What to Know Before Buying a Dental Practice

Assessing whether to buy an existing practice or start a new one is critical to making the right decision. Especially if you’re right out of dental school.

Established practices benefit from an existing patient base, trained staff, and operational systems. These can make the transition smoother and less time-consuming. What I like about this is that they are ALREADY cashflowing.

However, the buying process involves understanding various factors such as location, patient demographics, staff qualifications, and equipment value.

By asking the right questions and seeking professional guidance, dental professionals can navigate the buying process effectively and set the stage for a prosperous future in their new practice.

I started off as an employee (a periodontist renting space from an endodontist) and eventually bought a building and started my own practice.

I even wrote about the process in my first book, What They Don’t Teach You in Dental School. 

Let’s get into what you need to know before buying a dental practice.

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Pros and Cons of Dental Practice Ownership

Owning a dental practice offers several benefits.

First, it allows for greater professional autonomy. Dentists can set their own hours, choose their staff, and decide what services to offer.

This was the MOST attractive part of starting a practice for me twenty years ago. 

Financial rewards can also be significant, with the potential for higher income compared to working for someone else.

On the other hand, ownership comes with responsibilities. These include managing the business side of the practice, dealing with financial and administrative tasks, and handling any issues that may arise.

There is also the risk of financial loss if the practice does not perform as expected.

Career Goals and Practice Vision

Most of the dentists I coach can’t answer this question, “What do you WANT?”

Why? Most don’t set a vision or goals once they get out of dental school.

Goals

Your goals/vision will guide you in life.

For instance, if a dentist wants to build a long-term career with a distinct practice style or specialty, owning a practice can be beneficial. It enables them to cultivate a practice environment that reflects their values and professional aspirations.

Consider what kind of dental services are most rewarding.

Do you have a vision for a patient-centered practice or a focus on high-tech dentistry?

Evaluating if you’re prepared to invest the time and resources to achieve these goals is also important.

Market Trends in Dental Practice Sales

The dental industry has seen notable trends in recent years. One such trend is that dental practices are increasingly becoming part of larger chains or networks.

These groups often seek to standardize care and reduce costs, making competition stiffer for independent buyers.

Economic Trends

Economic trends also play a role. Legislation affecting healthcare and economic downturns can impact dental practice values.

Practices with an established patient base often hold higher value, as they promise stable revenue from the outset.

It’s also common to see variations in market listings throughout the year.

Many dental practices come up for sale when dentists retire, often leading to periodic surges in availability.

Comparing Rural and Urban Opportunities

Buying a dental practice in rural areas differs significantly from urban opportunities.

Rural practices

Rural practices might be less expensive but have lower patient volume. These locales often have less competition, offering a reliable stream of patients.

Urban practices

Urban areas, in contrast, feature higher practice values and patient volume but also increased competition. Proximity to other dental practices can affect patient retention and recruitment.

New owners can benefit from the available resources and support networks in urban areas. However, the appeal of a close-knit community and potential growth should not be overlooked in rural settings.

Balancing these factors is key to making a wise investment in the dental practice market.

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Financial Considerations

Analyzing Purchase Price and Valuations

The purchase price of a dental practice is a significant investment that should be carefully analyzed, especially for a new dentist strapped with school debt.

Potential buyers must evaluate the asking price and the practice’s valuation.

Practice valuations are influenced by several factors, including:

• location
• patient base
• equipment quality

Buyers should consider getting a professional valuation from a dental-specific CPA or consultant to ensure accurate assessment. Comparing similar practice sales in the area can also provide a benchmark.

Review of Loss Statements and Financial Records

Another important aspect of buying a dental practice is reviewing the loss statements and financial records.

These documents give insight into the practice’s profitability and financial health.

Loss statements reveal areas where the practice spends more than it earns, which can be critical for assessing potential risks.

Financial records include:

• balance sheets
• income statements
• tax returns

Reviewing these records helps identify trends in revenue and expenses over several years.

Understanding Cash Flow and Net Income

Understanding cash flow and net income is critical for determining the practice’s financial viability.

Financial Metric	Description
Cash Flow Analysis	Shows how much money comes in and goes out of the practice, indicating its liquidity and ability to cover expenses.
Net Income	The profit after all expenses, providing a clear picture of the practice’s earning potential.

A steady or increasing net income trend suggests a financially healthy practice, while irregularities may warrant further investigation.

Potential buyers should also consider the impact of financing the purchase on future cash flow.

Consulting with a financial advisor can help align loan repayments with the practice’s income to ensure sustainable financial management.

Preparing for the Purchase

Securing Financing and Loan Options

Securing financing is one of the first steps in purchasing a dental practice.

Buyers typically need to obtain 100% financing for the purchase price.

Most work with lenders who specialize in dental practice acquisitions. These lenders understand the unique aspects of dental practices and can offer tailored loan options.

To improve your chances of securing a loan, prepare a detailed business plan, including projected revenues and expenses.

You will also need to provide personal financial statements (PFS) and credit history.

Consider different types of loans, such as:

• Traditional bank loans
• SBA loans
• Seller financing

Each has pros and cons, so choosing the one that best fits your needs is important.

The Role of Dental Practice Brokers

Dental practice brokers play a significant role in the buying process.

They have insider knowledge of the market and can help identify practices that meet your criteria.

Brokers facilitate negotiations and are crucial in maintaining confidentiality.

They have access to listings that may not be publicly available and can expedite the process by vetting potential practices.

Furthermore, brokers can assist with the valuation of the practice.

They analyze factors such as patient base, location, and financial performance.

Working with a broker ensures that you are aware of any potential red flags and can negotiate the best possible deal for the practice.

Legal and Financial Advisory

Engaging legal and financial advisors is essential in the dental practice acquisition process.

Attorneys specializing in dental practice sales can guide you through the legalities, including the letter of intent and purchase agreement.

Financial advisors help analyze the practice’s financial health and advise on the potential return on investment.

They assist with due diligence, reviewing the practice’s financial statements, tax returns, and assets.

Both legal and financial advisors ensure that you comply with relevant regulations and mitigate risks.

Their expertise helps you make informed decisions and safeguard your investment.

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