by Tom Smeed
A knowledgeable buyer’s representative can help keep you from making major mistakes. While the accounting numbers are important, you must also understand the practice-management numbers. In many cases, the accounting numbers may show the practice in a positive light. However, looking at the practice-management information may give you a totally different picture. A knowledgeable buyer’s representative will help you interpret both accounting and practice-management information, as well as explain not only what the numbers mean, but what you will need to do to make the purchase of the practice work for you.
A practice information book I received from one broker showed a practice with gross receipts of $785,600 for the previous year and a net profit of $298,300. The location of the practice was good. The office had four well-equipped treatment rooms. The doctor had an excellent reputation in the community of about 100,000 people. The asking price for the practice was $541,000.
At first glance, this looked good to the potential buyer. A closer look by the prospective buyer and his representative uncovered some additional information. By actual count, the active patient base of the practice was 983. An active patient is any patient who has been in the office at least once in the past 18 months. The office averaged 107 hygiene visits per month. The doctor averaged six new patients per month. The gross production of the practice was $882,000 for the past year.
After looking at the computer reports, we found the office had adjustments for managed-care patients of $64,610, with the balance of the adjustments for other miscellaneous items. When reviewing the patient records, they showed the selling doctor had done a very good job of treatment-planning and he had completed a good majority of the major work that needed to be done. In talking with the selling doctor, he told us he was running a “petite practice.” A few years earlier, he had decided that he didn’t want to work as hard, so he cut his practice back to one full-time hygienist, two chairside assistants, and one administrative person. He worked fewer hours and cut back on his new-patient marketing.
While the practice still showed an above average production and a good profit, it was in for some major problems, even if the present owner did not sell his practice. The practice-management numbers showed the practice was maintaining its production because the doctor was doing more dentistry on the existing patients. His production per active patient per year was high compared to the average dentist, which indicated many patients had most of their major work done. This fact was verified when the buyer did a chart audit. The adjustments for managed care were high, indicating the doctor had either signed up for a lot of managed-care programs or had a high percentage of patients in managed-care programs. The computer reports and the chart audit verified this information.
Since the office had only averaged six new patients per month for the past few years, the patient base of the practice was being eroded. In other words, the practice was losing more patients through normal attrition than it was gaining. The computer reports verified this, as did the number of patients seen per month in the recall program. There were other things found regarding how the practice was being run, but they were not major problems in the eyes of the prospective buyer.
We outlined a strategy regarding what the buyer would need to do to make the purchase of the practice work for him. Based upon the new information, an appropriate price for the practice was negotiated. The buyer followed the suggested recommendations. The result ... he is doing well.
On completion of the sale, the buyer commented, “I almost paid too much for the practice. Having a buyer’s representative saved me a lot of money and helped me understand what I had to do to make the purchase of the practice work for me.”
