Acquiring an existing dental practice is an exciting time, but can be a daunting task and a complicated endeavor. However, when equipped with accurate, data-driven knowledge and a team of specialized professionals, you can set yourself up for a rewarding career and a smooth transition process. This article aims to equip you with the tools and information necessary to purchase a dental practice.
Location and Patient Demographics
Location is one of the most difficult of all the things you can change after purchasing a dental practice. Therefore, choosing a dental practice that’s located conveniently for your patients and yourself is vital. After all, this location could be where you travel every day for the next 20 years of your career. Many factors go into determining the ideal area, including housing, schools, community, etc., that will impact the type of patient you see and the quality of life for you and your family.
- The concentration of dentists in the area
- Ability to own the real estate now or in the future
- Stand-alone building, shopping center, professional office building
- Signage that allows the practice to do some advertising
When purchasing a dental practice, it is important to consider the style of practice you want to have and the demographics of the area in which the practice you are considering is located. Some of the different types of practices include Medicaid-driven, private insurance-driven, and fee-for-service. Many practices are a blend of some or all types. It is important to understand the demographics both of the area you are considering and any particular practice you are considering to make sure those demographics align with your expectations and goals. Getting a handle on the area – and practice – demographics will allow you to better understand the type of patients you will see and the pool of staff you can hire.
- Where do you want to live long-term?
- Local/City demographics
- Median household income and home values
- Average education level
Build Your Team of Dental Professionals
Once you have determined the type of practice you want and the location you want to be in, it’s time to start building your network to find the perfect opportunity. You’ll want to start reaching out to dental professionals who operate in the area frequently. Not every practice that comes on the market is the one for you, but once you find the right opportunity, you’ll want to be able to move quickly and effectively. Your team of dental advisors will help you through every step of purchasing a dental practice.
Dental Transition Consultant/Broker
A dental transition consultant can help you find the perfect practice in your desired location. We suggest staying in touch with all the brokers that operate in your area and keeping a close eye on their listings. Although dental transition consultants can represent a Seller, many also offer buyer representation services, such as consulting , due diligence review, and and dental practice evaluations. Be wary of any consultant/broker that claims to work on behalf of both the Seller and the Buyer. Your advisors should have only your interests in mind.
There are many CPAs out there who are general practitioners, all of whom will want you as a client. Perhaps, you already have a CPA you’ve been using for several years for personal matters. However, the benefits of working with a CPA that has dental expertise cannot be overemphasized. They can provide valuable industry knowledge, best practices from existing clients, overhead and cost analysis, fee schedule analysis, and advice on hiring and equipment purchases. A Dental CPA can be a long-term adviser for your business and personal goals.
Similar to a dental-specific CPA, many attorneys specialize in dental practice transactions. Your dental attorney will know and understand the nuances of a dental practice transition and can provide you with very specific advice and negotiate on your behalf. Your dental attorney should be brought in to negotiate and draft the purchase and sale agreement, lease, or real estate purchase agreement, non-compete agreement, and post-sale employment agreement (if applicable), and establish your entity.
Like CPAs and Attorneys, there are specialized lending groups that are dental-specific. Most small business owners can go to their local bank for financing, which is typically a generalist, however, since most of the value of a dental practice is goodwill, those lenders will see little value. A dental-specific lender will provide better terms and rates than a local bank because they understand and are experienced with the needs of the dental industry.
Once you have found the right dental practice for sale in your desired area, it’s time to begin the acquisition process. The market for dental practices is highly competitive so you want to be able to move quickly and confidently. Hopefully, by this time, you have identified the dental professionals that will help you at every step of the process to facilitate a smooth transaction.
Letter of Intent
The letter of intent, or LOI, is the first document you will need to submit to start the process of purchasing a dental practice. This document will outline your offer and its contingencies, such as doing your due diligence, obtaining financing, signing a lease or real estate purchase agreement, and signing the practice purchase agreement. If the offer is accepted by the Seller, you will send in an earnest money deposit which will be held in escrow by either the Seller’s broker or attorney. The LOI is typically non-binding, and if any of the contingencies are not met for any reason, then you can request for the earnest money deposit to be returned.
- Purchase Price
- Real estate – lease or purchase
- Accounts receivable (typically not included)
- Due Diligence
- Signing lease/real estate agreement
- Signing purchase and sale agreement
- Transition period (if applicable)
- Restrictive covenants, non-compete
Once the Letter of Intent has been signed by both parties, you may begin the due diligence process. The dental professionals you hire can help you evaluate and understand the selling dentist’s cash flow, financials, and operational information. This process is a great opportunity to analyze the opportunities and challenges of the practices and come up with a plan for post-closing. If there is a broker involved, they will have already done some due diligence to represent their client. However, you should always do your due diligence or hire a consultant to help you through the process.
- Financials, Overhead, and Cash Flow Analysis
- Production and Operational Metrics
- # of Active Patients
- Chart Audit
- Staff Census
- Equipment and Inventory Audit
Practice Purchase Agreement
The dental practice purchase agreement is a legally binding agreement that has all the details of the transactions. Your dental-specific attorney will help you negotiate the terms of this agreement and explain the different components that are included.
- Allocation of the purchase price / tax considerations
- Typically, 80% goodwill and 20% tangible assets
- Buyer and Seller representations and warranties
- Terms of non-competition and non-solicitation
- Post-employment/transition agreement
- If the seller plans to stay on for a few months post-closing
- List of equipment and assets being sold
- Website, name of the practice, computers, chairs, etc.
- List of items excluded from the sale
- The seller’s items such as photos, paintings, diplomas, etc.
Lease or Real Estate Purchase Agreement
Along with the dental practice purchase agreement, you will need to sign a lease or a real estate purchase agreement if you are planning to buy the real estate.
The terms of the lease typically must be the same duration as your practice loan. For example, if you have a 10-year practice loan, then you will generally want to have a lease with an initial term plus an option term (or terms) that cover a 10-year period.
If you prefer to own the real estate at some point down the road, you can negotiate the first right of refusal or an option to purchase. Most people confuse these two concepts; however, they often mean very different things.
The first right of refusal allows you to purchase the real estate whenever the owner is ready to sell. When the owner is ready to sell, you have the first right, however, if you decide not to exercise that right the owner can sell to a third party.
An option to buy often allows you to buy the real estate during a pre-determined period and the owner has to sell it to you if you decide to exercise the option.
Consult your dental-specific CPA to determine the best legal entity to set up in your state, often an S-corporation set up as a professional corporation or a professional limited liability company. Your attorney and CPA will work together to set up the entity and to provide you with the EIN. After you’ve obtained the EIN for your entity, you can begin the process of getting business insurance and credentialing with patient dental insurance.
You will need several different types of insurance for you and your new dental practice.
- Professional liability Insurance, which you may already have
- Worker’s Compensation
- General Liability Insurance
- Contents insurance
- Disability Insurance
- Life Insurance
- Depending on the size of the purchase loan, your lender may require this
- Real Property Insurance
- If you are purchasing the associated real estate
Dental Insurance Credentialing
Once you have created your entity and received your entity’s EIN, you can begin the credentialing process. To start we recommend credentialing with the same insurance the practice is currently in-network with. After some time, you can decide if you’d like to add or remove any insurance.
After the practice purchase agreement is signed and it seems with a high probability that the sale is going through, you should work with the seller to come up with a clear transition plan. This will include notifying the staff, patients, and vendors of the practice. This part of the process is always a little chaotic as it happens in a short period. We recommend meeting with the seller regularly as you approach the closing date to coordinate the logistics.
- Plan to meet the staff soon after the seller notifies them of the sale. We recommend meeting the staff the same day or by the next day at the latest.
- Have the Seller send a letter or email to all patients notifying them of the sale, and introducing you, your family, and your background. Not all patients will carry over after the sale, but most will if there is good communication about what is happening and you make a good first impression.
- While you don’t have to continue working with the same vendors, it will make the transition smoother, and after some time you can decide if you’d like to switch to other vendors.
While purchasing a dental practice can be a daunting task, it is also a very exciting time! With an experienced dental-specific team to guide you it can be a smoother, more enjoyable process. Ask your friends and colleagues who have purchased a practice which professionals they worked with or ask the professionals you are considering for referrals. The advice you get before, during, and after the process can be imperative to your and the practice’s future success.