If you’re planning to PURCHASE A PRACTICE in the next year, now is your chance to be like the legendary billionaire investor Warren Buffett.
As I wrote this, Buffett announced that his Berkshire Hathaway Company was investing $5 billion in Bank of America (NYSE: BAC). With a 2011 year-to-date loss per share of $.28, why would Buffett spend that kind of money? Obviously, he sees an upside to the deal.
Many other analysts put the value of Bank of America’s Merrill Lynch division alone at more than $10 per share. Shares in the entire bank closed yesterday at $7.65. No doubt Buffett sees even more potential.
The current economic headwinds have created the same kind of hidden value opportunities in dental practices. But, you have to be willing to overlook some warts to find the value. You also need the confidence that you will be a better manager than the seller.
A practice with subpar attributes in the geographical area you seek deserves a second look.
First, examine the practice revenue. Is it adequate, but does not translate into good profit? If not, why? Can you fix it? Are collections less than what you need? Too few patients, low fees, and poor procedure mix, among other reasons, can lead to inadequate revenue. Declining revenue can be caused by patient attrition, OR by the seller taking more vacation time than in the past. Can you correct these issues?
If you don’t think you can improve the practice’s net profit, keep looking. Remember, you pay yourself with profit, not collections.
CASE 1: $1,200,000 collections, beautiful eight operatory, high-tech office located in a three-year-old building. The building was for sale at market price. It was a nice location in a metropolitan area.
The warts: The seller was a bad manager. The office had far too many poorly trained staff members. Systems were cumbersome and inadequate. Worse yet, the practice actually reported a substantial annual net loss, and had for the last several years. There were lots of creditors. The economic climate made it impossible for the seller to borrow more money. Sound familiar?
The Buffetts: This was a husband and wife team. She was an associate at a large group. He was a systems manager for a multinational company. They concentrated on that collections fi gure of $1,200,000. They knew that with her clinical skills and his management experience they could turn those collections into a very nice return on investment.
The result: After extensive due diligence, they submitted a purchase offer well over
$600,000 — fair to them and the seller under the circumstances. They constructed a detailed business plan that served as their loan application. They found a bank that would do the deal on favorable terms. Their CPA concurred with the plan and the sale was completed. Their fi rst year revenues will be $1,400,000 with an above average net profit.
CASE 2: Average collections over four
years were $750,000, with a $375,000 net profi t. Nicely
done three-operatory offi ce located in a landmark medical
building in an upscale metropolitan area.
The warts: Trailing 12-month collections had dipped below $600,000. Net profit had sunk even further. The seller had a chronic medical condition that finally required surgery. In the previous year, he had been able to work less than half of his normal work schedule. He had a reduced workload on the days he did work. Many prospective buyers were afraid patients had left the practice.
The Buffetts: They noticed the hygiene schedule had been kept at its normal pace. A review of charts revealed over $200,000 in diagnosed, but untreated dentistry. The buyer knew the practice just needed a healthy dentist to recover.
The result: Trailing 12 months’ revenue is now back to $750,000. Profit has returned as well.
If you are a buyer, be like Warren Buffett. Make sure you are not overlooking hidden value in a practice.
This entry was posted on Friday, August 31st, 2012 by Steve Jordan and is filed under Buying,