Buying a Dental Practice? Here’s What You Need To Know First. (Part 2: Business Viability)

This is part 2 of my 2-part series that details the need-to-know data you should consider before you buy a dental practice. If you haven’t read the equally important Part 1, click here.
In this part, we’ll talk about the practice information that has to do with business administration and the metrics that aren’t advertised features of the practice (in fact, most patients will never even give them a single thought). But that doesn’t mean they aren’t unequivocally important to you, the potential buyer.

 

TOTAL PROFITABILITY

The single most important factor in determining the future success of the buyer is the Profitability of the practice. Too often, Gross Production and Net Collections receive the most attention when evaluating a practice, even though these numbers do little to define the financial risk a buyer must undertake. It’s critical to accurately calculate the true net profit of the practice. The Net Profit is Collections minus all practice expenses. To calculate the true Profitability, you must add back all doctor “perks” which are provided by the practice. When you divide the Profitability by the Collections, you will get the true profitability percentage of the practice. The closer to 50%, the better. Steer clear of practices with profitability below 35%.

 

Keep in mind that with your new practice debt service, you will need to produce more in order to maintain the same profitability level of the selling doctor.

 

PPO PARTICIPATION

A purchaser must know the “saturation” of discounted dental care in the practice. For each plan that the practice participates, you should have a breakdown showing the number of patients enrolled, the total dollar volume collected during the previous 12-months, the total fee discount given, the average % discount, and the most recent date the fees were updated. Also, total the entire PPO volume for the practice, including the total fee discount given. Understand how much you must charge out for each $100 of net production. Keep in mind that if a practice has 50% of its patients on reduced fee dental insurance plans, and the total insurance discount is 20% for all patient treatment, then the average PPO discount for the insured patients is 40%. Be extra cautious when the total PPO yearly discount is greater than 15%. The greater the total PPO discount, the harder you will have to work to maintain profitability.

 

PROCEDURE MIX

A very important financial report to review before buying a dental practice is the “Production by Procedure Report.” This report lists all dental procedures with their corresponding CDT codes, along with the number of these procedures performed and the total fee derived from each. Printing two copies of this report can be very helpful. The first copy should be sequenced by procedure code for quick reference. The second copy should have procedures listed in descending sequence, meaning the first listed dental procedure will be the one that derived the greatest revenue for the period of time you requested.

 

This report, at a glance, summarizes which procedures are producing the most revenue. If 70 root canals were performed last year, and you’re not proficient in endo, how will you replace that income next year? Conversely, if lots of endodontic procedures are currently being referred out, and you are proficient in performing that endo, you can expect to add substantial revenue based on this alone.

COLLECTIONS

I was going to call this section “Production and Collections,” but having fantastic production is less important if the collections are not also fantastic. Plus, it’s impossible to have great collections if you don’t also have great production.

 

A critical ratio is the Collections divided by Net Production. Net Production represents the amount of production from which you expect to collect 100%. From the Gross Production, you would subtract PPO adjustments, and all miscellaneous discounts given, such as cash discounts, staff and family discounts, etc. Be aware that the greater the PPO discount, the harder you’ll have to work to maintain profitability.

 

For the most recent twelve-month period, a Collections Ratio of 98% or greater is excellent. A ratio of 96% to 97% is acceptable, and a lower ratio is worrisome. A low collections ratio indicates a problem with collection systems, collection execution, or both. When this is the case, you must be willing to correct the problem in order to eliminate the collections shortfall. This will have to occur as soon as you take over the practice.

 

 

NEW PATIENTS

Everyone knows how important new patient flow is to a dental practice. When evaluating a dental practice, I count a “new patient” as any patient who has a first-time 0150 New Patient Comprehensive Examination or a 0180 Comprehensive Periodontal Examination. I’m not downplaying the importance of new patient emergency examinations (0140), but if these patients don’t become long-term patients for the practice, they have very limited value.

 

A healthy number of new patients is twenty to thirty plus per month. Keep in mind that the more procedures being referred out of the practice, the higher the number of new patients required for continued practice growth.

 

It’s also important to look at specific details about the new patients. Are there both children and adults? Are the new patients mostly fee-for-service patients or patients coming to you because they will receive a large insurance discount? Beware of a new patient monthly count below 20, unless the practice does lots of long appointment, comprehensive dentistry cases.

 

PRACTICE TRENDS

Make certain that you review the practice statistics for the most recent three-year period. You want to assure that the practice is not in a downward spiral. With the economy the way it has been for the last decade or so, a practice simply maintaining its productivity is acceptable. While on the subject, be certain to review practice statistics for the most recent period, including the previous month.

 

Always verify that the management software financial reports coincide with the information on the tax returns. More specifically, the total revenue collected should be reflected on the tax return, as well as the expenses that make up the practice overhead. If you cannot correlate this data, you must explore the reasons for the differences.

 

Does this list cover every possible aspect that might come up when buying a dental practice? Unfortunately, no; it’s impossible to spell out every intricacy you might encounter. Rather, let this guide serve as the foundation for helping make strong negotiations and a smart end decision about purchasing a practice. Just like having a marriage or a child, a business requires constant attention and a fair amount of planning. Buying a new practice is complex, but that doesn’t mean it has to be complicated.

 

If you’re struggling to navigate the “information overflow” of buying a dental practice and need help weighing your options, click here and get my help. I’d love to help you make a smart, profitable decision.

  

To your success,

Dr. Mike Goldstein
Atlanta, Georgia Dental Consultant