If you’re considering the purchase of a dental practice, the first questions you may be asking are where to start and what to expect. Preparation for a future purchase should begin months before making an offer on a practice. By starting early, you can reduce anxiety and mitigate risk. Locating the ideal practice may take several months. The more narrow your search, the longer it will take to find a practice. Consider making two lists of practice criteria: “Deal Breakers” and “Ideal Criteria.” You may need to keep an open mind with criteria like office location and equipment. When considering the criteria of the practice, focus on the practice’s cash flow and the seller’s practice philosophy and procedure mix.
Once you identify the practice you’re interested in, you will sign a non-disclosure agreement. Then the seller’s broker will typically provide you, the prospective buyer, with tax returns and other financial and practice reports. When reviewing this data, keep in mind the trend in collections over the past three years, the percentage of overhead in the practice, abnormally high expenses (e.g. rent or staff salaries), procedure mix, new patient count, and total active patients. Hiring an accountant to review the financials can help in assessing the cash flow of the dental office.
When an opportunity is identified as being a good fit, the next step is to visit the office and meet the dentist who is selling their dental practice. It may be helpful to share your CV or cover letter with the seller as an introduction to your visit. These visits typically occur after hours or on the weekend. The primary purpose of the visit is to become familiar with the seller and the practice. Ask plenty of questions to get the info you need, but do not discuss numbers or negotiate the terms of a sale directly with the seller. Communicating terms of the sale through the seller’s broker can help preserve the goodwill between you and the dentist selling their practice.
In the sales process, it’s important for the buyer to be ready to submit an offer quickly. To ensure you can make an offer quickly, pre-qualify for bank financing early in the process. Also, identify an advisor that can assist you in preparing an offer, typically in the form of a Letter of Intent (LOI). The LOI should address the sales price, earnest money, and closing date. The LOI can also address the seller’s involvement with the transition of the practice after the sale.
Once an offer has been accepted, the buyer should focus on the following four areas to ensure a timely closing:
- Purchase Agreements – the terms of the contract have been reviewed by your attorney.
- Bank Financing – secure a loan commitment and make sure all loan conditions are satisfied prior to the closing date.
- Completing Due Diligence – complete patient record audit, equipment inspection, and review of current financial statements and accounts receivable reports.
- Securing the lease or real estate contract for the building. – ensure terms are both favorable and satisfy the lender’s requirements.
The process of purchasing a practice can be overwhelming and emotionally draining. Starting early and hiring an experienced accountant attorney, can help the process go much smoother. For additional information about the buying process contact your local ADS transition expert.
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