Buying a dental practice could be the largest investment of your entire life.
It is a big deal. You should take this very seriously and make sure you understand all the details that go into your deal. While each deal is very unique, like a beautiful little snowflake, there are similarities that run through almost all of them. Here are 5 things you should understand about determining a purchase price.
- Buyer Beware - The very definition of Fair Market Value is what one individual is willing to pay to another. What you need to remember is that the seller only needs one person to say yes. It could be you, but it doesn’t have to be you. Just because a broker or seller tells you “this is the asking price,” does not mean that is the amount that you should pay. What matters most is the cash flow of the practice, the cash flow that you need personally, and how much are you willing to pay for that cash flow?
- Be careful who you listen to - Most of your golfing buddies have never done a deal of this size or specifically purchase a dental practice. And for those that have, it was in a different town, a different time, a different seller and your finances are different from there’s. What I am saying is what worked (or didn’t work) for them does not necessarily translate to your situation.
- Rule of thumbs do not matter - You will hear numbers thrown around like “most dental practices sell for around 65% of their annual collections” What does that mean? Are you telling me a $1 million dollar practice with 70% overhead should sell for the same price of a $1 million dollar practice with 55% overhead? – The answer is no, they are not the same value, nor should you pay 65% of collections for either of them.
- Cash is King – Please review the financials and extract the doctor benefits buried in the report. Afterward, normalize the major categories for irregularities to determine an approximate annual cash flow. You can then apply a multiplier to this depending on your particular set of facts and circumstances. You will pay a premium for a dental practice that is “not on the market” or in a desirable location, or with a long-term staff at a decent employee cost. You will receive a discount on a practice that has been on the market for a considerable period of time or has a distressed seller or has unusual high annual costs.
- Invest in good counsel – Use common sense here. You are about to sign your name to the largest investment decision of your life. You thought dental school was expensive??? You will find out very quickly that many will only want your signature and your money. They will tell you things like “don’t worry about it” or “we had people already look at this, it's fine” maybe even “why are you being so difficult”. If you hear any of these statements either; run or take note that those people are not on your side. Make sure you not only have good people on your team but also make sure that you understand all the steps and why you are doing each one along the way. There are many people that want to take your money and only a few that want to see you succeed.