Sign up for Funding Circle newsletter!
Get our latest news and information on business finance, management and growth.
Updated: March 27th, 2020
Buying a dental practice is a big undertaking. But, it also has the potential to pay dividends. If you want to start your own dental office, purchasing an existing practice means you’ll have the benefits of a trained staff, an established patient base, and fewer startup costs.
However, depending on the practice, you may have to make significant changes to the staff, facility, and operational systems to be successful.
Whatever your reason, if you want to know how to buy a dental practice, we’re here to help. We turned to two experts for advice on how to successfully purchase a dental practice.
Here are the nine critical questions you should ask yourself, plus three tips for getting the most out of a buyout.
Before you shop for dental practices, it’s important to clarify your intentions. Do you want to expand your current practice, start a practice in a new part of town, or take over a practice that has a well-established patient base?
For Dr. Jason Doublestein, DDS and co-owner of 44 West Dental Professionals, it was a matter of logistics and opportunity. “We needed a bigger space for our current practice,” he said, “but we also wanted to expand our patient base and look ahead to future growth.” Buying his retiring neighbor’s dental practice allowed him and his partner to achieve both goals.
When searching for a practice, keep your goals front of mind. Understanding what you want to accomplish — whether it’s offering a wider array of services or hitting a higher revenue — can help you narrow your search and prioritize the right opportunities.
Before you buy a practice, you need to have a good understanding of how it serves its current patients. Before buying his practice, Doublestein said he and his partner reviewed the seller’s software to see what types of services he offered and how many procedures he performed a year. In doing so, Doublestein discovered that he and his partner offered more comprehensive services than the seller, who primarily did fillings.
Examining the details helped Doublestein determine what type of practice his retiring neighbor was running, and allowed them to figure out what they wanted to do. For example, is it a comprehensive dental practice that does full mouth reconstructions and cosmetic work, or one that primarily handles teeth cleanings and fillings?
You need to examine the practice’s day-to-day work to determine what type of operation they’re running, and whether or not you’re qualified and prepared to offer the same services. If, like Doublestein and his partner, you want to offer services that the selling dentist doesn’t offer, you have to consider how much work you’re willing to do to implement these.
Not only will you have to train the staff on new treatments, but you’ll also have to spend money promoting your services and take time to get the patients up to speed.
When buying an existing practice, you need to consider the real estate you’re working with. Is the location of the practice close to your target patients, easily accessible for you and your team, and within easy walking or driving distance to other neighborhood amenities?
Once you answer these questions, examine the facility. In addition to looking at the size, condition, and aesthetic of the property, you should also consider whether or not you’ll have to make tenant improvements or undergo remodeling to change the office layout.
Doing any type of construction takes time and money, so it’s important to ensure you have enough cash and resources to make the changes you want.
Before purchasing a dental practice, it’s vital to do your due diligence to determine the practice’s value. Ideally, you want to invest in a practice that has good profit potential and longevity. A practice broker can help with this process.
Start by looking at the past five years worth of tax returns from the current practice, recommended Ken Stalcup, a CPA and senior director with Houlihan Valuation Advisors. “Five years gives a new buyer a pretty good idea of the history and recent growth — or decline — in the practice,” he said.
You should also be looking at the practice’s gross revenues for areas of growth and decline, Stalcup said, as well as a practice’s net income to see how profitable it is. “Finally, the new owner will want to look for, identify, and eliminate any unnecessary expenses,” Stalcup added.
You can estimate the value of a practice — and figure out how reasonable the seller’s price is — by looking at the practice’s revenue, Stalcup explained. “A very general rule of thumb says that a dental practice is worth 60% to 70% of the annual sales plus inventory,” Stalcup said. As an example, if the seller’s dental practice has $100,000 in annual revenue and $2,000 in inventory, it’s worth roughly $62,000 to $72,000.
Use this as a starting point for practice valuation discussions, and make sure to talk with your accountant to help navigate this decision.
Part of your inspection process should involve auditing the practice’s equipment and inventory. You need to consider the following two key factors: whether or not the practice has the equipment you need, and what condition that equipment is in.
Buying new equipment is expensive, so it’s important to determine how much money you’d need to outfit your practice with the right machines and tech. You may have to buy new machines to round out your services, replace broken chairs or lighting, or upgrade the practice’s software and tech if it’s outdated or inefficient.
Unless you work alongside the seller to transition as an owner, you may lose patients when you take over the dental practice. Certain patients may not like the changes you make to the practice, while others may not be as motivated to make appointments with a dentist they don’t know personally.
When you do a buy-out with no transition, Doublestein said you can expect to lose between 20% and 25% of patients. “We anticipated losing a percentage of patients,” he said, “but when we looked at the numbers we figured out we could sustain those losses.”
It’s crucial to review your profits and losses to ensure you can maintain good cash flow without patients, but it’s also important to determine whether or not you’re willing to ramp up marketing to attract new patients.
The two most critical factors to consider before buying a dental practice, Stalcup said, are growth potential and cash flow. “All other things being equal,” he said, “a practice with greater cash flows is worth more than a similar practice with smaller cash flows.” The same principle is true for practices that are consistently growing, he said.
Of course, growth is about more than just money. It’s also smart to look at the amount of procedures and services the practice offers.
Doublestein recommended looking at a few different numbers to determine a practice’s potential. First, look at the number of new patients the practice has seen each month for the past couple of years. “You want to see if the practice is growing or shrinking,” Doublestein explained. “If it has a good reputation,” he said, “that’s a great sign.”
Next, look at the number of active patients the practice has. “You can’t just look at the number of patients in the dental software,” Doublestein said, “because that could account for someone who came in one time for an emergency.” A better measure of a practice’s success is active patients, or people who are scheduled out 12 months into the future (for a teeth cleaning, for example) and have appointments dating 12 months back, Doublestein said.
Finally, look at the practice’s hygiene retention rate, suggested Doublestein. In other words, are people coming back for their cleanings every six months? “The dental hygiene program is the economic engine of the dental practice,” Doublestein said. “Not only are you producing revenue with cleanings, X-rays, and exams,” he explained, “you’re diagnosing all the needed work during those appointments.”
When you acquire a dental practice, you inevitably have to make certain changes to set the business up for success. However, some businesses require more work than others.
Certain practices may be more dialed in when it comes to their staff, patient base, and revenue, which means these places may also come with a higher price tag. On the other hand, practices that are more affordable may require more work.
The type of dental practice you go for depends on your budget and background. It’s a good idea to assess not only your cash flow, Stalcup said, but also your professional experience and personal strengths and weaknesses.
“If dentists are business-minded and they like a challenge,” Doublestein said, “they might want to take a practice that’s not doing so well and ramp things up.”
However, some dentists prefer to focus on clinical work rather than admin or business strategy, he explained. “Someone like that might want to pay a premium for a practice that’s thriving,” Doublestein said.
You’ll likely need to apply for financing when buying a dental practice. Beyond the purchase price, you’ll also need money to upgrade equipment, hire new staff, redesign the dentist office, or plan for expansions.
Fortunately, you have a few different financing options. The option you go for depends on your credit score, as well as the amount of time you have. If you have great credit and can afford to wait a few months to hear back from a lender, consider applying for a bank loan or loan from the Small Business Administration. These loans offer the lowest interest rates and longest repayment periods, but they can be difficult to qualify for.
Online lenders, on the other hand, usually have higher annual percentage rates — on average anywhere between 7% and over 90% for a term loan — but the application and approval processes are generally easier. You don’t need to have perfect credit, nor do you need to submit extensive paperwork to apply. Plus, you can receive a response in as little as one day after submitting your application.
Meet with your accountant to review your credit score, financials, and purchasing timeline to figure out what move makes the most sense for you.
Before you buy a dental practice, it’s helpful to get to know the owner. Find out whether or not you have similar specialties, leadership styles, practice management systems, and philosophies on patient care. It’s much easier to take over a practice if you and the selling dentist align in your skills and beliefs. If that’s the case, you may want to consider doing a transition.
When Doublestein bought his first practice, he worked alongside the lead dentist for three years to get to know the practice’s patients, staff, and processes. “Working side by side with the person you’re taking over from transfers a lot of goodwill to patients,” he said.
Doing a practice transition takes more time, but it usually leads to better patient and staff retention. Plus, a professional transition consultant can help you create a plan, organize your documentation, and negotiate terms with the seller. “They set you up for success from the start,” said Doublestein.
To minimize your losses during and after a buyout, it’s crucial to hire a few different professionals to help guide you. “New owners need to have current, relevant financial information in order to make good decisions,” Stalcup said. Hiring a good CPA can help with that, he explained.
You may also want to hire a valuation specialist and an attorney who can create a purchase agreement and advise you on legal issues. Beyond looking at the practice’s patient base, Stalcup said you also need to determine other key details, such as:
Above all, “Take advice from people who are familiar with dental practices,” said Stalcup. Surrounding yourself with savvy professionals can result in a smoother, more successful buyout and transition.
When you purchase a practice, you have to be willing to work hard, said Doublestein. Instead of trying to cut corners, embrace the effort that goes into buying, transitioning, and improving a medical practice.
“The most important thing to do is be productive: do the dentistry you were trained to do, be transparent, educate your patients well, and work hard to gain their trust,” Doublestein said.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.