Buying a Dental Practice: Are the Seller’s Patient & Financial Records Telling the Truth?
Dental practice management software has become ubiquitous. Most practices today are computerized at some level, but what does that really mean to your practice?
When Henry Schein PPT is asked to value a dental practice, we look for the reports that are available from most of the commonly used programs. These statistics provide buyers and practice acquisition lenders with vital information for evaluating the health of the dental practice.
How Many Active Patients Do You Have?
As the adage says, “garbage in, garbage out,” meaning the accuracy of any computer report is limited to the accuracy of the information that is entered and maintained. As one example, prospects who are buying a dental practice and dentists who are selling a dental practice both want to know the number of active patients in the practice.
But what is the definition of an active patient? Generally, we look at the number of patients treated by the practice in the last 18 months.
This window of time has been an accepted standard for years; however, dental practice software reports usually will not show that number anywhere. We can’t help but wonder why.
Most offices that still use paper charts do periodic chart reviews and move patient charts to storage when the patients have not been in the office for approximately 3-4 years. However, when the inactive charts are removed, the dental practice software is often not updated.
Inactive patients need to be inactivated in your software, too, or they will continue to be counted in the patient register. When selling or buying a dental practice, you need to provide buyers with accurate patient statistics.
As dental practice transition specialists, we often see practices with 7,000-10,000 patients on patient statistics reports, yet there are only 2,000 patient charts in the office. It is unlikely there are 7,000+ active patients in a general practice with only two hygienists seeing patients five days per week. Such ambiguity is not generally favorably received by potential buyers. In most practices, even having 2,000 patients is too much.
Is Your Accounts Receivable Report Accurate?
Another often-overlooked report is accounts receivable. If you want to know how well you are doing financially, look at this report at least monthly. How much did you produce, and how much money have you collected of that production? Your overhead costs are a function of the production of the office, not the collections.
Your overhead may seem to be too high when compared to the collections, but evaluating your overhead, relative to your actual production, may reveal a quite different perspective.
We’ve seen offices where the accounts receivable approach $500,000 and more. How does this happen? If the practice owner does not regularly review the status of the patient accounts, a continuing error will never be corrected and, over time, that can become an exponential error. Why is that a problem? Because when you are selling your dental practice, you will be required to disclose the amount of money owed to your practice.
The accounts receivable is money owed to the practice by patients and insurance companies (if you submit claims for patients) less the amount of patient credits. Credits include patient overpayments (most likely due to duplicated payments by insurance companies) plus patient prepayments for dentistry not yet performed. Longstanding errors are usually going to be seen in the aged collection report, probably in the “over 90 days” or “over 120 days” columns.
When buying a dental practice, you should look carefully at the seller’s accounts receivable report. If the balance or amount of credits is excessive, you may find that the office software has not been properly closed at the end of each month for many years.
NOTE: The only way to rectify this is to have the dental practice you are buying go back and close each month individually until it is up to date.
The seller will also need to either write off very old accounts or send them to collection and remove them from the practice software.
When you are selling your dental practice later in your career and have not regularly reviewed your Accounts Receivable report, you could find yourself at the closing writing refund checks to patients for their overpayments (credits). You could also be transferring money to the purchasing doctor, as that money will be held for the new owner’s patients to return to the office. In either situation, it can be a real problem, forcing sellers to return tens of thousands of dollars in order to sell their practices.
How do you avoid all of this? Look at your accounts receivable report. If the balance or amount of credits is excessive, you may find that the office software has not been properly closed at the end of each month. The only way to rectify this is to go back and close each month individually until you are up to date. You also need to either write off very old accounts or send them to collection and remove them from your software. Remember, the time to discover how your practice looks in management reports is now–not the day you decide to sell it.
Contact a Professional at Henry Schein Professional Practice Transitions
Have a question about buying a dental practice? Contact us online and have a Henry Schein Professional Practice Transitions Expert help take the stress out of dental practice transitions.
Henry Schein Professional Practice Transitions, Inc. is a national leader in dental practice transitions. A subsidiary of Henry Schein, Inc. they provide expert guidance for selling and buying dental practices, assessing partnership and associateship opportunities, and performing dental practice appraisals and valuations.