Planning to Purchase or Start a Dental Practice? Here Are 12 Key Steps in Your Due Diligence Journey
If your goal is to be an owner of a dental practice, due diligence is not optional. Mistakes or oversights when purchasing, starting or investing in a practice can be costly, both financially and emotionally. This article gives a high-level view of how to create your path to the satisfaction and benefits of ownership.
1) Gain Experience:
The most realistic path to purchasing a dental practice is first gaining experience as an associate. You will not be responsible for compensating employees, paying vendors, arranging insurance participation or adjusting your fee schedule. The exact number of years varies, but the sooner you learn systems and processes involved in running the business, the better.
2) Build Your Professional Network:
It’s time to assemble your team of advisors and begin looking for an existing practice with an existing patient base. A banker, CPA, insurance agent, financial advisor and lawyer will make up your team of professionals to guide and advise you throughout this process. Building relationships with these professionals early on in your career will benefit you for much longer than the short time it takes to purchase a practice – so don’t delay!
3) Initial Practice Analysis:
Obtain basic information about the practice you are interested in purchasing, e.g. annual collections, number of operatory rooms, employee benefits, and size of practice. Before obtaining more specific information about the practice, you can expect to sign a “Non-Disclosure” agreement. This agreement protects the Sellers personal financial information, tax information, methods of operations (trade secrets) and other information that gives this practice a competitive advantage.
4) Apply For Loans:
You may be thinking that no bank is willing to loan you the startup funding while you are carrying student debt. However, many banks have specific teams designed to provide funding for young business owners such as yourself. If you think about the earning potential of a healthy, well run dental practice over the course of a 30 year career, your student loan debt can seem quite modest. Ask your attorney, CPA or financial advisor who they know that specializes in operating loans for dentists. Send an application to three or four banks and request a written loan proposal. This pre-approval will allow buyers to know you’re serious about purchasing a practice. Most banks will allow for 30 – 45 days to negotiate or choose a loan before the terms expires.
5) Draft Your LOIs:
A Letter of Intent, or LOI, is a legally non-binding document that details the elements of the practice transition you and the Seller have negotiated. The LOI is the ‘first draft’ of any forthcoming legal documents and also allows for the Seller and Buyer to negotiate terms of the agreement. Also the LOI serves to minimize misunderstandings and complications that can delay your efforts.
LOIs can vary, but most should specifically list:
i) What assets are included and excluded from the purchase price (you don’t want to show up and have all the operating rooms empty and the paintings taken from the walls).
ii) If you are buying existing accounts receivable, and if so, under what terms?
iii) Purchase price and asset allocation: the IRS gives different tax treatment to various assets being purchased – dental supplies, chairs, patient records, the building itself, etc… How you allocate the purchase price can have a very important impact on your tax bill – talk with your CPA about this.
6) Due Diligence:
Due Diligence attempts to answer the question: What is the value of this practice? This is the point in the process where you decide “This is the opportunity for me” or, “No, this is not the best opportunity for me.”
What should you understand after performing due diligence?
i) Details regarding office lease / purchase of building / purchase of land.
ii) Fee schedule
iii) Insurance participation
iv) Number of active patients
iv) Three years of financial statements and tax returns
v) Charges, collections, production,
vi) Pull sample of charts to review treatment
This is an enormous part of the transition process, and most CPA firms and dental transition specialists have several page documents detailing due diligence procedures. Appropriate due diligence takes the longest to complete out of all the other steps.
7) Establish Business Entity:
Most dental practices use an S-corp as a legal entity to practice through. The benefit of using an S-corp is that owners can save money on payroll taxes by taking an “Owner Distribution” in addition to a reasonable salary. With tax reform, however, there are new tax strategies for establishing an entity to consider, so consult your CPA and attorney.
8) Apply for Insurance:
Professional Liability insurance, Business insurance, General liability coverage, and your own personal insurance all need to be taken into consideration at this step in the process. Start by consulting with your advisors about what insurance policies the Seller has in place, and why, so you can understand what steps you need to take to be properly insured.
9) Negotiate Lease / Facility:
Negotiate and finalize a commercial real estate lease if purchasing the building is not part of the transition. Getting the lease accurate and correct is well worth the expense of an attorney. There many other factors to consider, such as janitorial needs and supplies, if the patient waiting area needs a redesign, hiring grounds crew and parking lot maintenance. By this point, you may need start thinking of who will run your operations or be the practice administrator.
10) Select Source of Financing:
Now is the time to choose a loan you received written proposals from back on step 4. Have your CPA complete a financial analysis of the loans and provide a recommendation. If appropriate, negotiate a better deal with the lender of your choice. Identify exactly what other documents the bank needs from you during this transition process and do your best to provide them in a timely manner.
11) Prepare for Purchase:
Get ready with your long list of questions to answer, such as: Do you need any special permits from your state dental board? Do you need to apply for a Nitrous Oxide registration? Have you obtained a local business license? Will you be accepting Medicaid and Medicare? If so, apply for your Medicaid and Medicare numbers. Determine if you will keep the existing practice management software. Will you offer a form of Care Credit or implement a patient membership program? Again, these are areas where your professional advisory team can help you review and answer.
12) Purchase Practice:
Congratulations! You have joined the small percent of people in our economy who own a business! Now your real work begins. However, if you have been thorough in your due diligence and built strong, trusted relationships with your professional advisors, you will have set yourself up for success.
Accessible CPAs to Help You Create Your Path
Determining how to (and whether you should) buy into or start a business can be a big challenge to overcome alone. DS+B’s healthcare team has the experience and business connections to help you along the way, efficiently. Contact us to begin a discussion and plan your path to building and/or improving your dental practice.