Hidden pitfalls of practice acquisitions
The purchase of an established practice offers some assurance of steady patient traffic and earnings production. Once dentists have identified such an opportunity, an acquisition may seem relatively easy. However, there can be challenges to evaluating a practice’s health and getting the acquisition closed. Here are some common bumps in the road:
Setting expectations early as to timing and document collection will help temper frustrations. Sometimes, the practice owner has little formal business training and has limited time to devote to operational aspects of the practice. An owner may be surprised by the amount of information requested during a normal due diligence inquiry. It may take several weeks to compile the data and then more time to address resulting questions.
Many practices prepare cash-basis financial statements, so year-toyear comparisons can be skewed if the practice’s average collection rate varies. For example, billing issues could result in misleading financial statements. It is essential to involve practice acquisition team members, particularly an accountant and lender, to ensure the buyer has an accurate picture of the practice’s health.
Many dentists assume that practice values are similar to real estate values, resulting in unrealistic sale price expectations. As a buyer, having a valuation prepared by an expert third party should be high on the list. In BMO Harris Bank’s experience, depending upon the practice type, practices generally sell anywhere from 60% to 85% of one to three years’ average collections. However, a valuation expert will apply several more factors in determining a qualified value.
When considering a practice acquisition, buyers should outline a clear path to purchase, including the preliminary financial review. The practice acquisition team will help determine the business viability of the practice. However, as the ultimate decision maker, dentists would want to stay actively involved.
Editor’s note: This article is provided by BMO Harris Bank, the ADA Member Advantage endorsed provider for practice financing. Call 1-833-276-6017 or visit bmoharris.com/dentists for more information.