Owning a dental practice comes with many advantages. As an owner, you can take advantage of increased lifetime compensation, build equity in a business, leverage strategic tax planning and maximize the use of various retirement plans to build wealth and prepare for life after ownership. Essentially, it can serve as a ticket to control your own destiny.
When you’ve decided you’re ready to embark on this rewarding journey of buying a dental practice, and you’ve found a practice that could be “the one,” you may find yourself looking for direction on your next steps. While every practice purchase is unique, and many steps can occur simultaneously or in a different order, here’s a high-level view of what the process can look like at a glance.
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With a life-altering decision on the line coupled with a complex process, an experienced dental transition advisor can provide detailed buyer consulting, walking you through each step and instilling confidence as you go.
1. Understand your transition options
You have many options when it comes to buying a practice. This may involve an outright sale, partnership, staggered sale, merger or another route unique to you.
Each path has its own advantages for both the buyer and the seller. In order to choose the best option for you, it’s a matter of understanding your personality, current situation and vision for the future.
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It’s also key to know early on if you have the option to purchase the practice real estate. This aspect of the transition has significant financial implications and several moving pieces. While the real estate is a separate transaction from the practice sale, this critical component requires consideration well in advance and often deserves an entire plan of its own.
2. Ensure the practice aligns with your goals
Think about why you want to pursue ownership and what you want in your ideal practice. Consider the location, current doctors, doctor philosophy and mission, patient base, feel of the practice and the future opportunities.
Do your goals and your desires align with what the practice has to offer? Are you passionate about the geographical area and comfortable with the current owner from a clinical, business and personality perspective? Could you see yourself calling this practice your “home”?
If they don’t completely match, this doesn’t necessarily mean you have to rule out the practice just yet. Some factors can be a “warning sign,” while others can actually be a benefit in disguise. A good transition advisor can help you tell the difference.
3. Become familiar with your lending and financing options
Without a doubt, buying a dental practice comes with immense financial implications for you as the buyer. In order to find the best lending solution to fund your practice, it’s beneficial to understand what banks look for in the practice and borrower’s financials.
Some critical components to know and prepare for include personal liquidity required to secure the practice loan, existing debt obligations and the amount you are looking to borrow (i.e., practice loan amount, working capital, etc.). The bank will also assess the practice’s profitability, stability and risk and whether or not it supports your personal financial situation.
If you’re concerned about your student loan debt, this type of debt actually has less of an impact on lending decisions and interest rates than you may think. Student debt is considered to be a low priority debt, while higher priority debts may include credit cards, auto loans or personal loans.
A dental-specific lender has a solid understanding of the industry’s economic landscape and can walk you through your financing options. They’re also able to accommodate you and offer variable options as your business grows.
4. Choose your transition support team
Buying a practice doesn’t need to be a journey you navigate alone. There are several dental-specific professionals that can guide you through the process, including transition advisors, lenders, attorneys and financial planners.
Because dental practices are their own niche within the healthcare industry, with unique characteristics, the ideal situation is to connect with individuals or companies who specialize in the various aspects of dental transitions. When building your team, be mindful of their experience in this type of transition to guarantee they are a good fit.
5. Dive into the due diligence
In dental practice transitions, the due diligence process can help provide reassurance that you’re making the right choice in the practice.
Due diligence involves researching and analyzing pertinent information about the seller and the practice, which allows you to be better equipped to make an informed decision about the opportunity.
To understand the risk and potential of purchasing the practice, you need to assess the practice’s financial and operational documents and consider various factors. This can include multiple and very specific measurables in categories like the practice’s financial health, operational processes and efficiencies, patients and staff, partnership dynamics (when applicable) and any specialty-specific aspects.
The due diligence piece can be a lengthy, complicated process that requires significant effort from all parties, but the goal is to ensure you trust what is being presented by the seller.
6. Craft your letter of intent
When you’re ready to place an offer on the practice, the letter of intent (LOI) shows your commitment to the seller.
Also known as a purchase proposal, an LOI is a written offer to buy the practice and details the material terms of the dental transition and negotiation. Typically, the LOI is a skeleton that includes the foundational building blocks to agree upon, serving as the framework for the legal documents as well as a good faith agreement by both the buyer and seller.
There isn’t a one-size-fits-all when it comes to LOIs, and depending on your relationship with the seller, the LOI can be formatted as an email with bullet points, a simple Word document or a formal letter using a template provided by your dental transition advisor.
While there aren’t specific requirements of what you need to include in your LOI, a few common items that you can add are the parties’ names and entities involved in the sale, offer price, identification of the type of sale (asset or stock), tax asset allocation (if it’s an asset sale), closing date, contingencies to closing, an exclusivity clause, seller workback terms and building sale and/or lease terms.
After crafting the LOI, you’ll want to make sure that both parties agree on the terms and are ready to move forward.
7. Negotiate the deal
The terms in the LOI are then formalized into legal documents that govern your transition. This is when more detailed negotiations take place.
There are a couple of different legal documents that govern your transition and the agreement moving forward. Depending on your transition type, you may need an asset purchase agreement, partnership or operating agreement, bill of sale, seller associate or workback agreement and the lease or real estate purchase agreement.
During this phase, focus on making the deal valuable for both you and the seller. Picture what it would be like if you were in the seller’s shoes in order to stay fair and reasonable. Try not to get hung up on the tiny details, and instead, remember your goals and know what the items in question really mean for the big picture.
8. Complete operational responsibilities to set up your new practice for success
Ownership may start to feel more real as you work on operational tasks in the practice. During this time, it’s key to communicate and work with the seller so that all the responsibilities are handled appropriately.
A good place to start is with the general contracts and services. You want to review practice contracts to determine if services should be transferred, adjusted or cancelled (i.e., computer software, utilities, telephone, marketing). You may need to transfer or adjust any equipment leases, x-ray registrations or nitrous registrations. You will also need to set up your Taxpayer Identification Number (TIN) and National Provider Identifier (NPI).
Another area to consider is the patient-related aspects, which includes patient and referral notifications and understanding prepaid patient balances and accounts receivable. You will also need to familiarize yourself with the HR side of the business—aspects such as staff positions, tenure, schedules, compensation, vacation, insurance policies or continuing education—and make any necessary adjustments.
As you start to meet the staff, it’s important to be prepared with as much information as possible to answer any questions as to how the transition might impact them.
9. Close the deal
This final step occurs when lending has been approved, all documents are signed and delivered, and the seller receives funds from you. At this point, you are officially the new owner of your practice!
It’s important to remember that each practice transition is multifaceted with different levers to pull and pieces to put together. A dental transition advisor, like NDP, can guide you through every step and ensure your transition supports your ultimate goals.
