforts of all advisors involved in the transaction. We work closely with your accountant, who will scrutinize the financial health of the practice; an attorney, who will manage legal, due diligence and ensure all contractual elements are in your best interest; a broker, who can provide insights into market trends and assist in finding the right practice; and a banker, who will arrange the necessary financing. Our role is to ensure that all these professionals are aligned with your goals, providing a cohesive and strategic approach to your purchase. This collaborative effort is crucial for effectively navigating the complexities of buying a dental practice and setting you up for long-term success.

Related Reading: Tax Planning for Dental Practice Owners

Understanding Cash Flow and Growth Potential

One of the first steps in acquiring a dental practice is to assess the cash flow of the existing practice. This involves looking at the revenue streams, expenses, and profitability. It’s vital to ensure that the practice can sustain its financial health and has potential for future growth. Evaluate the growth potential by analyzing the local market, competition, and the practice’s historical performance.

Related Reading: How Dentists Can Maximize Income

Related Reading: How Much Dental Practice Owners Make

Evaluating the Existing Patient Base

A robust patient base is the cornerstone of any thriving dental practice. When considering a purchase, look closely at the demographics, loyalty, and satisfaction of the existing patient base. This will impact your immediate revenue and your ability to attract new patients. Understanding the practice’s patient turnover and retention strategies provides insight into its stability and future success.

The Role of Real Estate in Your Purchase

The decision to buy a dental practice often includes considerations about real estate. Decide whether you will buy or lease the space where the practice is located. Owning real estate can offer long-term financial benefits and stability, but it also requires additional capital and responsibility. Leasing might provide flexibility, especially if you are not yet ready to commit to a specific location long-term.

Related Reading: Real Estate Investing for Dentists

Navigating the Purchase Agreement and Letter of Intent

The purchase agreement is a crucial document that outlines every aspect of the purchase, including the purchase price, terms, and conditions. Before signing anything, thoroughly review the agreement with a legal advisor specializing in dental practice acquisitions. A letter of intent (LOI) is a formal proposal to buy the practice, signifying your serious commitment while allowing time for due diligence.

Related Reading: How Much Do Dental Practices Sell For?

Due Diligence and Working with the Selling Dentist

Due diligence is your opportunity to verify the details of the practice, from financial records to compliance with regulations. This phase is critical to ensure there are no hidden issues. Working closely with the selling dentist can help you gain valuable insights about the practice and facilitate a smooth transition. Maintaining a good relationship with the selling dentist is beneficial, as they can introduce you to the patient base and ensure continuity of care.

Related Reading: Buying Into a Dental Practice

Financing Your Dental Practice Purchase

Securing financing is a key step in purchasing a dental practice. Financial institutions with experience with dental practice purchases typically offer the most attractive terms. Be prepared to present detailed plans for the practice, including how you will enhance its cash flow and growth potential.

Planning for a Smooth Transition

A smooth transition is essential for retaining patients and staff. Plan transition strategies with the selling dentist, which may include a period of collaboration. This collaboration can ease any uncertainties patients might feel and ensure that the staff is supportive of the new management.

Avoid These Key Mistakes

When purchasing a dental practice, several common mistakes can jeopardize the transaction’s success and the practice’s future. First, verify that the selling dentist is genuinely ready to retire or move on. A seller who is hesitant or ambivalent can complicate the transition and the transfer of patient trust. Secondly, ensure that you are capable of and willing to perform the procedures that the selling dentist performed, as this continuity is crucial for maintaining the practice’s existing revenue cycle. Additionally, invest ample time in familiarizing yourself with the practice and its owner. This in-depth understanding can help prevent unexpected challenges and facilitate a smoother transition.

Another common pitfall is the failure to document every detail of the agreement in writing. Verbal agreements are not enforceable and can lead to significant misunderstandings or disputes. Lastly, avoid the temptation to ‘wing it’ or handle the entire purchase process alone. The complexities of such transactions typically require the expertise of professionals specialized in different aspects of dental practice acquisitions. Engaging experts such as brokers, accountants, and attorneys can provide the guidance and support needed to navigate the purchase process effectively and legally.

Lastly, wait a few years after graduating from dental school before buying a dental office space. From our perspective, a high level of success is achieved with years of experience relative to young dentists. Team members of the practice will see you as a good fit if you have some experience with patient care and dive into practice ownership.

Related Reading: Selling Your Dental Practice To A DSO

Related Reading: Cash Balance Plans for Dentists

Conclusion

Buying the right dental practice involves carefully considering many factors, including the existing patient base, cash flow, real estate options, and the purchase agreement terms. By diligently evaluating these factors, you can increase your chances of purchasing a successful dental practice. Remember, the goal is to buy a dental practice and lay a foundation for a thriving business that will grow and evolve over time.

For personalized advice and detailed financial planning regarding dental practice acquisitions, consider consulting with professionals like us at Arch Financial Planning. We are here to help you make informed decisions that align with your career ambitions and financial goals.

Arch Financial Planning is a dental-focused financial advisor that helps dental practice owners nationwide. Be sure to read our guide and hire the right team of advisors who can assist with building and selling the practice you’ve built to empower your retirement plan. 

Related Reading: Tax Consequences of Selling Your Dental Practice

Related Reading: Investing for Dentists

This article was originally published here and is republished on Wealthtender with permission.

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