Practice growth through acquisition, Issue 10

Dentists know how difficult and time consuming it is to grow their practices through marketing efforts, hard work, excellent service and building their reputations over the years. Some dentists have found an additional method for practice growth that has similarities to an investment model growth in public companies.

Dentists know how difficult and time consuming it is to grow their practices through marketing efforts, hard work, excellent service and building their reputations over the years. Some dentists have found an additional method for practice growth that has similarities to an investment model growth in public companies.

These dentists have been attempting to acquire additional dental practices and have their businesses grow through acquisition. Of course, there are difficulties with this model of growth that dentists without sound financial backgrounds will encounter but it is definitely a much faster method to use to increase the size of your dental practice. The dentist should be very wary of attempting to increase the size and value of his or her dental practice using this method of growth and should follow sound business practices such as making sure that those who understand acquisitions and running a business are in charge of this approach to growth.

How to approach this

Since money is still readily available for dentists with good credit, and dental practice values are stable - if not increasing compared to the rest of the economy as a whole - a dentist who is interested in this type of model for growth should package his or her financial data and be prepared to present that data to a bank to secure a credit line.

People need to be hired with expertise in financial matters regarding dentistry such as outside certified public accountants, in-house controllers and good bookkeepers. An attorney with dental practice knowledge should also be part of the team for structuring the organizational format to be used in the acquisition model for liability and income protection.

The record keeping responsibility and accuracy is one traditional weak point in dental practices that will severely hamper the growth of the practice with an acquisition model. Once the proper people are employed, the search for a viable acquisition can begin. It is really important for the dentist who will be the buyer of the new practice to continue practicing dentistry. Many make the mistake of thinking that their existing practice can continue to thrive while they practice accounting, deal making and other areas of business in which they have little or no experience. Don’t make that mistake. It will cost a great deal of money and hurt your existing dental practice. Be as smart as you were in taking your current practice to the level that it has achieved as you attempt to build a multi-practice organization.

Finding, financing acquisition

Now that you have your team in place, your next step is to find the dental practice. There are practices for sale throughout the country but the pricing is now increasing due to a number of factors such as the economy and the fact that dental practices are very stable financially so that dentists are not selling as readily as in the past. Many dentists have lost considerable money in their retirement plans and also cannot afford to retire for that reason as well since their savings have been depleted.

Specialty lenders have money readily available for a sound acquisition so when the practice becomes available for the acquiring dentist, the flow of information begins. It is not uncommon to have a direct loan equal to the practice acquisition price plus an additional 10 to 15 percent for working capital. Finding the dental practice can be accomplished through dental practice brokers, your own marketing people searching for the practice and through professional journals as well as your own advisory network. Your advisors, if experienced and known throughout the dental industry, have contacts of their own and can assist in the search for your acquisition.

Negotiation process

At this point, you will find that your team starts paying for itself. Once the practice is found, the analysis of the financials, the study of the clinical side of the practice, the patient retention and new patient monthly additions, among other items, will be studied. A practice valuation should be ordered even if you feel there may not be a need for one.

The lenders like to see an appraisal, similar when buying a home, so that they receive a comfort level as to their loan to value with the acquisition and their willingness to lend a substantial amount for working capital, which is almost always needed at the acquired practice. Your “inside” people can do the majority of the analysis and when the point is reached where you are almost ready, your outside CPA should be involved to assist in presenting the tax ramifications and helping with the presentation for the financing. Once these areas of expertise have been addressed, your lawyer should be involved for the preparation of the acquisition contracts or for the review of contracts prepared by the selling dentist’s attorney. The allocation of the purchase price, the warranties and representations agreed upon by you and the seller and the loan package approval will all be in motion as the due diligence process is proceeding.

What comes after the acquisition?

Congratulations on your acquisition. Typically the infrastructure of the acquired practice remains in place at the dental practice that has just been purchased. If there is a transition in personnel, a good time to do so is after you and your business personnel are soundly in place and thoroughly understand the nuances of the acquired practice. Some of your team will arrive and spend a good deal of time at the new practice converting systems or learning the systems that are in place and teaching the staff your methods for continuity and for streamlining your commonly owned practice into a format that is similar to your own. This exercise will ensure that what has just been purchased will pay for itself and also bring profits and the ability for continued growth through acquisition to you and to your team.

Bruce Bryen is managing partner for Bryen & Bryen LLP, Certified Public Accountants. Based in New Jersey, Mr. Bryen specializes in deferred compensation such as retirement plans, income and estate tax planning, the determination of the proper organizational format, asset protection and structuring loan packages for presentation to financial institutions. Bruce is also experienced in providing litigation support services and has testified on numerous occasions as an expert witness. Contact him at 800-988-5674, ext. 112.