On this episode of the Drill Fill Bill Podcast titled Performing Due Diligence When Purchasing A Dental Practice, guest speaker Dr. Eric S. Studley, CEO of Eric S. Studley & Associates, Inc., a nationally based insurance brokerage firm specializing in the insurance and financial planning needs of dentists, shares a few basic tips on how to navigate the nuances of purchasing a dental practice. Whether you are just embarking on your professional journey or have been practicing dentistry for some time, you can learn from this insightful interview. Please click the link below to listen to the full episode, or you can keep reading for a highlight of Dr. Eric Studley’s podcast interview.
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Introducing Dr. Eric S. Studley
In addition to presiding over a nationally-based insurance brokerage company, Dr. Studley is the founder of Doccupations, an online algorithmic dental job matching service and educational resource. Dr. Studley recently retired from New York University College of Dentistry, where he served as an Associate Clinical Professor, directing a group practice, the practice management program, and the ergonomics program in the Department of Cariology and Comprehensive Care.
Dr. Studley has consistently been the #1 disability producer in the United States with Guardian Life Insurance Company of America and Berkshire Life Insurance Company of America. Dr. Studley has lectured throughout the country on the subjects of insurance planning, risk and practice management, ergonomics, ethics, wellness, and case acceptance. Dr. Studley is also a speaker for the American Dental Association’s practice management program for dental schools throughout the United States. He has published articles in numerous dental journals. In 2009, Dr. Studley was a contributing author of a practice management textbook for new dentists entitled “Dental Practice – Get in The Game.”
PULLING THE TRIGGER
Considering the recent changes in the dental profession (e.g., decreasing dental insurance reimbursements, an increasing corporate presence, and the pandemic), is dental practice ownership still a viable and desirable career path?
Dentistry has always faced many obstacles, including the HIV pandemic, the incorporation of fluoride, and the increasing presence of corporate dentistry. Throughout the years, the profession has experienced various waves. However, dentistry, the career, has not gone away. Dentistry has often been used as an economic barometer—to measure the regrowth of the economy.
Dentistry has gone through recessions and other types of economies, and it has emerged ahead of the curve. This current pandemic has created innovative opportunities in the profession. Hence, practice ownership is still a very viable option.
Many novice buyers erroneously believe that the purchase process begins at the closing table. What are some of the preliminary steps dentists should take before they consider a potential practice?
Early planning is essential. Start planning during dental school, residency, and even while working as an associate. Have a vision. Imagine where you would like to practice. Envision the type of practice you would like to have. Visit other practices. Build or repair your credit. Create a business plan. Take advantage of the sample generic business plans that are available from the ADA and some financial institutions. Evaluate demographics. For example, if you want to establish a fee-for-service practice, then your evaluation of the median income during the planning stages is critical.
Strategic planning might also include doing a residency in an area where you might consider living or working. Maximize your work experience. Think of your associateships as opportunities for growth and development. Know that even if you didn’t start planning during dental school or residency, you can glean from your years of work experience. Moreover, some banks might factor in your work history when evaluating your loan application.
FINANCING
As a first-time buyer, contacting a bank regarding practice financing could be daunting. What are some recommended strategies? (e.g., cold calling, contacting equipment reps for leads, reaching out to the ADA, etc.)
Create an advisory team (e.g., accountant, lender, insurance advisor, attorney, contractor, etc.). One of the best ways to start developing your team is through personal referrals. Secondly, develop relationships. Thirdly, utilize the dental community resources—the ADA, local dental societies, and study groups. It is important to find people who are qualified and capable of explaining things that you do not understand. Don’t be afraid to change your team if it isn’t working for you.
Should one prequalify for loan approval?
Yes. Prequalifying for a loan will help you determine your budget. Additionally, it will allow you to negotiate more efficiently. The seller is more likely to negotiate with a buyer who is pre-approved for a loan.
Do you recommend finding a bank that offers practice management consulting as part of its terms and conditions?
Banks that do provide practice management consulting as a service do so to ensure that new business owners are appropriately managing their finances. However, if this service is not automatically offered, it is possible to acquire it separately. Whether or not you utilize these services will depend on your business experience and knowledge.
THE HUNT
What are some key factors that should be considered during a practice sale search?
Be prepared. Have at least a three-month reserve. Do your due diligence. Have your advisory team in place. Your advisory team can give you an objective, professional perspective without emotional attachment. However, keep in mind that most professional advisors charge an hourly fee, so it is imperative that you are prepared and organized. Prior to hiring an advisor, create a checklist of the things you would like to accomplish. Doing so will enable you to minimize their professional service fees.
What are some red flags to be aware of when purchasing a practice?
In order to avoid some of the pitfalls associated with the practice search process, it is important to become informed! Educating yourself on the process will enable you to appropriately converse with the involved parties. In addition to educating yourself, you might also want to consider working with a practice broker. Many practice brokers are vetted by the ADA and the local societies. However, it is also important that you research the brokers. Look them up. Make sure you do your homework. Some brokers require exclusive agreements in order to work with them. Before you sign anything, get an attorney. AGAIN, GET REPRESENTATION (i.e., an attorney or accountant) BEFORE YOU SIGN ANYTHING.
Once you hire your team of licensed professionals, they will be able to identify potential discrepancies, pitfalls, and red flags. They are not emotionally invested. Additionally, the bank will also conduct its own evaluation. If the bank representatives do not think that your practice venture is financially secure enough to generate the income necessary to repay the loan, they will not lend you the money.
When pursuing a potential sale, be wary if the seller is not forthcoming. If the seller is reluctant to provide the practice’s financial information, that is an indication to pause.
Finally, evaluate the lease upfront. Review it for any overt issues. For example, evaluate whether the lease is transferable or renewable. Again, if you have conducted your preliminary review and have decided to proceed, hire an attorney to thoroughly review the lease and any other documents before you sign.
SEAL THE DEAL
How does the buyer determine whether the asking price (for the practice and potential real estate) is reasonable? Is there a standardized metric?
There are different accounting ways to evaluate the practice’s sale price. During the negotiation process, deductions could be applied to both the seller and the buyer. Again, it is important to have the advisory team involved at this point. Your attorney and/or your accountant will review the financials and advise you on the appropriate course of action.
What happens if the seller’s equipment is leased? Should any remaining balance be disclosed and included in the asking price? If not, how should that matter be handled?
Buyers should inquire about the status of all leased equipment and technology. As part of the review process, the buyer should determine whether or not the leases for the equipment and technology are transferable.
Is it appropriate to take pictures of the practice, equipment, and inventory?
Yes. Additionally, participating in a virtual tour is a good way to preview the practice. Doing a virtual tour decreases travel time and allows you to narrow down your options.
What should one look for when reviewing a lease?
The most important step in reviewing a lease is to hire an attorney. You might also want to consider the following factors: Is the lease assignable? Is it renewable? What are the escalations? Is there an exit clause? Another piece of advice is to speak with other dentists and tenants. Listening to other people’s experiences could give you scenarios to consider. It is important to consider and evaluate the worst-case scenarios up front.
What are the top key pieces of advice on the following topics?
Computer Systems/Software: Licensing
When evaluating the computer systems and software programs currently in use by the practice that you intend to purchase, always assess the program’s compatibility and upgrade cost. Are those programs able to communicate with other programs? Does the current system support upgrades, and if so, what is the capacity? Evaluate the long-term benefits of using the existing programs. Ask other dentists about their experience using a particular program or technology. Seek out dentists with varied years of usage (e.g., 1 year, 5 years, or 10 years).
How to Inquire About Impending Litigation
Hire a licensed dental attorney. Your attorney will help you identify and address any pending issues. If an issue is identified and you still decide to continue with the transaction, your attorney can advise you on how to proceed in a manner that will ensure that any or all concerns are identified and addressed in your contract.
How to Address the Topic of Employees (e.g., retention, non-solicitation, potential assumption of benefits, etc.)
Once the practice has been sold, the seller cannot compel employees to continue their employment. However, one way to retain key employees is to provide enticing compensation. Keep in mind that you may also want to remove some of the current employees and bring in some of your own.
Dental Insurances
Review the practice’s accepted dental insurance plans during the due diligence process. If you want to retain the current plans, speak with the corresponding insurance agents about the credentialing process and try to get credentialed as soon as possible.
Finances/Accounts (e.g., account receivables, personal bank statements, property taxes, payroll taxes, business taxes, etc.)
If a seller has multiple practices, ask for all the necessary financial reports from each practice. The next step would be to hire a forensic accountant. He or she will be able to conduct the necessary assessments and advise you whether or not the purchase is a viable venture.
Closing remarks
Do not be afraid or embarrassed to ask questions that you do not know or understand. If you can’t ask questions of your advisors, you have the wrong advisors.
For more information on Dr. Eric Studley, you can check out his website: http://www.drericstudley.com.
Disclaimer: All information provided in the “Due Diligence When Purchasing a Dental Practice post and the corresponding podcast episode is for informational purposes and is not intended to replace professional legal, accounting, or financial advice. Before taking action based on any information presented on the Drill Fill Bill Blog Website or Podcast, we recommend that you consult a licensed professional (i.e., attorney, accountant, financial advisor, etc.) for counsel pertinent to your specific situation. Please seek and follow the advice of your own licensed attorney, accountant, or financial representative. The use or reliance on any information contained on this site or podcast is solely at your own risk. The Drill Fill Bill Blog website, the Drill Fill Blog Podcast, its affiliates, and guests are not responsible for any damages that may occur resulting from the use of any information provided.
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