**What to ask for when analysing a practice for sale**
When analyzing a practice for sale it is important you receive certain important pieces of information from the vendor or broker. The purchase of a dental practice is a significant financial outlay and you must have the appropriate information in order to analyze it critically. The standard things such as the location, opening hours, information about the current clinicians, BAS statements, demographics, competition and asking price should be known or can be researched. Further, you should also have an understanding of the physical appearance and layout of the practice by visiting it.
We will discuss the other critical pieces of information below.
- Types of work being done (items fee report):
The items fee report is perhaps one of the most underutilized pieces of information when considering whether to purchase a practice. Each practice management software calls this report by different names but it basically shows the amount of each item number being performed over a certain period of time. Much can be revealed about a practice from this items fee report. Often many people ask what happens if the practice has manual records and no software? Obviously, it is difficult in these scenarios. However, we typically suggest to collate a 2-week period of items being performed and use this as the basis of the report.
As Dentists we’re well placed to read these reports. For example, a large number of 419s being done and a lack of 415s/417s being done would likely mean that there is a demand to save teeth in the practice but the vendor is referring most out of the practice. If the purchaser has an interest in Endodontics, then this represents a considerable opportunity. Conversely, if there is a large amount of removable prosthodontic item numbers (711s/712s etc.) or orthodontic item numbers (8XX) being done and the purchaser has no interest in dentures or orthodontics then this poses a risk to the purchaser in terms of being able to maintain the practice billings going forward. These are just a few examples of what this report can reveal. It’s about finding opportunities but at the same time being careful of procedures, billings and goodwill that can’t be replicated.
- Profit and Loss Statements for at least the past financial year (the 3 past financial years is better)
It is important these are proper accountant provided reports for tax purposes rather than extracts from the accounting software. At times due to delays in formalizing tax returns, extracts from the accounting software may be all that is available for the past/current financial year (particularly around the middle of the year). However, accountant provided reports from previous years should also be viewed. These statements are important in comparing expenses and profitability to industry benchmarks and calculating an accurate earnings before interest, tax, depreciation and amortization (EBITDA) figure. These statements can provide great insight into a practice and reveal opportunities to improve profitability or reveal items that cannot be changed and make the practice unviable. For example, if rent is significantly above industry benchmarks this cannot be changed post-sale (in most cases) and will always weigh heavily on profitability and make the practice unfeasible to purchase. The opposite may be true if the practice has a higher than industry norm consumables percentage. Any savvy potential purchaser may be able to lower this with better and more efficient ordering processes and increase profitability.
- Payroll summary report for at least the past financial year (the 3 past financial years is better)
The payroll summary allows you to compare auxiliary staff (DAs/Receptionists) wages to industry benchmarks. Further, it also allows you to decipher how the vendor is being paid (if they’re a clinician). In order to calculate an accurate EBITDA the vendor should be paid their market wage. All too often we see vendors not take a market wage which artificially boosts profitability and the eventual sale price of the practice. It is critical to understand this and include the vendors market wage as an expense.
- Information about the equipment
Ideally you would want a list of the major equipment. This list should include the brand and age of the major equipment. When we talk about major equipment we refer to the chairs, xrays, autoclave, CADCAM systems, lasers, endo/implant motors, compressor/suction (basically all equipment above about 5K). This should give you an indication of the need for replacement of these items. For example, dental chairs >15 years old probably will need replacement shortly following the sale.
- Information about the current lease
Your lawyer will go through the fine print. However, items such as the total rent, outgoings, yearly increases along with the time remaining on the lease and options are important to understand. For example, if you’re purchasing a practice with only 2 years remaining on the current lease and no options available. Then it is imperative further options are negotiated prior to the sale contract going unconditional. Your financier will also need to ensure there is security of tenancy and a certain length of lease remaining (generally the same length of time the loan is taken over) in order for you to gain finance.
Most times these documents will be provided to you by the vendor or broker. However, if they are not or certain items are missing we cannot stress the importance of asking for more information.
If you have enjoyed this post or it has been helpful, please share, like or comment below.
We cover this and much more at our practice ownership seminars. Our next practice ownership seminar is coming up in Melbourne on the 5th and 6th of February 2022. These seminars now only have a few spaces available – please register ASAP to avoid missing out.
We also offer expert guidance in various areas of practice ownership. Please see the below link for more information.