BUYING A DENTAL PRACTICE: 14 TIPS

14 Tips for Dental Practice Acquisition

Too many dentists go astray when buying an existing dental practice. These tips are the course correction you need to keep you from making costly mistakes and ending up with a practice that doesn’t fit your goals.

1. Establish a network of reliable advisors for guidance throughout the process, and do so early.
2. Know your past production history and how much production you can handle (and how much you’d like to..)
3. Ask friends and colleagues if they’re happy with their dental practices, and why or why not.
4. Take location and demographics into account during the decision-making process.
5. Connect with dental professionals in your desired area.
6. Recognize the value of the existing staff in the practice.
7. Personally visit and assess the practice before making a decision.
8. Assess how aligned you are with the seller on quality of care, patient relationships, and other matters.
9. Don’t rely on the seller’s asking price; do a thorough valuation to understand what the practice is really worth.
10. Negotiate the price before finalizing the deal.
11. Exercise caution with owner-financing options.
12. The real estate purchase or lease negotiation is a separate transaction, so don’t mix it with the practice purchase.
13. Consider the term of your practice loan carefully.
14. Handle the seller’s phase-out delicately for a smooth transition.

We’ll go into detail on each of these below. But first, a word on working with Dental Buyer Advocates.

1. Establish a Network of Reliable Advisors

If you’re considering purchasing a practice, you want the right experts at your side. 

1. Practice transition consultant (such as Dental Buyer Advocates)
2. Dental-Specific CPA (such as Dental Buyer Advocates)
3. Dental attorney
4. Lender

With these four experts on your team, you’ll steer clear of bad decisions and save yourself a lot of time and money.

2. Get your production history and target practices close to that number.

Knowing how much production you’ve done (monthly or annually) in the past allows you to determine your purchasing power, and ensures you can meet the financial obligations associated with acquiring a practice. Here are some key points to consider when assessing your production history.

1. Get a production report from your current or past jobs. If you find it impossible to get an actual production report from your practice management software or your current boss, don’t panic! You can estimate your monthly and annual production numbers with help of some bankers and a few notes on your typical daily schedule
2. Don’t target practices that have production much higher than your current skills and hand speed. The rule of thumb is that banks will approve you for a loan if you can do roughly 80% of a seller’s production, and do most of the same money-making procedures.
3. Talk with reputable dental bankers (and reach out to Brian@DentalBuyerAdvocates.com) if you need a name) if you have specific questions about your production history and how that would translate into your bank loan budget.

3. Learn From the Experience of Other Practice Owners

By tapping the brains and experiences of other dental practice owners, you can gain valuable insights that set you light-years ahead.

• Inquire about their overall experience as practice owners, including the challenges they faced, the rewards they have enjoyed, and any unexpected factors that have influenced their satisfaction. Understand the specific aspects of practice ownership that have contributed to their overall happiness, such as patient relationships, clinical autonomy, work-life balance, financial success, or practice growth.
• Gain insights into the dynamics of their practices by asking about the culture, team dynamics, and patient demographics. Understand how these factors align with your own goals, values, and preferences. Learn about the availability and quality of support staff, the efficiency of practice management systems, and the overall patient experience.
• Inquire about the financial aspects of their practices, such as revenue potential, overhead costs, profitability, and their ability to achieve their financial goals. Understand how their financial success aligns with your own aspirations and consider factors such as insurance relationships, fee structures, and patient base demographics.
• Discuss the opportunities for professional growth and development within their practices. Ask about continuing education opportunities, access to advanced technologies or specialty services, and their ability to expand their clinical skills and pursue their professional interests. Consider how these opportunities align with your own career goals and aspirations.
• Inquire about the overall work-life balance they have achieved as practice owners. Understand their ability to manage their schedule, personal life, and professional responsibilities. Discuss the level of control they have over their workload and the flexibility to pursue personal interests outside of the practice.

4. Consider Location and Demographics

A practice’s location and demographics can make or break its success. Here are some factors to consider:

1. Assess the accessibility of the practice location for both existing and potential patients. Ideally, the practice should be located in a convenient and easily accessible area with ample parking and good visibility. A prominent location can serve as a form of advertising and attract new patients.
2. Conduct a thorough analysis of the demographics in the area where the practice is located. Consider factors such as population size, age distribution, income levels, and cultural diversity. This analysis will help you determine if the patient demographics align with the services you plan to offer and the target market you want to serve.
3. Evaluate the competition in the area by identifying the number of existing dental practices and the services they offer. Determine if the market is saturated or if there is room for growth and expansion. Assess the market demand for dental services and identify any gaps or underserved areas that you can capitalize on.
4. Consider the presence of specialists and other healthcare professionals in the area. Evaluate the potential for collaboration and referral relationships, as these can contribute to practice growth and patient satisfaction.
5. Assess the community dynamics and level of community engagement in the area. Look for opportunities to get involved in local events, organizations, and initiatives to build relationships and establish your practice as a trusted healthcare provider in the community.
6. Consider the potential for practice growth and development in the chosen location. Evaluate factors such as population growth, economic trends, and planned infrastructure developments that may contribute to an increase in the patient base and demand for dental services.
7. If you are planning to purchase a practice property or lease a space, carefully evaluate the terms, costs, and suitability of the real estate options available in the desired location. Consider factors such as square footage, layout, lease terms, and potential for future expansion.
8. Familiarize yourself with the local regulations, licensing requirements, and legal considerations specific to the area where the practice is located. Ensure compliance with local healthcare regulations and consider the impact of any specific laws or restrictions on your practice operations.

A strategic choice of location can contribute to practice success, patient acquisition, and long-term growth. Similarly, favorable demographics create tailwinds that make success so much easier.

5. Connect With Other Dental Professionals

Build strong ties with other dental professionals in your community. You never know how these relationships will pay off, but other professionals can help you find a practice to buy, provide insights on the local market, potentially serve as referral partners, and provide invaluable advice on owning and running a dental practice.

Here are some ways to build connections with other dental professionals:

• Participate in local dental societies, dental association meetings, dental conferences, and other industry events. These gatherings provide opportunities to network with professionals in the area and engage in discussions about the local dental community.
• Enroll in study clubs or continuing education programs that attract local dental professionals. These forums allow for networking and establishing relationships with like-minded individuals who are dedicated to professional growth.
• Consider reaching out to dental professionals individually through phone calls or emails. Introduce yourself, express your interest in the area, and inquire if they are open to connecting and sharing insights about the local dental market.
• Utilize online platforms and forums, such as social media groups or professional networking platforms, to connect with dental professionals in your area. Engage in discussions, ask questions, and seek advice from professionals who are active in these online communities.

6. Visit and Assess the Practice

Don’t make an offer on a practice until you visit it. An on-site visit allows you to gather firsthand information, evaluate the practice’s suitability, and make an informed decision. Here’s why visiting and assessing the practice is important and what you should consider during the visit:

• Visiting the practice gives you an opportunity to assess the physical space, including the layout, size, and condition of the office. Consider factors such as the number of operatories, waiting area, sterilization room, and overall functionality of the space. Assess whether it aligns with your envisioned practice setup and if any renovations or upgrades would be necessary.
• Interacting with the practice staff allows you to observe their dynamics, professionalism, and level of engagement. Assess their knowledge, skills, and experience, as they will be an integral part of the practice’s success. Determine if there is a good cultural fit between you and the existing staff and whether they would be receptive to the transition.
• During your visit, pay attention to how patients are managed and the flow of appointments. Observe the practice’s efficiency, waiting times, and patient experience. Evaluate if the practice has a steady patient base and if it can handle the patient volume you anticipate. Consider the potential for growth and the need for additional marketing efforts to attract new patients.
• Request access to the practice’s financial records, including revenue, expenses, tax returns, and profit margins. Analyze the financial performance to assess the practice’s profitability, stability, and growth potential. Look for any red flags or discrepancies that may require further investigation or clarification.
• Use your visit to understand the practice’s operational systems and processes. Evaluate the existing workflows, appointment scheduling, billing procedures, and patient records management. Assess the practice’s use of technology and software systems and determine if they align with your preferences and efficiency goals.
• Take note of the equipment and technology used in the practice. Evaluate their condition, age, and compatibility with your treatment approach. Consider the need for any upgrades or investments in new equipment to support your practice goals and provide optimal patient care.
• Gain insights into the patient demographics, treatment mix, and referral sources. Assess the patient retention rate and determine if there are opportunities for growth or if certain patient segments may need additional attention. Understanding the patient base will help you gauge the practice’s potential for continued success.
• Evaluate the practice’s location and the surrounding area. Assess the demographics, population trends, and competition from other dental practices. Consider if the location aligns with your target patient base and if there are opportunities for growth or potential challenges to be addressed.
• Use the visit as an opportunity to ask the seller and staff any questions you have about the practice, its history, and future potential. Seek clarification on any concerns or uncertainties you may have. Open communication and transparency will help you make an informed decision.

7. Assess Alignment of Approach

The seller’s own approach to dental practice management is a critical component, and one that you should assess when you visit the practice. 

You don’t want a jarring change when the practice transitions from the seller’s management to yours. Buyers and sellers should align on key issues such as the following:

1. Quality of patient care
2. Patient relationships and rapport
3. Culture and values of the practice

If there’s perfect alignment between the seller’s philosophy and your planned approach, you’re in luck. If you catch mismatches, you may be able to use them to your advantage. For example, if you find a seller whose quality of care is below your standards, you may have spotted an opportunity to increase your practice’s value.

8. Perform Your Own Valuation On the Practice

The seller’s asking price may be influenced by their personal circumstances, emotional attachment, or desired financial outcome. You need to perform your own valuation and arrive on what you’re willing to pay. 

Here are some different factors to consider when performing dental practice valuations:

• Market comparison: conduct a market analysis to understand the prevailing prices of dental practices in the area. Research comparable practices that have recently been sold or listed for sale. Consider factors such as location, patient demographics, practice size, revenue, profitability, and growth potential. This comparative analysis will provide insights into the fair market value and help you determine a realistic range for the practice you’re interested in.
• Financial evaluation: evaluate the financial performance and potential of the practice. Review the historical financial statements, including income statements, balance sheets, and cash flow statements. Look for trends, growth patterns, and profitability indicators. Consider factors such as revenue, expenses, profit margins, patient retention rates, and collections. Analyze the practice’s financial health and projections to estimate its future earning potential.
• Tangible and intangible assets: assess the tangible and intangible assets associated with the practice. Tangible assets include equipment, supplies, and real estate (if included). Evaluate their condition, value, and potential for future use. Intangible assets encompass goodwill, patient relationships, brand reputation, and practice systems. Consider the strength of these intangibles and their contribution to the practice’s value.

And remember: dental practice valuations are tough! Don’t hesitate to ask for help. A relatively small investment (our consulting fee) could save you tons of money. Contact us to talk.

9. Negotiate the Price

Negotiation creates an environment where both parties can find common ground and reach a win-win outcome. The seller may have certain expectations, while you have your own considerations. 

Emotions can run high, especially if the seller is convinced their practice is worth a certain figure and you’re offering less. 

Engaging the help of Dental Buyer Advocates for the negotiation process can take you out of the hot seat. We can objectively show the seller why you’re offering what you’re offering, with data and logic to back up our numbers.

10. Exercise Caution with Owner Financing

Owner financing involves the seller acting as the lender and providing financing to the buyer for the purchase of the practice. Owner financing can be a wonderful thing in many situations, but you need to approach it carefully. 

Ensure that all terms and conditions of the owner financing agreement are clearly documented in a legally binding contract. This includes the loan amount, interest rate, repayment schedule, any applicable penalties or fees, and any collateral or security involved.

Consider the reputation and credibility of the seller when evaluating owner financing. Assess their track record, financial stability, and integrity in previous transactions.

11. Keep Real Estate Separate

When acquiring a dental practice, it’s important to understand that the real estate purchase or lease negotiation is a separate transaction from the purchase of the practice itself.

If you decide to purchase the commercial space where the practice is located, it involves a separate negotiation and agreement with the property owner. This transaction typically follows a similar process to any other commercial real estate purchase, involving due diligence, financing, and legal documentation specific to the real estate transfer.

Alternatively, you may choose to lease the space for your dental practice. In this case, you would negotiate the terms of the lease agreement with the property owner or landlord. Lease negotiation involves discussions on rent, lease duration, renewal options, maintenance responsibilities, and other terms that govern your tenancy.

12. Consider The Term Of Your Loan

For your practice loan, aim for a range of five to 15 years. Most commonly, these loan terms are 10 years. Longer terms help minimize cash flow impact and risk during the early stages of practice ownership. 

Plan to keep the loan for at least five years and explore flexible prepayment options. Some loans offer interest-only payments for the first six to 12 months. Choose between fixed or adjustable interest rates, with fixed rates providing stability over the next seven to 15 years. 

Locking in a strong fixed rate is recommended to avoid painful rate increases in the future.

13. Recognize The Value Of The Existing Staff

A practice’s staff members have built relationships with patients, understand the practice’s operations, and possess valuable institutional knowledge. In most cases, you definitely want to keep them on—and keep them happy. They can be one of your most valuable resources.

14. Create A Smooth Transition

It is common for the seller to continue working in the practice for a period of time to ensure a seamless handover and maintain patient relationships. During this phase, clear communication and collaboration are essential.

Establish a transition plan with the seller, outlining their role, responsibilities, and timeline for gradually reducing their involvement. This allows for a smooth transfer of patient care, knowledge transfer, and staff integration. Maintain open lines of communication, address any concerns or questions, and ensure that both parties are aligned on the transition process. 

Resources for Dental Practice Acquisitions

Here are the different areas where you’ll need to focus. Click on any of the headings to learn more about a specific aspect of buying a dental practice.

Finding a Dental Practice to Buy

From using a dental practice broker to doing your own legwork, we cover the different ways you can find a practice to buy.

Valuing a Dental Practice Accurately

Dental practice valuation is tricky. There are a lot of factors to consider, some qualitative and some quantitative. 

Negotiating with the Seller

You need to have some good negotiation skills to craft a win-win that helps you and the seller each get what you want.

Performing Due Diligence

When performing your due diligence, there are some red flags and some green flags to consider. 

Getting Financing

We help you navigate the world of dental practice financing, from initial preparation through closing.

Closing on a Practice

Let’s look at any final closing tasks you need to handle when you finalize your dental practice ownership.

Transitioning Practice Management

Dental practice transitions need to be handled in the right way to minimize turbulence. You don’t want to alienate your existing patient base.

Understanding Practice Insurance

We cover the gamut of insurance issues, from credentialing to malpractice insurance and a whole lot more.

Tackling the Legal Side of Things

A guide to the legal issues involved in acquiring and maintaining a dental practice.

Frequently Asked Questions on Buying a Dental Practice

Is it better to purchase an existing practice or start a practice from scratch?

Both approaches have their advantages. Consider buying an existing practice if you want immediate cashflow. If you’re in no hurry—and if you’re willing to do a lot of heavy lifting—starting your own practice might be for you.

Advantages of buying an existing practice:

1. Established patient base: An existing practice comes with an established patient base, which can provide immediate revenue and reduce the time and effort required to build a patient roster.
2. Cash flow and profitability: An established practice often has existing cash flow and profitability, allowing the buyer to start earning income from day one.
3. Staff and systems in place: An existing practice typically has trained staff and established systems, reducing the need for extensive hiring and setup.
4. Reputation and goodwill: The practice may have a positive reputation within the community, leading to higher patient retention and attracting new patients.

Advantages of starting a practice from scratch:

1. Complete control and customization: Starting a practice from scratch allows you to build the practice according to your vision, including the choice of location, equipment, and design.
2. Flexibility and innovation: Starting fresh gives you the opportunity to implement new technologies, treatment approaches, and practice management systems without any pre-existing constraints.
3. Lower initial investment: Starting from scratch may require a lower upfront financial investment compared to purchasing an existing practice, which often involves acquiring goodwill and paying a premium for an established patient base.
4. Personal satisfaction and growth: Building a practice from the ground up can be personally fulfilling, allowing you to shape your own culture, values, and patient relationships.

What is the average profit margin of a dental practice?

The average profit margin for a dental office ranges from 30% to 40% of gross receipts. Factors that influence profit margin include staff salaries, commercial mortgage or lease, overhead, patient flow, and much more.

Profit margin is a measure of the practice’s profitability after accounting for all expenses, including overhead costs, staff salaries, supplies, equipment maintenance, rent, and other operational expenses. A higher profit margin indicates that the practice is generating a larger percentage of revenue as profit, which can be an indicator of financial stability and success.

How much should a dental practice spend on supplies?

Ideally, a dental practice will spend 4% to 6% of its overhead on supplies. Try to strike a balance between maintaining adequate inventory levels and controlling costs. Proper inventory management, negotiating favorable pricing with suppliers, and regularly reviewing and optimizing supply ordering processes can help keep expenses in check.

What multiples do dental practices sell for?

Dental practice multiples average around 60% to 80% of gross revenue, or 4 to 6 times EBITDA.

What is the average gross revenue of a dental practice?

The average gross revenue for a general dental practice in the United States typically ranges between $500,000 and $1.5 million per year.

These figures are averages and can vary significantly based on individual circumstances. Some dental practices may generate higher gross revenue if they offer specialized services, have a larger patient base, or operate in high-demand areas. Conversely, smaller practices or those located in less populated areas may have lower gross revenue.

Are SBA loans good for financing a dental practice acquisition?

• Benefits. SBA 7(a) and 504 loans offer long repayment terms (up to 25 years), lower down payments, and attractive fixed interest rates. This can make the acquisition more affordable. The max loan amount for dental practices is $5 million.
• Eligibility. The dental practice must be an established business operating for at least 2 years. The buyer must have good credit, sufficient collateral, and provide financial projections showing ability to repay the loan,
• Long timeline. The application process for SBA loans is extensive with strict requirements. It can take 1-3 months to get approved. There are upfront costs for packaging and origination fees.
• Lender. It’s important to find an SBA Preferred Lender experienced with dental practice financing. They can guide you through the process and paperwork.
• Use of funds. SBA 7(a) can be used for working capital, equipment, renovations, and acquisition costs. SBA 504 can finance real estate and fixed assets. 
• Loan amount. The maximum SBA loan depends on the value of the practice, projected cash flow, collateral, and the buyer’s credit. 

What questions should I ask when buying a practice?

1. Why is the dentist selling the practice? Selling dentists can have all sorts of reasons for making the switch. Ideally, they’re ready for some downtime and not bailing on a problem practice. 
2. How many patients are active and seen regularly? Verify patient numbers and retention rates.
3. What types of dental services does the practice provide? This will indicate potential growth areas.
4. What is the payer mix? Learn the percentage of patients with private insurance, Medicaid, uninsured. This impacts reimbursement rates.
5. Who handles billing and collections? Review the billing system and collection rates.
6. What dental technology or equipment is included? Assess maintenance needs and replacement costs.
7. What is the average reimbursement per procedure? Calculate your potential revenues.
8. How many new patients per month in the past year? Evaluate new patient growth.
9. What are the staff arrangements? Assess staffing needs and costs going forward.
10. What is the rent cost and length of the lease? Understand your occupancy expenses.
11. What are the future growth opportunities? Look for unmet needs to expand services.
12. How are patient records maintained? Ensure proper record transfer.