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Buyer Beware by Ken Alexander and Ryan Alexander

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Buyer Beware 

The top 10 pitfalls to look out for when purchasing an orthodontic practice

by Ken Alexander and Ryan Alexander

The profession of orthodontics has been very good to the vast majority of those who have purchased a private practice, but certainly no one wants to overpay for a business or discover after the sale that certain pitfalls were unaccounted for in the sales price. Transitions take a certain amount of hard work, patience and persistence.

The value of an orthodontic practice is largely determined by just a few things, the most important being the company’s net adjusted profits. This is the free cash flow that’s expected to benefit the new practice owner going forward if they run the practice exactly the way the seller has been running it the past few years. Adjustments are made for the doctor’s salary, taxes, and all benefits and perks that accrue to the doctor’s benefit. The final net adjusted profits number gives the buyer the basis on which to make an offer for the practice, and gives the lenders confidence in lending hundreds of thousands, even millions, of dollars to purchase the business.

Although net adjusted profits, total net production, net collections, and the number of new patients and starts all play a role in how an appraiser will value any particular practice, there are many other things to consider.

For instance, we’re currently evaluating two potential practice purchases for a buyer, both in the same area, both about $1.1 million. One has a much nicer, larger facility with a 35% profit margin, and the second is a smaller, older facility with only three chairs but a 48% profit margin. If net income alone is used to determine value, the second office with $100,000 a year in greater free cash flow should be worth far more than the practice that is nicer, larger and newer, but this is simply not the case. There is a significant cost that must be factored into the purchase of the more profitable practice, realizing the future costs to move to a newer facility in five to 10 years.

Over the years, our group has identified more than 20 potential pitfalls that a buyer should be aware of in buying an orthodontic practice; this article will address the top 10. Some are inevitable, as an aged facility and equipment often comes with a retirement practice. Others are unique to the particular practice and should be assessed before making an offer.

Unfortunately, many buyers and appraisers rarely take into consideration these potential pitfalls when assigning a value to a practice, because net profitability often reigns supreme. But if you’re buying, please investigate these potential pitfalls before you’re handed the keys, so you won’t suffer any great surprises as you try to move the practice forward.


1. Underfunded contracts receivables
Every orthodontist should understand that the accounts or contracts receivable (C/R) is the bucket of dollars owed to the practice, past, present and future. It represents all the everyday new charges minus adjustments that go into the C/R and all collections that come out of the C/R, leaving a balance that in theory should cover all of the costs of completing the patients currently in treatment. The average C/R balance is approximately 55% of yearly collections, but this can vary greatly—some practices may be at 75% with small down payments, while another is at a measly 30% by asking for one-third down and accelerated 18 monthly payments. Practices in areas where a significant number of patients pay in full will show lower C/R balances.

Can you see there must be a valuation difference between two similar $1 million practices in collections, each with $420,000 in profits, yet one is leaving behind $750,000 in its C/R balance and the other leaving only $300,000? Out of all the pitfalls, this is probably the one that most greatly should affect true practice value, yet it is still not possible to get even the major appraisers to agree on how much C/R should be left behind for the buyer to collect before reducing a practice’s value.

Important note: It is vital not just to get a C/R balance number, but to also determine how much of that amount is potentially collectible. Some practices show a healthy balance but when investigated, many accounts showing a balance haven’t made a payment in the past four to six months, meaning they’re unlikely to be collected.

Also, be sure the seller keeps the responsibility for all credit balances on the books at closing that cannot be worked off. It is the seller’s responsibility to make any necessary refunds of such balances.


2. An inadequate facility
Lately we’re seeing some very profitable practices being sold with very small, three-chair facility footprints. As the practice grew, its owner did not make an investment in a larger, better designed facility with an adequate number of chairs and a nicely designed exam/consult room. It’s one thing for a retiring doctor to finish up his or her career in a facility they’ve grown accustomed to over many years, but the buyer will want something far more efficient and nicely appointed to be proud of in their new career.

The pitfall, although obvious, often gets neglected considering the current free cash flow is high, yet the expense to create a new facility with a higher rent will significantly affect profitability. Part of the hidden cost of a small space is that the owner needs to work more days, seeing fewer patients, than if they were in a larger facility with a larger waiting room. Who wants to spend a career working four days a week when they could have done it on three days if they just invested another $500,000-plus into a new facility after buying the practice? It’s always a joy to find a practice for sale where the facility is only 10 to 15 years old and will last the new owner their entire career unless practice growth is significant.


3. Too few new-patient exams and observations
One of the most critical aspects of any business is attracting new customers. Without new patients (NPs), a practice dies, so it’s vital to evaluate the NP numbers for the past few years to see if that number is declining, and to look into the future to determine if that number will be adequate to carry forward the current starts. It’s likely that a retiring doctor’s NPs are dwindling as his best referral sources retire, and he no longer puts his energy into personally marketing the practice to the area dentists. The practice that has 250 new patients yet starts 80% of them is often considered to be of greater value than the practice that has 400 NPs and starts 50%. Each starts 200 patients a year, but actually the one with 400 NPs has far more potential, and less risk, than the one with many less NPs.

The same is true for patients on observation recall. Imagine two similar practices in every way except one practice does almost no early treatment and has 300 patients in the observation “refrigerator” for future starts and the other has 100. It’s estimated that approximately 70% of all patients placed on observation recall will start with the practice over time, which means the larger recall base is anticipated to deliver 210 future starts, or approximately $1 million dollars of income, while the smaller observation base will yield potentially only 70 starts, or $350,000.


4. Outdated equipment: Pan/ceph, chairs, units, sterilization and instruments
With most practice sales, the equipment is older, and there should be some positive value consideration for the practice that has newer equipment. A pan/ceph machine is not inexpensive and if it’s older than 14 years, we usually reduce the practice value by at least $25,000 to offset part of the cost for replacing the machine. Be aware that appraisers rarely assign an adequate positive or negative value for equipment and rarely understand the numbers and condition of the sterilization and instruments.


5. Outdated computers, server, software and paper charting
Isn’t it strange that we give so much value to the net profits of a practice and yet some of the higher profits are generated by not keeping the practice up to date with equipment, computers and software? Even today, we are working with multiple buyers looking at practices using paper charts at the chairs instead of computer charting. For the buyer, it is mandatory to convert from paper to computer and the cost is generally $15,000-plus, not counting the time and hassle to scan the paper charts into each patient’s files. In some cases, the practice has unsupported software that has been outdated for more than 10 years and needs a full software upgrade and many new computers, which can add up to a $30,000 investment after purchasing the practice.


6. Patients overdue in treatment time
From a stress and anxiety perspective, this pitfall may be the worst of them all for a buyer, and the appraiser can’t really help you much with it. The buyer needs to understand how treatments are progressing, and at a minimum should review the practice’s last 20–30 debonded cases to see how long they took to treat and be in approval of their final outcomes. Out of all the transitions we’ve been a part of, the most memorable ones are when the buyer calls distressed, depressed and completely overwhelmed. In these cases we ask, “Did you take the time to review the last 30 debonded cases to be sure you could take over the seller’s work?” And they inevitably reply; “No, we talked about treatment, but because the doctor didn’t want the staff to know, I never got around to it. But I have to rebond every single case, because he has so many bends all over I can’t work with, and now the patients and parents are so upset with me for telling them it will take a lot longer.”


7. Very high fees for the area
We don’t see this too often, but there are practices for sale where the doctor has built up a significant reputation, and along with it charges $1,000–$2,000 more than the other practices in the area. The bottom line of the net profits usually looks great, unless this operation comes with huge aligner and supply bills and a high-rent office that helps defend the higher fees. The potential pitfall is seen when the patient says, “I’ve known Dr. Quality for 20 years now, but who are you, Dr. New Grad?” Higher fees are often associated with reputable experience, and because it takes two years to treat a case, the new owner will have a hard time maintaining the previous fees out of the starting blocks if the seller does not work back.

So why not just reduce the fees $1,000? Unfortunately, every dollar you cut the fees is a dollar lost from profits, none from expenses. Cut $100,000 off your fees and you have to start approximately 40 more cases a year to make up for the lost income. Inheriting a practice with a reputation of having high fees can work if you can carry the reputation forward—usually by partnering with the seller for a year or two—but beware.


8. Incompatibility of buyer and seller
The profession of orthodontics has in it some of the nicest, kindest and most caring doctors ... but not every one of them is this way. It’s not unusual to hear of conflicts between two good doctors who have very differing personalities and views of treatment, management and philosophies. I have more concerns with a man’s success taking over a woman’s practice than with a woman taking over a man’s practice. Please analyze the type of patient base the practice has developed around the seller’s persona and personality to determine if you can easily assimilate into the practice. Will these patients accept you and bond with you keeping the referrals healthy?


9. Referrals are too concentrated among just a few dentists
Reviewing the practice’s referral reports is mandatory before closing the sale. Ask the seller if they have any individual referral sources who make up more than 10% of the NP referrals. If you find that the practice is 15% or more referred from one pediatric or dental practice, investigate it to feel comfortable that you won’t lose this source with your purchase.


10. Heavy on HMO plans and Medicaid
When a practice has more than 30% of patients in HMO and Medicaid plans, it generally should have an impact on the practice value. Which of these two identical-income practices should have a higher valuation: The one that’s HMO/Medicaid seeing 80 patients a day or the other seeing 60 private pay patients a day, but working one day less each week? Participating in discounted plans can help to build patient volume, but when the discounted patients begin to surpass the full-fee patients, such practices are potentially headed for a decline. Make sure you’re not buying a treadmill of low-fee cases where HMO patients are increasing as private pay dries up, skyrocketing the overhead.


Conclusion
Buying an orthodontic practice can be one of the most rewarding career endeavors. It generally will provide you with a significant increase in personal income from a good salary, plus significant additional profits as the business owner. It gives you great control over who you work with, how you treat out cases and how many days a week you want to work. But let the buyer beware that you need to evaluate the potential pitfalls that can exist in any practice to be sure that you get a fair value and that you have no great surprises after buying.

You will need to accept that no practice will be perfect. But the more you’re aware of what to look for, the better your questions will be as you investigate to find the ideal practice that you can make your very own, with the goal of receiving the many rewards of private practice ownership.

Author Bio
Ken Alexander

Ken Alexander and Ryan Alexander of Alexander & Sons Consulting are considered two of the top consultants in orthodontic practice management and transitions, having worked with more than 1,500 orthodontists over the past 35 years. Website: alexanderandsons.consulting
Ryan Alexander
Orthotown Magazine
September 2025
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