Qualitative Analysis in Dental Practice Valuation

Have you ever had a friend who wanted so badly to be in a relationship they talked themselves into being with someone who was a horrible match for them? I had a roommate in college who wanted to be married so badly that he talked himself into relationships that were obviously a poor fit. Being the good roommates we were, we’d kindly point out obvious flaws with his latest girlfriend.

We’d point out, “Dude. She’s still dating other guys! We just saw her with Brad down the street.”

Of course, he would defend the decision, “Her mom told her to not stop dating until she’s serious with someone. I think proposing will make things serious!”

Buying a dental practice is a lot like finding someone to be in a serious relationship with. It’s a huge decision. It’s vitally important to get right. And the consequences of choosing well or poorly will impact the quality of your life.

You’ve got to get the analysis right and for a dental practice, that means getting the numbers right. But it also means getting the non-numerical numerical right. The qualitative factors.

When looking for a practice, this sounds like a conversation I had with a dentist with a few years of an associateship under her belt about her search for a practice in the suburbs of Seattle. Married with a few kids, she and her husband spoke at length with me about the importance of good schools and a short commute. They wanted to raise her kids in an environment similar to their suburban upbringing. But, like a lot of doctors looking for a practice to buy, she was having trouble finding one that fit her criteria. She called me about a practice in Downtown Seattle, outside where she was normally looking. We looked at the numbers of the practice, and the quantitative side of the analysis could work. However, I was concerned about her desire for a short commute and the practice location.

I asked her, “Where would you live if you bought this practice? Have you found a neighborhood close to the practice with good schools?”

(Long Pause)

“The closest one my husband and I feel comfortable with is 15 miles north of downtown.” She replied sounding a little guarded.

Personally having been stuck in Seattle traffic many times I responded, “That’s…what?…a 30 minute drive on I-5 one way, on a good day, right?”

A second pause, “About that, yes.”

“And about an hour in traffic, right?” was my follow up question.

Knowing what I was going to say next, she replied, “Or more.”

I asked my last question “…so why are we even talking about this practice??”

Don’t get married or buy a practice just because you’re mentally ready to move on to your next career step. How do you do that? The numbers have to work, obviously. But you’ve got to get the qualitative side of a dental practice right too.

And just like deciding whom to marry, would you ever get married without dating first? Would you buy a car without at least taking it for a test drive? Would you buy a house without seeing and inspecting it first?

You’ve got to get out and see the practice first-hand. And when you do, there are seven areas to pay special attention to. I’ll give you a few of the questions for each of the seven areas you need to ask when looking.

Key Area #1 – The Family Test

This is the Monopoly Test. This is called the Monopoly Test because if the answer is “no” to any of the above questions, do-not-pass-go and stop analyzing this practice. You’re considering living somewhere for a period of, probably, decades. Consider the following questions:

• Can you live in this city, and (more importantly, if applicable) can your spouse live here?
• Will you have the kind of life you want in this area?
• Will you be able to do the things that are important to you, if you spend 50 weeks a year in this part of the country?
• Will the cost of living here enhance or detract from your financial goals?

Key Area #2 – The Selling Doctor

Interview the selling doctor; get to know him or her. If your style doesn’t match the selling doctor, it will be more difficult to carry the practice forward in the way it has been carried so far. Consider these questions about the selling doctor:

• Does your personality style match the selling doctor?
• Do you have similar values and philosophy on life and business?
• Do you share a similar clinical diagnosis philosophy?
• Do you feel comfortable with the selling doctor’s ethics?

Key Area #3 – The Facility

Don’t even think about purchasing a practice unless you have, or plan to visit the practice in person. There is no substitute for a boots on the ground inspection of the facility, grounds and area. Consider asking these questions as you consider the facility:

• Are the office and signage easily visible to the public?
• How is the physical appearance of the building, inside and out?
• Are there major changes you’ll need/want to make to the building?
• Is there sufficient parking?
• Is the building in a part of town that has the demographic of your target patient base?
• Would you want to get your dental work done in this office?

Key Area #4 – The Equipment

The tools you’ll be working with can enhance or detract from the practice you purchase. If you’re a recent grad, you’re probably used to the latest and greatest equipment most dental schools seem to have. Consider the following questions regarding equipment:

• Does the seller have the equipment/instruments you’ll need and want to do your work?
• If not, how much will it cost you to acquire the equipment you need/want?
• Is the equipment left or right-handed?
• What does the local equipment rep have to say about the quality of tools in use?
• Open bay vs. quiet rooms for doctor and hygiene?
• What do you notice about the non-front- and-center equipment: delivery units, compressor, vacuum, nitrous, etc?

Key Area #5 – The Team

Your team will be your family away from home. Getting along with them is important. But even more important is understanding who they are as individuals. Their reasons for being in their careers. Their hopes, dreams and goals. Their ability to be coached, and expectations of their new boss. Consider these questions as you analyze the team:

• What is the staff’s general attitude towards the transition?
• Will they be staying with you or leaving? Who will you have to replace?
• What is the tenure of the staff?
• What do you think of current salaries, benefits and any existing employment contracts?
• What are the main reasons other staff have left this practice in the past?
• Does the staff see any problems in the practice?
• What changes would they recommend making in the practice?
• How often do they receive feedback (both positive and negative)? How often do they improve their ability to contribute value to the practice?
• Do they know the practice goals? Do they have personal goals or development plans?

Key Area #6 – The Patients & Scheduling

Patient flow and scheduling are the circulatory system of any practice. Without it, the practice dies. If there are problems with patients & scheduling, everything else becomes harder. Consider these questions when considering patients and scheduling:

• How long is the doctor booked in advance? (Hopefully 70-80% full for the next two weeks)
• Is there room for emergency visits?
• How far is hygiene booked out?
• Are there gaps in the hygiene schedule?
• What are the primary sources of new patients?
• What are the current internal marketing programs?
• What are the primary external marketing programs?
• How are you going to attract new patients to the office?
• Does the office have an online marketing plan integrating website, social media & SEO?
• What changes would you make to the scheduling process?

Key Area #7 – Production & Chart Audit

Patients may be coming in the doors, but how do you know they are the types of patients you will be able to help? Or the types of patients you want to help? Consider the following questions about the production and charts in the practice:

• Do they use digital or paper charts?
• What percentage of active patients come from fee for service, PPO, HMO plans, Medicaid?
• What percentage of total annual production is from Hygiene?
• Review the x-rays in the chart and compare them with the work diagnosed and performed. Do you agree with the diagnosis?
• Are the treatment notes complete and legible? Could you pick up this chart and treat the patient without trouble?
• Can you find any patterns of patient treatment and acceptance?
• Do you have the expertise to confidently perform the treatment in a chart?
• How much accepted treatment is there not yet performed? (*Rule of thumb: for $500k of revenue, there should be $300k of diagnosed, presented and accepted, untreated dentistry)

A final tip as you consider the list above: the help of a professional who specializes in helping dentists with this type of analysis is invaluable. Not only can they help you think through all of the above and more, they can give you a sense of what the answers to those questions mean. If the quantitative side of a practice analysis works, and the qualitative side in the questions above work, you may have found a practice worth buying! Good luck!