We recently discussed a case study on a successful practice purchase. You can find that here. https://practiceownership.com.au/client-case-studies-the-successful-practice-purchase/
In this article we’ll discuss a not so successful purchase. We encountered this practice last year when doing a practice purchase assessment. However, the initial purchase was in 2022.
The purchase price in 2022 was 525K. The practice was doing 635K/year in billings at the time. It had a fitout that was ageing but functional. There was space for 3 dental chairs with 2 chairs already present. The practice had been owned by the same dentist for many years. He was retiring and did not want to work anymore. The clinics item fee report from 2022 showed 40% of the billings came from fixed prosthodontics with the rest made up mostly of recalls. There were minimal new patients and other procedures being done. The rent was 130K/year for the 140SQM clinic which was on the 4th floor of a CBD building. There were other dentists within the building and also plenty of dentists nearby. The practice was not preferred provider.
The buyer at the time was a middle-aged male dentist who had recently passed the ADC exams. He had considerable experience in his home country and had a wide clinical range doing most specialist procedures.
We got to see the numbers of the practice 2 years on. The clinic did 245K in the 1st year post takeover and 215K in the 2nd year post take over (the items fee report showed a wide variety of the specialist procedures being done but not much volume). The billings had dropped dramatically! The new owner was putting in considerable sums of money to support the cashflow. The practice was losing roughly 12K/month without the dentist even paying himself for his clinical work. The buyer had self funded the practice purchase so had no loan repayments.
The buyer from 2022 wanted to sell the clinic. Our client who wanted to purchase this practice came to us with the details and figures. The asking price was 325K. After doing our analysis our strong advice was not to purchase the clinic and our client agreed. The clinic has since been shut down. The current lease term had only a few years left to run so the owner may have paid it out and/or negotiated to leave. The buyer from 2022 had lost a large amount of money from the initial purchase price and also the losses over the 2 years. However, there was also the lost opportunity cost of the buyers billing ability. That is, he would have billed more in a busy associate position. All up he probably lost close to a million dollars.
There are many lessons in this. However, perhaps the biggest is to consider who you’re purchasing the clinic off and the ability to replicate their billings. In this case, the original seller had built up a loyal base of patients over years. He did a large amount of fixed pros on this loyal patient base which caries a higher treatment cost and therefore increased the billings of the practice. Also, some of this patient base no longer worked or lived in the CBD or had retired but had continued to travel to see him. When he left they found a dentist closer to where they live. The buyer in 2022 had to rely on getting new patients which was very difficult in that location given the competition present. The rent and the micro-location of the clinic was also major red flags.
The purchase price of the clinic in 2022 of 525K may have seemed appealing to the buyer given the rise in start-up costs. Also, the lack of clinical offerings and his ability to provide more may have also seemed appealing. However, these can’t just be viewed in isolation and need to be assessed alongside other factors.
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