How to Avoid Financial Pitfalls of Buying a Practice by Charlene White

I consulted with one young orthodontist who called me in a panic. Overhead was 117 percent and the bank cash reserve was headed to zero. Between the school loans, bank loan, high rent, high staff payroll, one-year employment agreement of $13,000 per month for the selling doctor and a downturned economy, the orthodontist’s dream was fading before his eyes.

You may be thinking, “How could that happen?” Well, unfortunately, it does. It’s important for the purchasing doctor to get reputable advice to prevent him from buying a practice when it’s not financially viable. The numbers need to be evaluated to make sure it’s a win/win for both parties.

Fortunately, purchasing a practice doesn’t have to be disastrous. Here are some steps to take to prevent unwanted pitfalls:

• Have a demographic study done of the prospective area. No marketing plan can overcome a poor location. I recommend Valmont Research; go to valmontresearch.com or call 805-665-3575 and speak to Greg.
• Hire an expert to advise you on the purchase price, lease and salaries. I consulted with a young doctor who had signed a 10-year, $9,000-per-month lease on a property that was valued at $3,500 per month. Get your own adviser—don’t depend on the seller’s adviser to compute a fair rental rate for the space. (By the way, that young doctor’s building had empty units. He was able to renegotiate the lease for a fair price.)
• Calculate the potential overhead numbers and plan for the unexpected. If you’re getting a bank loan to pay for the practice, have the bank hold back a percentage in escrow to make sure the seller holds up her end of the bargain.
• Have a clear understanding of when the selling doctor is leaving. Six months to a year is ideal in most cases. Situations vary; the important point is to have an agreement.
• Don’t agree to an employment contract with the selling doctor. If the practice has historically been a one-doctor practice, often you can’t afford to pay for two doctors’ salaries.
• Review the active patient contracts and assess how many active patients have a zero balance but are still in treatment. Confirm who will be finishing these cases or if the practice purchase price needs to be adjusted.
• Have a noncompete signed with the departing doctor (if it’s legal in your state). This prevents the selling doctor from setting up a practice down the street.
• Get in writing how he or she plans to introduce you to the patients and referring doctors and teams.
• Do not expect the referring doctors to continue to refer you. There are no guarantees. Design a patient-oriented marketing plan.
• Make sure you receive the addresses of all former patients from the past five to seven years. This is a valuable mailing list for marketing.
• Look at three years of net production, net collection, starts, exams and recall figures so you can assess if the practice is trending up or down.
• If your spouse is not in favor of the purchase, don’t move forward. Spouses tend to have a sixth sense about these issues.
• If the facility is outdated, plan to remodel and update the office. A new doctor can’t afford to work in an outdated facility. Old furniture and old equipment aren’t worth anything.
• If there is staff you don’t want to keep, ask the selling doctor to tell them that their jobs end when the practice is sold. This prevents potential unemployment issues for you in the first year of the practice. Often someone who has worked in the practice for 25-plus years is being paid well above the normal salary range. Be realistic about how much payroll you need and can afford.
• Don’t buy a house before buying 100 percent of the practice, just in case it doesn’t work out and you have to move.
• Review a list of the recall patients. Look at the date of their last visit and their age. This can potentially be a “file of gold” if the system has been kept current.

The goal is to negotiate a win/win contract for both parties. There are good practices for sale at a fair price. Purchasing a practice is still a viable alternative to starting or enlarging your practice. Invest in sound advice and make wise decisions.

Charlene White is an internationally renowned orthodontic practice management consultant.
She received a bachelor’s degree in dental hygiene from Old Dominion University in 1975 and launched her company, Progressive Concepts, in 1983. White’s lectures, consultations, workshops, articles, training products and software module have benefited thousands of orthodontic practices. White is an AAOF Regent and recently was elected to the board of the nonprofit Smile for a Lifetime. She and her husband, Dennis, live in Virginia Beach, Virginia, where they enjoy golf on the weekends.