Practice Purchase
Due Diligence – Beyond the Numbers

R. F. Willeford, MBA, CPA/CFP
 

            When you start to evaluate an opportunity to buy a practice (or buy into a practice), a qualified CPA should be part of your team. Your first instinct is to have them look over several years of tax returns, financial statements and other lists of “stuff”. After all, an accountant is supposed to “count”.

            While those items are important, a CPA knowledgeable about dental matters knows that the practice numbers are just the tip of the iceberg—and possibly not the most critical part. It is important to understand what is behind those numbers. The numbers tell us about the past. Can they suggest anything about the future? What other factors might tell what the future of the practice looks like? Is there potential for improvement, either through marketing, better communications skills, better management, change in procedure mix, etc.? Or is the practice maxed out, with a concern that the production and resulting cash flow may not be reproducible by the purchaser—or at least not by you with your current skill set? (This can well be the unsophisticated buyer’s worst nightmare.)

            Remember, the most important thing you are buying is patients, combined with the likelihood that those patients will continue to let you serve them as their new dentist of record. Unless equipment is very new (probably less than 3-5 years old) or very old (perhaps over 20 years old), then equipment is not a big issue. You may know that there is newer equipment available, but when is the last time a patient visited the local dental supply showroom! Once you have the practice rolling, then you can go buy some of your dream equipment….

            So, here is a list of vital, non-financial information to check out. A variation from the norms suggested is not necessarily good or bad. It is just an item to evaluate further.

I. Patients:

A. How many Active Patients are there? (Count the charts!! See more under Charts below.)

1. An “active patient” is one who has been seen within the last 18 months.

2. 1,200 – 2,400 patients is a broad average for a solo practice.

B. What is the annual gross production per active patient?

1. Example: $500,000 gross/1,500 active patients = $333/pt.

2. Typical range is $300 - $500 per patient.

a)     If below $300/hr.:

(1)       Do they really have as many active patients as stated?

(2)       Are the doctor’s and/or staff’s communication skills with patients poor?

(3)       Are doctor’s clinical skills poor, slow, not confident?

(4)       Are the patient dental IQ or economics of the area not good?

(5)       Do they have a lot of managed care?

(6)       Is the facility cramped?

b)     If above $500/hr.:

(1)       Do they have more active patients than indicated? (Not likely!)

(2)       Does the doctor do large cases. Can you reproduce?

(3)       Is the doctor is very fast? Can you be that fast?

(4)       Is the doctor generally high energy.

(5)       Is the doctor a great salesperson/communicator. Can you replicate?

(6)       Is there evidence of insurance fraud? Work not actually done?

II. Charts:

A. Examine selected charts by doing a Chart Audit of at least 100 charts.

B. Note the date of last visit and appointment patterns.
Are the patients truly “active” or were they just one-time emergencies,
or did they just respond to a special bleaching coupon offer, etc.)

C. Note zip codes and patient age.

D. Are there any special religious, ethnic, gender aspects to be aware of?

E. What types of procedures were done?

F. What is the type and amount of diagnosed treatment outstanding? Does that suit you?

G. Is there evidence of perio charting?

III. New patients:

A. How many new patients are there per month per doctor?
The “right” answer depends on your style. A comprehensive practice may only want 10-12 new patients per month—or less. A general, fee-for-service practice may be fine with 20-30. A high volume or managed care practice may want 75-100+!

B. What is the source of new patients: yellow pages, internal, other doctors, marketing?

C. How is the mix of new patients: percentage of emergencies, children, managed car?.

D. What is the gross production divided by the number of new patients.
Should be $2,000 - $4,000 per new patient.

E. Are new patients seen by the doctor or hygienist first? Does this suit your philosophy?

F. Does the practice do comprehensive new patient exams? Does that suit your philosophy?

IV. Hygiene:

A. How many of days of hygiene per week are there?
Is the answer consistent with number of active patients?
(One hygiene day per week serves about 200 active patients.)

B. Do they use assisted hygiene?

C. What can a hygienist legally do in that state?

1. Is doctor supervision required?

2. Is the doctor legally required to examine each patient at each visit?

3. Can hygienists administer anesthesia?

D. What kind of recall system is used?

E. What percent of patients are in recall system?
85% of all active patients  is very good.

F. Do hygienists use intra-oral cameras effectively?

G. What percent of total office production done by hygiene dept.?
20-25% typical. Higher may indicate a “prophy palace” where the doctor’s production is too low. Or higher may indicate a lot of soft tissue management at higher fees.

H. What procedures are included in “hygiene production”: doctor exam, sealants, x-rays, panorex?

I. Does the hygienist compensation include some kind of commission or bonus?

J. Does the hygienist produce at least 2.5 times their gross wages?
3 times or more is preferable.

K. What is the protocol re soft tissue management? Is this being done?

L. Noted management consultant Linda Miles says her best practices follow rule of 1/3-1/3-1/3:

1. 1/3 of total office production is hygiene

2. 1/3 of hygiene production is related to perio codes and soft tissue management

3. 1/3 of production is the hygienist’s pay. (If doctor exam is not included in production.)

V. Staff:

A. Is anyone leaving soon?
The front desk position is often critical in a transition.

B. Is anyone near retirement age?

C. Any an employees family members of the seller?

D. Is a family member not actually being paid?

1. i.e., Spouse working front desk, hygiene, etc. without pay?

2. Need to add a wage for this position?

E. Has anyone been hired recently?

F. Identify the unofficial key leaders among the staff. Their loyalty and enthusiastic support
will be critical to your success. Beware if you can’t get along—or get them gone!

G. Is the staff too set in their ways to adopt your new changes?
I know offices where the whole staff was replaced in a year, and it was for the better!

H. Is your leadership style appropriate for this staff?

I. Is there a bonus system in place that you are comfortable with?

J. Are staff gross wages, including hygienist, less than 25% of production?
Typical is 22-24%.

K. What are total personnel costs (wages, payroll taxes, benefits-excluding retirement plan)?
Prefer less than 28-30% of production.

L. Are the number of staff appropriate?
1 Chairside for 13 Dr. pts. (not counting hygiene) and 2 rooms.
1 Front Desk for each 20 Pts. per day, including hygiene.

M. Is the staff accustomed to benefits or a retirement plan that you may not be able to afford?

VI. Scheduling:

A.     Do they use block scheduling or some other system?

B.     Do they schedule toward a daily goal?

C.    Is the time per procedure feasible for your skills and speed?

D.    Are overlapping appointments feasible for your skills and speed?

E.     Are broken appointments a problem?

F.     How far are they booked ahead?

VII. Production:

A.     When were fees last raised?
Should ideally be done at least annually.

B.     Are fees appropriate? What percentile generally?
Should be 60-80^th percentile, if not higher.

C.    Are fees consistent (i.e., all about the same percentile)?

D.    If necessary, will the Seller raise fees prior to the sale?

E.     Review the reports for Production by Procedure and Production by Provider.

F.     Are there any procedures referred out that you can retain?

G.    Are there any procedures that you can’t do and must refer out?

H.    How much is being produced per hour by each Doctor and by each Hygienist?
Prefer Doctor at least $300/hr. and Hygienist at least $80/hr.

I.        Is high production due to fast speed, high fee schedule, or type of procedures?

J.      Did seller over or under treat patients compared to your style?

K.     How fast can the Doctor do a crown prep compared to you?
One unit might require about 60-90 minutes of chair time: 10 minutes to get numb, 5-30 minutes prep, 10 minutes impression and 20 minutes assistant time to fabricate the temp. If the doctor does the temp, then you will need more doctor time naturally. The total chair time should certainly not exceed 90 minutes.

L.      How fast can the Doctor seat a crown compared to you?
With quality prep, good lab and try-in by good assistant, some doctors spend less than 5 minutes for a single unit and perhaps 10 minutes for a bridge! Whatever the time is for either prepping or seating, if the Seller is a lot faster than you are, you have to be sure this is the right practice for you.

M.    What is the ratio of the fee charged for PFM crown vs. the lab cost?
Ideally should charge 5-7 times the lab cost.

N.    Is there any reason to suspect playing games with insurance companies?

O.    Are there many pre-paid accounts where work has not been done yet?

VIII. Managed Care:

A.     How much production is done under PPO or capitated plans?

B.     Are the plans assignable to you?

C.    What is the quality of plans (oxy-moron)?
Look up production figures for each major plan and look at their fee schedule.

IX. Marketing:

A.     Is there any formal marketing/advertising program?

B.     How effective is their current marketing?

C.    How good is the staff and doctor about asking for internal referrals?

X. Misc:

A.     Get comments about the seller from suppliers, specialists, other dentists.

B.     Is there a history of the use of management consultants? How effective were they?

C.    Does the seller have any special post-graduate training?

D.    May indicate things you can’t do yet.

E.     Indicates that the seller is keeping up.

F.     How is the quality of lab cases? Is there a lot of remake potential?

G.    Is there an associate present without a contract?
This could be a deal killer!

H.    What are the doctor’s plans after the sale? You need to be very clear about this.

I.        The practice may not be big enough to support both of you.

J.      There could be issues with staff loyalty.

K.     Given a choice, a lot of patients my prefer to see the senior doctor if he is still available.

            Remember, all practices are unique. Some characteristics that are perceived as a negative by one potential purchaser may be seen as positive by another candidate. In fact, the ideal practice to buy may the one in which they are doing many things “wrong” and the fees are too low! Such a practice may have the most room for improvement, assuming you have the ability, knowledge, leadership skills and advisors to tackle such a project. However, it can be tricky to tell the difference between a “fixer upper” and a “money pit”, just like it is with real estate….

            At a minimum, once you have gotten comfortable with the above questions, then you can have a qualified CPA look at a few year’s tax returns and financial statements. Better yet, get a “dental” CPA who understands the ins and outs of practice transitions and valuations to work with you to navigate the above list and evaluate your findings in the first place!