The value of a practice is determined by calculating the available income for a purchaser after the practice expenses are considered. Usually, practice financial statements and tax returns are adequate to break down the financial condition of the business, providing a purchaser with a good representation of practice income, and expenses. By examining the day sheets, deposit slips, and bank statements, a purchaser should find a direct correlation between the services provided to patients and actual practice income.
New Patient Payment Vehicles Effect Transitions
We’ve noticed new trends in practices including use of healthcare-specific credit cards and financing plans for dental treatment. These credit vehicles are welcomed by practices, since once the patient is approved, the entire estimated treatment cost is advanced and paid immediately to the practice (less a pre-arranged percentage withheld by the bank).
So what’s the problem?
When a dentist deposits the money received as prepayment for future patient services into the practice’s general bank account, that money becomes intertwined with money deposited for services already performed.
There is nothing illegal or wrong with this practice if the money has gone into the general account, however, the due diligence review may not discover the credits. Without full disclosure by the seller, the purchaser might walk into a practice where many of the returning patients expect their continuing treatment provided at no additional cost. Patients will expect their money has been properly transferred to the new practice owner.
Outstanding Credit as Important as Receivables
When evaluating a practice for purchase, it’s important to take a look at the receivables report for not only the amount due but how much is out as a credit. Within a transition, the credits should either be paid back to the patient from the seller just before closing or transferred to the purchaser in conjunction with the sale.
The latter is generally preferable for maintaining continuity of the practice with the patient. After purchasing, the purchaser may consider using a separate bank account solely for prepayments similar to how escrow accounts are utilized by brokers and attorneys. As treatment is provided, money can then be transferred to the operating account. This separation allows the owner to more accurately track the practice collections and profitability. Furthermore, this separation protects the practice in the event that a patient decides not to complete treatment.
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.