The three most important factors in a successful practice transition are: location, size of patient base, and above average net profit. If the practice you are purchasing has these key ingredients, chances are substantially increased that your acquisition will be a successful investment. Of course, there are other factors you still should consider. These include practice type, service mix, condition and size of the facility, and new patient flow. These factors all should be considered when purchasing a practice.
As with real estate, it’s all about location, location, location. Picking the proper location is critical. Unless you are very familiar with a community, we strongly recommend that you have a demographic site analysis prepared. The analysis will give you data about the community’s economics, population, unemployment rate, average housing costs, and future growth potential. We recommend that your demographic study also includes dentist-to-population statistics, as well as number of dentists in your area.
Size and Composition of Patient Base
The size of the active patient base is also critical. The larger the number of active patients (those who have been in for treatment in the last 12-18 months), the greater the revenue opportunity. Since most dental practices grow from marketing to existing customers, the larger the number of active patients, the better the chances of long term success. You also should look at the composition of the patient base, however, including patient age and how far patients travel to the practice. Two reports that should be prepared to understand the patient base should categorize the patients by zip code and age.
Zip Code Analysis
Knowing how far your patients travel is important. If you are purchasing a practice in a smaller town or community where the owner has practiced 25-30 years, it is highly probable that a number of patients are second generation patients who may be traveling some distance to visit their dentist of many years. If the distance is substantial when the seller retires, there is a higher probability that some of these patients opt to find a new dentist closer to home since there is no connection to you–the dentist. If they are changing dentists, they may be likely to find one closer to home. In this case, it may become even more important to retain current staff for them to keep a connection with the office or for the seller to stay for a while after the sale.
Another key report to analyze is the age analysis report. What is the age distribution of your patient base? The type of services you have to provide will vary, depending on the age of the patient population. Is it an older patient base or one that has a good cross section of ages?
New patient flow is a clear indicator of a practice’s vitality. In practices where the owner has been reducing clinical time and possibly not accepting new patients, it may be a real problem. For example, purchasing a practice where there has been little marketing and few new patients per month (e.g., 3-5) will mean that an investment in internal and external marketing strategies should be made. Conversely, a healthier rate of 20-25 new patients monthly is preferable and will mean that you are not starting from scratch.
Purchasing a practice with operating overhead in excess of 70% versus one that has a 55% overhead ratio usually commands dramatically different practice values. Practices with healthy profit margins allow you to easily handle your practice acquisition debt, as well as maintain a comfortable lifestyle.
Analyzing the practice’s production reports is a very critical component of your due diligence process. If the retiring dentist has been focusing on complex restorative dentistry, it would not be surprising to see 50-60% of the seller’s production relating to this category. This may imply, in especially smaller patient bases, that many of the clinical procedures have already been performed, or that you’d be purchasing a maintenance practice. Conversely, if you analyze the production report and see minimal perio and endo services, that provides an excellent opportunity for growth. Nonetheless, carefully reviewing the production reports from the last two years will give you a good picture of what is happening in this practice.
Condition and Size of Facility
With most recent graduates being trained in state-of-the-art clinical facilities, their preference is to purchase a practice with updated equipment and technology. Absent this, practice values will be considerably lower if you have fully depreciated equipment and minimal or no technology. The rationale is simple–more funds must be borrowed to purchase new equipment and/or technology.
These are only a few tips that, if carefully analyzed and reviewed, will help you make your practice acquisition decision. For more information or a free phone consultation, please contact Henry Schein PPT at -1-800-730-8883.
Thomas Snyder, DMD, MBA