Buyers Beware by Dr. John H. Foley

Buyers Beware 

Think you’re ready to buy a practice? As this doc discovered—twice—it’s important to be cautious and make sure it’s a good fit

by Dr. John H. Foley

One of the most difficult decisions for orthodontists is choosing to strike out on their own and purchase a practice: The financial risk is significant, the stress on family is profound and there is no playbook for managing staff or patients. The work of adapting an existing business to fit a new provider is not to be taken lightly.

Of course, the rewards of being your own boss, directing your own schedule and having autonomy in treatment planning and case management are substantial positives. I’ve had the opportunity to make this decision not once, but twice—first by purchasing a solo practice in 2012 after graduating from residency, and again in the summer of 2020 after relocating to another state.

Each purchase had its own unique challenges and unexpected frustrations. Navigating the details of a practice buyout can be an emotional roller coaster, and there are always circumstances that make you question whether this is the right practice for you. In hindsight, there were a number of things I’d approach differently now. I’m by no means an authority on the complexities of practice acquisition, but my experiences have taught me some valuable lessons in taking the reins of an existing practice.

Finding the right practice takes time

It can be difficult to be dispassionate when you’re negotiating to buy a practice. Once you’ve decided to acquire your own practice, that excitement can lead to significant anticipation. It’s natural to compare yourself to colleagues who have climbed their way out of student debt and are finally realizing the potential of their careers. When I first left residency, I was intent on a buyout and anxious to find an office. Looking back, this eagerness led me to look past some long-term considerations in evaluating my options.

For example: Consider your family—or future family—in your choices. Living in the community in which you practice is essential for many doctors, but not all. If the commute isn’t a concern, you can consider options that are farther away from where you want to live. In my first practice purchase, I had yet to meet my wife and had not fully envisioned how she’d influence my career choices: My practice was far suburban and she worked as an attorney in the heart of downtown. Regardless of where we chose to live, one or both of us would end up with a grueling daily commute.

Your partner’s career will always be a consideration, depending on how your practice location will affect their work-life balance. Take the time to sit down and consider these variables with each opportunity that presents itself. No situation will be perfect, but weighing these factors will help to frame what is most important to you.

Also: A practice should be congruent with your vision of the future, even if it requires some temporary sacrifices. If circumstances don’t align with your goals and aspirations, then consider continuing your search. Purchasing an older practice may mean practicing with older technology until profitability allows for upgrades. A startup may have brand-new equipment but will sacrifice immediate cash flow as a result. The first practice I purchased was still using paper charts, and while I would’ve loved to upgrade to computer charting immediately, I knew that maintaining positive cash flow in the practice was more important at the time.

Associateship is a good option if an acceptable practice sale is not available, and can provide valuable experience both clinically and administratively. After relocating to the East Coast, I was employed as an associate in a busy practice, which allowed me to get to know the area and the other dental professionals around me. This was a hugely beneficial experience for me and provided a new perspective on the rigors and benefits of practice ownership. My associateship enhanced and developed my understanding of staff training, the importance of targeted marketing and reputation management, as well as work-life balance in a busy practice setting.

Again, no situation will be absolutely perfect, but compatibility with the considerations that are most important to you is essential to your prosperity and happiness. Trust the process and be patient.

Be your own champion

Very few orthodontists have a significant business background; as a result, each orthodontic practice is uniquely evolved and managed over time. Orthodontics can have that “cottage industry” feel and most practices are still small businesses operated by individuals who are heavily invested in them, both financially and emotionally.

As a buyer, you will need to be flexible, investigatory and persistent. You will take an office tour with the seller, who is an esteemed colleague, and assume they want a win-win resolution to the practice transfer. While you may very much like the person who is selling the business, the only person who will be looking out for your best interests is you.

Understandably, any practice owner will be emotionally invested in the business that they have built and nurtured. He or she will be concerned about the future for the practice and their staff. Respect the value of their goodwill and their attachment. It is important to understand their motivation, too: Why do they want to sell? Some are moving on to retirement, others are scaling back or moving on to different positions. Do they view the practice as an entity with a long future of patient care, or as a declining asset to be unloaded and rebuilt by a new owner?

Recognizing their intent will help you understand if they have invested in the future of the practice by keeping systems current or if the office has not seen any changes in recent years. The immediate and future needs of the office can—and should—weigh into the value of the practice.

The more time you invest in learning about practice management and transitions before you start this process, the better prepared you will be. Read journal articles and network with people you know who have acquired offices recently. Find out what worked well for them and what they wish they had done differently. An accountant who works with dental offices and understands the way they operate is an essential resource. Attorneys who are familiar with dental and small business acquisitions will provide valuable insights. Just as you would hope a patient would seek you out as a specialist, enlist the help of professionals who are very familiar with dental practice transitions to lend their expertise.

Understand the movement of money in the practice

It may seem obvious, but your first consideration will always be, “Is the practice profitable?” Your success will depend on its ability to provide enough income to cover expenses, pay staff members, invest in marketing and compensate you as the owner. Without the basic assurance that the office can reasonably sustain success, you must consider other options.

A deep dive into the financial reports is a critical first step into understanding the practice’s economic health. You’ll need access to tax returns, profit-and-loss statements and employment records. As you consider the purchase price for a practice, understanding the complete picture of owner compensation is essential.

The great benefit of purchasing an existing business is the potential for immediate income. This will all be for naught if the cost of servicing your loan consumes most of your earnings. There are great resources available for comparing the average overhead expenditures in individual categories, including staff, marketing and supplies. Your accountant or practice management consultant should be able to provide these for you and help you break down any bookkeeping. A review of employment records should highlight the staff turnover in the practice: If staff are leaving at a high rate, you’ll want to investigate if this is consistent with industry norms or if there are specific reasons for the attrition.

As sellers prepare for the sale of the practice, they will have spent months or years organizing themselves for an eventual transition. Review the finances to identify any reduction in overhead or sudden upticks in collections in recent years. Sellers will want to maximize the profitability of their practice and may make different decisions than they would in other circumstances. Scaling back on marketing and equipment purchases or offering larger discounts for paid-in-full accounts might be two easy ways to inflate a practice’s value on paper.

It is important to probe the seller and ask pointed questions. Simply asking the seller what changes they would make in the next five years or which equipment they would upgrade or replace can reveal valuable insights into the practice’s needs and potential.

Spend time in the office

It is critical to spend time in the office when patients are being seen. A beautiful, clean office after hours can be transformed into chaos with a busy schedule of patients. You’ll want to see the staff in action and observe their effort and enthusiasm in providing care. Make sure that the team is following appropriate infection control and proper sterilization procedures. The atmosphere of a practice can swing wildly on the happiness of the patients, the ability for the team to operate in a timely fashion and the environment created by the office leadership.

This is your opportunity to size up the equipment as well. When you’re buying a house, you flip light switches and turn on faucets, and an office should be no different. Check the vacuum and compressor, the radiographic equipment, how quickly the computers are running, and if the instruments are in need of significant repair or replacement. Perform a chart audit to evaluate the thoroughness of the office record-keeping and the quality of the treatment outcomes. Ask the staff about how much bracket inventory is routinely kept in the office and how often new orders are placed. Inquire about maintenance logs and who’s responsible for maintaining the units. Expenses can climb quickly if a practice needs to be substantially updated after purchase.

Your subjective appreciation of the situation is just as important as your pragmatic evaluation of a practice in operation. Determining whether your practice approach and treatment philosophy will be compatible with the seller’s is crucial. Trust your instincts. No matter how many checklists you complete, if you feel uncomfortable with your observation of the practice, there is probably a good reason to consider moving on to a different opportunity.

Determine the value of the business

The valuation of an orthodontic practice is as much an art as it is a science. A seller can expect to pay as little as $5,000 to as much as $30,000 (or more) for the dissection and valuation of their practice. As a buyer, the valuation document you’re given to review will be impressive and sizable. A description of formulas and explanations of the valuators’ approach to practice analysis are included. There are comparables to similarly sized practices in similarly sized areas. You must remember that every practice evolves differently and there are always things that affect the value of a practice uniquely.

Sellers can be unrealistic in setting their purchase price and may make use of the market analysis of a large firm or dental supplier as validation for their desired purchase price. You must use your own market assessment and the advice of professionals and advisors to come to your own conclusion. Of primary consideration is whether you can afford the practice loan repayment and still service yourself with a reasonable income. All other decisions will be predicated on that initial and essential conclusion.

In my experience, one of the most challenging aspects in a practice’s value is the facility. The monthly lease can be a nonstarter if it’s exorbitant, if it doesn’t have transferability or if the rate of increase is unfeasible. Some sellers may own the property in which they operate and might be paying themselves an overly generous rent every month. Look at comparable commercial lease rates for the area to see if the expected rent makes sense. The cost to relocate and build out an office space is considerable, but saddling yourself with an unfair lease will also hinder your growth potential.

Staff will almost always be the largest component of an office’s overhead and are worthy of a lengthy discussion with the seller. If the staff will be staying on after the transition, a review of their compensation and benefits is an important conversation. Existing personnel can be powerful advocates for a new doctor in a practice because they’re familiar with the patients and their families. Their approval will resonate strongly with current patients and can be critical to your early success. Be cautious, however, not to restrict your ability to reevaluate the team, their salaries and benefits. Your “new” practice will have a contrasting financial footing and you will have to assess it differently as a result.

Patience is a virtue

In my second practice purchase, I found myself much more confident in my approach to both patients and staff. Because I had been through the process once before already, I was better able to insert myself into an existing office atmosphere, handle the transition of patients in treatment, and prioritize the things that needed to be addressed immediately versus those that could be adjusted in the future.

Any time you start a new venture, there is a desire to do everything immediately and all at once. Most people like to have things set up they way prefer as soon as possible. Experience has taught me that it’s critical to understand the way the practice currently operates and the systems it employs before attempting to make any changes that will be felt directly by staff or patients. There is a great deal to gain from observing how a successful practice runs. No two offices are the same, and learning from colleagues and team members is one of my favorite ways to grow as a provider.

Your plans for the practice may include a new logo, different marketing strategies, updated paint and instruments or completely different systems. While these are all good goals to have, understanding the cost of these from a financial standpoint and from a team buy-in aspect are critical. Making wholesale changes to office systems without your team having a chance to get to know you and your personality can be a recipe for frustration and resentment. Giving individuals time to adjust and accept the idea of change, and for them to become comfortable with you and your approach to treatment are important first steps.

The vision you have for your “perfect” practice will undoubtedly change as you advance in your career. There will never be a time when everything is operating seamlessly and there are no challenges to be addressed. Success will always be making the most of your opportunities and finding happiness in the work that you do, and when you choose happiness, your team and your patients may find it as well.

Earn CE credit and learn more about buying your own practice
“Buying a Dental Practice: There Is More to It Than Price” is one of Orthotown’s most popular CE courses for a reason: CPA and certified value analyst Tim Lott explains all about due diligence before buying a practice.
To watch the video for the chance to earn 1.5 CE credits, click here.

Author Bio
John H Foley Dr. John H. Foley grew up in Lake Zurich, Illinois, a northwest suburb of Chicago. The son of an orthodontist and a dentist, Foley was exposed early to the world of dentistry. After attending Saint Louis University for undergraduate studies, he earned his dental degree from the University of Illinois College of Dentistry, then studied orthodontics at the Mayo Clinic hospital in Rochester, Minnesota.
Foley worked for three years in suburban Chicago before relocating to Raleigh, North Carolina, with his wife five years ago. In 2020, during the pandemic lockdown, he completed the purchase of his practice in Cary, North Carolina, establishing Foley Orthodontics. Outside of work, he enjoys spending time with his wife, Heidi, and their two boys, Tadhg and Knox.

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