Dr. Michael Gradeless
The most commonly played game of pool is 8-ball. In the game of 8-ball, pocketing the 8-ball is how you win the game; pocketing the 8-ball also can cost you the game. The eighth ball is the most powerful ball in the game. Last month, I promised eight steps to evaluate a practice purchase. I gave you seven and promised to cover the eighth step in this month's column. Like the game of 8-ball, the eighth step is the most powerful in the game. Auditing the practice you are purchasing is the most important step in winning the practice-acquisition game.
There are three ground rules when it comes to auditing a practice for potential purchase. First, you should expect complete disclosure. This means that you and your representative have complete access to the practice, including access to the computer system, charts, staff interviews, and tax returns. The second ground rule is the corollary to the first rule. You must be well prepared for your audit. You must not expect the seller to produce the same information multiple times. Understand what questions you need to have answered and develop a plan for getting those answers. Going back to check something you forgot is not a good thing. The third ground rule is to evaluate all the information on the basis of how well the practice will support your goals and your vision. Do not be swayed by visions of great cash flow if the practice will not support your vision of how and where you want to practice dentistry.
The first step in auditing a practice purchase is to examine the paperwork. Initially, look for an audited form that shows collections and expenses. The best way to see this is with a tax return. Your accountant must have access to documentation that will allow him or her to give you a clear picture of the cash flow in the practice.
The second area of paperwork to audit is in the charts. You must count the number of active patients. The standard definition of an active patient is any patient seen in the practice in the previous 18 months. Are treatment plans written in the chart and can you read the notes? What type of treatment does the practice actually do? Are there periodontal chartings? What are the demographics of the patient base?
The other major area of paperwork you need to examine is the sale documentation. Make certain you are properly protected by a restrictive covenant and that the contract actually says what you think it says.
After studying the paperwork, it is time to look at the people. How long has the staff been with the practice, and is anyone leaving soon? Are any members of the staff related to the selling doctor? Look at all aspects of the pay. The gross wages of the staff are typically 22 percent to 28 percent of total gross production. Before your first day in practice, you should be intimately aware of the vacation, health, pension benefits, and bonuses that the practice has historically provided. Then, make a decision about what benefits you will provide. You should consider having an employment interview with each employee. You definitely want to keep the staff intact, but interviews will give you three big benefits. First, you will get free practice doing employment interviews (which you will eventually use), the new staff will get a chance to meet you personally, and you will have the opportunity to learn about the systems in the practice. The people and the systems determine the efficiency of the practice. The best bargain in a practice purchase may be a practice with great people and poor systems.
Finally, it is time to take a critical look at the facility. Changes are always needed to make the operatories efficient for you to use. Calculate carefully how much you will have to spend on remodeling. Paint, carpeting, and furnishings need to be in good condition or you should replace them up front. After borrowing for a practice purchase, you may not be willing or able to add to the debt for several years. The most important issue is to look at the office and decide if you can see yourself going to work there every day.
Every practice has both positive and negative characteristics, and the practice audit is only the beginning of the questions you should ask. Take your time to answer every question you can to make certain the practice you buy will support your vision and provide you with a satisfying career.
Dr. Michael Gradeless, a 1980 graduate of Indiana University, practices preventive dentistry in Indianapolis with an emphasis on cosmetics and implants. He is an adjunct faculty member at Indiana University where he teaches the Pride Institute university curriculum of dental management. He also is the editor for the Indiana Dental Association. Contact him at (317) 841-3130 or e-mail him at [email protected].
