January 16, 2019
Purchasing a Practice: What Is a Fair Price?
My colleagues and I will spend the first few months of this new year focusing on various aspects of dental practice transitions. We will consider this topic from the perspectives of both practice buyers and sellers.
Let’s start with a question many of my clients ask when buying a practice: What is a fair price?
From an academic point of view, fair market value is defined in Revenue Ruling 59-60 as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
We all make purchase decisions every day – some small and some big. As we gain experience, we begin to identify factors that help us evaluate potential purchases. When buying a can of soup, for instance, we might compare price, quality and availability before making our purchase. While it may seem odd to compare the purchase of a dental practice to your weekly grocery shopping trip, some core factors are common to both. I refer to these metrics as the three As: affordability, availability and appropriateness.
When considering a potential practice purchase, ask yourself: Can I generate enough cash to pay all of my expenses and pay myself the level of income required to meet both my short-term needs and my long-term goals? Looking at a target practice’s production and collections is a good place to start. Will you be able to equal or exceed those levels?
Considering expenses, some practices cost much more than others to operate. Do you understand the expense structure of the target practice? Does this cost structure make financial sense to you? For example, the target practice may serve high-net-worth patients. It would be logical, then, that the office occupancy expenses could be higher than another practice’s. Finally, the biggest factor for most buyers is the ability to service practice purchase debt. Your banker will require you to convince him/her that your practice will generate more than enough cash to repay your loan.
Short-term goals generally involve meeting your current personal living expenses. But you must also give equal consideration to your long-term financial goals, such as funding your children’s education and your retirement.
Being available is a two-way street. You have to be ready to buy and the owner of a target practice has to be ready to sell!
At my local store, the aisles are packed with a large and diverse selection of food. I can shop 24 hours a day, seven days a week, and I can almost always find what I want at the price I wish to pay. If only we could shop for a dental practice like we shop for groceries!
In searching for your acquisition practice, you must be ready and willing to act quickly.
It is vital you are clear on the type of practice you wish to buy and its features. Are you looking for a solo practice, or do you wish to buy into a group practice? How many operatories do you need, and what level of staffing is required? The better you define your target, the greater the odds that your search will result in practices that truly meet your criteria.
Much like working with a banker to pre-qualify for a home mortgage, you can establish a relationship with one or more bankers by providing them with the basic personal information required for a practice purchase loan application. For example, most lenders require a personal financial statement and three years of income tax returns. When you find the right practice, you can submit the required practice data to the lender. If your application is complete, underwriting should take no more than 10 business days.
In my opinion, this is the most difficult factor to define; it is an intangible. After finding a target or targets that are affordable and available, you now have to go with your gut when making a final decision. Perhaps it is the target practice’s patients, staff, culture or specific location that attracts or detracts. Whatever it is, the more time you devote to understanding what your ideal practice looks like, the more likely you’ll know if a target is right for you.
The practice integration advisors at Buckingham have helped dentists navigate the myriad financial and other decisions involved with purchasing a practice for many years. We would be happy to walk with you on your own journey to practice ownership!
This content originally appeared January 16 on DentalTown.com
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