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Monday, April 8th, 2024 | by James Ackerman

Navigating Your First Dental Practice Purchase: Red Flags to Watch For

As a young dentist on the cusp of buying your first dental practice, the excitement is palpable. However, it’s crucial to approach this significant step with a discerning eye, armed with the right questions to ask when buying a dental practice.

There are several red flags to look out for when buying a dental practice that, if overlooked, can turn your dream purchase into a financial quagmire.

This article highlights key areas to scrutinize during your due diligence process, which is one of the critical steps to buying a dental practice.

Assessing Cash Flow

Understanding the cash flow of a potential practice is non-negotiable. Adjust for non-cash expenses like depreciation and normalize owner-specific expenses to see the true financial picture.

Use a spreadsheet to track these adjustments as percentages of gross income, providing a transparent view of the practice’s profitability.

Evaluating Compensation Structures

Examine the compensation of current owners and staff. Adjustments here can reveal the actual cash flow available post-purchase.

Be wary of inflated wages, especially for family members, and ensure that staff costs align with industry standards of 20-28% of gross income. The good news is the practice has long-term staff; the bad news is long-term staff (high wages).

Dental Practice Transitions

Look out for signs of impending retirements, overpaid positions, or benefits that might be unsustainable for you to maintain. Hygienists should be efficient producers, ideally generating three times their salary.

Keep Costs in Line by Understanding Occupancy Expenses

Occupancy/Rent costs can make or break a practice’s financial health. They should ideally hover around 5% of gross income.

Rural practices can have significantly lower occupancy costs. Adjust the rent to fair market value if the seller owns the property.

Be leery of a “Taj Mahal” office; you can do just as much dentistry out of a $500,000 building as you can out of a $2,500,000. The problem is that the practice’s cash flow may not cover the mortgage/rent.

Insurance and Legal Fees: Necessary Protections or Financial Drains?

Insurance is essential, but only to a point. Optional dental practice insurances that don’t directly benefit the practice’s operations should be reconsidered. These include disability, office overhead insurance, and life insurance.

Legal and professional fees should also be reasonable—excessive costs here could indicate more profound issues.

Evaluate the ROI on the Practice’s Equipment and Technology

Equipment needs will vary, and upgrades can be costly. Right-handed vs. left-handed setups, digital X-ray systems, and other technological advancements should be evaluated for their return on investment.

Understanding Insurance Contracts During the Due Diligence Process in Dental Practice Purchases

Insurance contracts, such as HMOs and PPOs, can have long-term impacts on practice operations. Understand the terms thoroughly before committing, as they can be challenging to alter later.

Review the Procedure Mix and Maintain a Balanced Portfolio

Review the practice’s procedure mix and production reports. Be cautious of ongoing treatments like orthodontics, which you may need to complete, and consider how much revenue comes from specialized procedures you may not be able to or do not wish to provide.

Tread Carefully in Partnerships and Buy-Ins

Partnerships and buy-ins can be complex. Ensure you’re comfortable with all aspects of the arrangement, including the potential need to find a new partner when the seller leaves.

Dental Practice Transitions

Often, the original partners were around the same age and stage of life. However, a junior partner may have significantly different views on technology purchases and financial decisions for the practice.

Smart Steps to a Successful Dental Practice Acquisition

Buying a dental practice is a monumental decision that requires careful consideration and the right tips for buying a dental practice. By being aware of these red flags and conducting a thorough evaluation, including all the things to consider when buying a dental practice, you can make an informed decision that sets the foundation for a thriving dental career.

About the Author

James Ackerman

James R. Ackerman is a graduate of St. Louis University in St. Louis, Missouri with a B.S.B.A. in Accounting. He began his career in public accounting at Arthur Andersen. After leaving to pursue his lifelong passion as an airline pilot, Mr. Ackerman returned home to St. Louis to join ADS Midwest. He has been with ADS Midwest for over 9 years and has completed over 50 transitions. He is a licensed real estate broker salesman in both Missouri and Illinois. Mr. Ackerman helped organize the Practice Transition lecture at the University of Iowa School of Dentistry for alumni and students. Mr. Ackerman and Mr. Jaffe lecture to dental audiences, residency classes, dental district meetings, continuing education courses and other dental society functions throughout the Midwest and the United States.