Welcome to the DentalDirect Buyers Guide. If you've not already done so, sign up as a registered buyer. It's quick, easy and 100% free! After you complete your registration you'll be able to open and review any practice portfolio listed on the site. For more complete information about buying a practice download our Free Ebook.
There are many advantages to being a DentalDirect Buyer. Here are just a few:
- We are the first and only service that allows you to see complete dental practice listings in their entirety online.
- DentalDirect sellers do not have to build a 10% brokers commission into the price so you are likely to get a better deal.
- Since you don't have to access the information via a broker, you can be looking at complete practice portfolios in minutes instead of days.
- You can look at practices anywhere in the US anytime you like 24/7.
- Since you can fully evaluate practices online, you'll only spend time visiting practices in which you have a sincere interest.
- Since all of our listings are created by our sellers using the DentalDirect Template, you can easily compare practices "apples to apples".
- It is a pressure free buying experience. There are no brokers trying to "sell you" anything. You look at practices anonymously until you are ready to contact the seller and arrange a showing.
- By using the resources on DentalDirect you can become an educated buyer and make well informed decisions greatly increasing your chances of finding a practice that's right for you.
Assessing Your Personal Needs
Before you begin looking at practices it's a good idea to take stock of your personal financial needs. Any practice you buy must pay all your personal expenses and cover your monthly practice note with some money left over. Pretty simple. We recommend you write out your monthly expenses including any loans you may have and multiply by 1.5 which will account for taxes and give you a cushion for the unexpected. Then add in the anticipated monthly note that you will have for your new practice. This is what your net profit will need to be every month to safely cover your expenses during the term of your practice loan. The first test any practice should pass is whether the cash flow will cover the loan plus your expenses with room to spare.
What is your financial position? What loan amount are you able to be qualified for? It is a good idea to talk with lenders early on if you are going to need a practice loan. There is no need in looking at practices that you cannot afford (unless the seller is willing to finance you). Fill out a personal financial statement and have preliminary discussions with several lenders as you begin looking at practices. Lenders who routinely work in dental sales can be especially helpful to you. Brokers may tell you that they know all the right people to get you qualified for a loan and I suppose this is true. It is also true that these same people can be found by searching the terms "dental lenders" on Google for free.
What Type Practice Are You Looking For?
It's a good idea to write down the qualities of your ideal practice before you start looking. This is not to say that you are going to find a practice that fits your ideal. You probably won't. But you can usually find one that you can make into your ideal with the implementation of a few changes and a little work. By creating a baseline ideal, you can look at practices and ask yourself what you would have to do to take what is there and make it into what you want. Some practices might require minor changes while others would need a major overhaul. You have to decide if a practice is a great fixer upper or a money pit. Having a picture of your ideal practice before you start looking will help you do that.
Some areas to consider might be: Price, cash flow, overhead, production/collection, # of active patients, procedure mix, location, furnishings, square footage, # of operatories, age and quality of equipment, insurance participation and practice philosophy. The list could go on but the point is to get a handle on what you are looking for. Dentists usually know the right practice when they see it. If it feels right and the cash flow works for your particular situation, that's a good sign that you've found the right one.
How to Look at Cash Flow
Cash flow is simply money in and money out. Cash flows are presented in 2 forms, "As reported on tax return" and "Adjusted". The adjusted cash flow tells you what net income you can reasonably expect from a practice. It "backs out" the discretionary expenses that are included in the tax returns to provide a more accurate picture of the potential net profit. It is important to understand and account for the differences between these two versions of cash flow. Your accountant can certainly help you do this if need be. The Current Year Income and Expense is a categorized cash flow for the year in progress. It is presented by expense category since this is how most dentists think about expenses. We break the expenses out into 7 general categories: Facility, Administration, Staff, Clinical Supplies, Lab Costs, Marketing and Improvements. Each area of spending can be assessed by the buyer and can be viewed conveniently as a percentage of total collections. A cash flow broken into typical dental expense categories gives you a quick and easy snapshot of where a practice is strong and weak. It also lets you see how it could be improved by you.
Contacting the Seller
When you have found a practice that interests you, you can contact the seller directly. Contact information is found on the last page of each portfolio. The method of contact is chosen by each seller individually and is not a part of DentalDirect. Contact the seller to ask questions or arrange for a personal showing.
Visiting the Practice
When visiting a seller's practice you should always put your best foot forward. The seller needs to feel comfortable that you are a good fit for the practice and that you will take good care of the patients and staff. Be respectful and cognizant that you are a guest and always ask permission whenever appropriate. If you have any significant others with you, make sure they understand this as well. You should wear appropriate attire to a showing. Most of what you purchase with a practice is goodwill and the goodwill is best maximized if the seller likes you and is impressed by you. Sellers are often entrusting you to care for patients with whom they have a 20 or 30 year relationship. If you can foster a relationship of trust and mutual respect between yourself and the seller, you will both benefit.
Making an Offer
If you decide to make an offer, you can do so using the Letter of Intent form found at the bottom of the Homepage under "Downloads". It is a simple document that outlines the basic terms of an intent to purchase with several provisions. It is important to understand that a Letter of Intent is not a binding contract. It places an obligation on neither buyer nor seller. The terms of the Letter of Intent can be rejected, accepted or countered by the seller. The LOI is typically submitted to the seller via email attachment. The Letter of Intent document has provisions in it that allow for a period of time for the purchaser to perform due diligence. Financial due diligence can be performed by the buyer and/or their accountant and involves the examination of the books and bank accounts to ensure that the practice numbers are accurate. Non-financial due diligence is usually performed by the buyer and involves the examination of the hard assets of the practice (such as equipment and furnishings) as well as a chart audit. It is typical to examine at least 100 randomly selected active patient charts for record keeping and completeness of documentation as well as work to be done. During the due diligence period no other offers may be entertained by the seller. The practice can, however, continue to be shown. Terms usually addressed in the LOI include purchase price, the restrictive covenant (non-compete clause), allocation of assets for tax purposes, earnest money and a description of items not included in the sale as well as contingencies for the negotiation of an acceptable lease/purchase and financing approval. We feel that you should speak with your dental attorney and dental accountant before you submit your LOI to the seller. There are several parts of the LOI about which you may need professional advice, especially the terms of the restrictive covenant, asset allocation, earnest money and the lease/purchase. Although the Letter of Intent is non-binding it is important that the terms be well considered and that the offer is made in good faith.
The Restrictive Covenant
The restrictive covenant (aka non-compete clause) is intimately bound to the goodwill since one is of no value without the other. There are several components to an effective restrictive covenant, the first is that it be reasonable in terms of time and distance. This is largely determined by the distance most of the patients travel to come to the practice. A rural practice will often have a larger geographic limit than a practice in an urban setting because the patient base comes from a wider area. Just remember that it has to make sense in terms of the particular practice. Courts will not uphold a restrictive covenant that is not reasonable.
All restrictive covenants must contain a geographic area in which the seller is prohibited from practicing dentistry in any capacity for a set period of time. It also strictly prohibits the seller from attempting to solicit any patient or employee (unless the employee has been dismissed by the buyer already) of the practice. Remember that most of what you buy is goodwill and patient records. The restrictive covenant protects these assets from becoming diminished in value after the sale. If an associate also works in the practice, the restrictive covenant should apply to them as well.
Allocation of Assets for Tax Purposes
Every dental practice sales contract must contain within it a section that lists the assets being transferred from the seller to the buyer and their assigned values. The assets typically include dental equipment, instruments, supplies, furnishings, patient charts/records and goodwill/restrictive covenant. The way the total purchase price is allocated to the various assets has tax consequences for both the buyer and seller. The value of the assets is certainly not random but there is some flexibility in deciding what each group of assets is worth. For instance, there has been an equipment appraisal performed so the value of that asset is relatively fixed. However, it is not set in stone. All the values of the hard assets in the practice are something of an approximation.
The seller would like to allocate the assets in such a way as to minimize the income tax they will owe on the gain. The seller's gain will be taxed at either the capital gains rate (flat 15% regardless of income) or at the rate of ordinary income depending upon how the gains have been allocated in the contract. Since the gains attributable to the sale of the hard assets of the practice will generally be taxed as ordinary income and the goodwill will be taxed at the capital gains rate, it is advantageous to the seller to allocate as much of the purchase price as possible to the goodwill. The buyer, on the other hand, would want to allocate more of the purchase price to the hard assets like equipment, furnishings and supplies to maximize their tax deductions since they can be written off sooner than the goodwill which must be amortized over a 15 year period. The allocation objectives of the buyer and seller conflict, therefore the allocation of assets will be a compromise to be fair to both parties. As with the restrictive covenant, it is necessary for the allocation of assets to be reasonable to the circumstances.
The Draft Contract
After the general terms of the sale have been agreed upon, the seller's attorney will typically create a draft sales agreement that is reviewed individually by both parties. The contract includes all the details involved in the transaction. After the draft sales agreement is completed you should carefully review it and amend any part with which you do not agree or add in parts that you feel need to be present. You should go over the contract at this stage with an attorney who has experience in dental sales. Using an attorney who is not familiar with dental sales and especially one who is overly contentious over petty matters will cost you a lot of money that you don't need to spend. When you and the seller have approved a final version of the sales contract and a search has been performed to make sure there are no leins or encumbrances that need to be addressed, you are ready to set a closing date.
The seller's attorney or an agent of the title company can preside over the closing. It is usually a good idea to initial each and every page of the sales contract in addition to signing it to insure that both parties review and agree to every part of the contract as set forth. This way there can be no misunderstandings. If you want to re-read the entire contract at closing to make sure it is still the same, you are certainly entitled to do so. After both parties have initialed and signed the contract, the practice belongs to you. Congratulations!
After the Sale
If it is a "walk away" sale, the seller will usually have to finish work in progress and remove personal belongings if not already done. If the accounts receivable was not sold with the practice, your staff will still help with the seller's collections as per the terms in the contract. All other "after the sale" provisions in the contract are fulfilled.
For more information about the buyer's side of practice transitions download our Free Ebook.
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