6 key considerations when purchasing a dental practice
In recent years, there has been a surge in the buying and selling of dental practices. The inherent goodwill of a practice, the move towards regional and national consolidation and the availability of 100 per cent financing make the decision to buy that much more attractive. In addition, a high percentage of dentists are approaching retirement and looking to monetize their well-established practice, making investing in an existing practice a viable option for new dentists. With so much riding on this investment, the decision to purchase a practice can be overwhelming. To simplify the process, dentists should focus on these six key issues.
1. Financing
If you have a relationship with an existing bank, stick with it – your personal information and history are already in their system, which simplifies the process. If you don’t have an existing relationship, work with an advisor who has relationships and experience you can leverage. As a buyer, your primary questions are (a) will the target practice generate enough cash to fund your lifestyle while repaying the loan and (b) are you personally ready to accept the risks associated with carrying this level of debt?
2. Working capital and cash flow
When purchasing a practice, dentists commonly underestimate their working capital needs, but cash management is extremely important. Within a week or two, you will need to cover payroll and operating expenses, but you are likely to have little cash. It is a good idea to arrange a line of credit as part of your financing package, providing working capital as needed. Understand that your net income is not your net cash flow. Certain payments – such as principal payments on debt – come out of your after-tax cash flow and are not factored into your net income.
3. Legal and tax considerations
Generally, you either purchase the shares or the assets of the target practice. The legal agreements are complicated and should be reviewed line by line with your lawyer. Before signing, understand the obligations you may be assuming, including employee severance, building and equipment leases and other contractual agreements. You should also understand your annual income tax and indirect tax filing requirements and deadlines.
4. Deal structure and income tax planning
Deal structuring and related income tax planning is never one size fits all. The planning for a recent graduate with no spouse or children will be entirely different than the planning for a 45-year-old associate with a family. Individualized planning is the key. Work with your advisor to develop a personal budget, so you can understand how much cash you can take from the company and the related income tax implications.
5. New pressures and responsibilities of being an owner
Purchasing a practice brings new responsibilities, including staff, cash collection, patient issues, scheduling and suppliers. Some people are better suited to be an associate, avoiding the stress of the day-to-day decision-making. In addition, there is an emotional toll involved in running your own business. Before purchasing a practice, it is important to understand the commitment you’re making and the impact it will have on all aspects of your life. Understand that your home life will be affected and your spouse or partner will become involved, directly or indirectly. Having access to an experienced advisor as a sounding board during this transition can be extremely helpful.
6. Books, records and accounting
Day-to-day bookkeeping and recordkeeping is an issue that is often overlooked. A relationship with a good bookkeeper is not required, but it can give you one less thing to worry about. For payroll, it is wise to enlist the services of a payroll company, rather than navigate the complex rules yourself. An advisor can assist with software selection for your business, including the benefits of Sage, QuickBooks or QuickBooks Online. This advisor can also review monthly or quarterly reports and monitor your production, net income and cash flow. They can work with you and your team, ensuring there are no surprises and your practice gets off to a smooth start.
Purchasing a practice can be a stressful process. Engaging an advisor experienced with all aspects of the deal will add value and reduce stress. A team approach always yields the best result.
Carl Hooper
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