June 17, 2022

Buying A Dental Practice
Part I – Getting Started

Buying a dental practice can be a better alternative to opening a practice from scratch. The permits, leases, equipment and patient base are already in place.  You should be able to start practicing immediately after the sale.  However, there are some considerations to keep in mind when negotiating and finalizing the purchase of a practice.

What Should I Know About Financing the Practice?

One of the first steps to take is to reach out to lenders to develop relationships and to get pre-qualified for a loan.

When you apply for the loan, the bank will look at two primary factors.  First, the bank will review your personal credit history and determine whether there are any red flags.  Then, the bank will review the financial data from the practice to evaluate the associated level of risk.  If you have a poor credit history, you may have a difficult time securing a loan.  Banks may also shy away from a practice with too many red flags.  These can include things like declining revenue trends and high overhead.

You will also need to make sure the loan is right for you.  In addition to the interest rate, you should consider factors like the length of the loan and any discounts the bank offers.  Above all, you will want to be comfortable with the bank and your banker.

How Do I Find the Right Practice?

Location is essential when buying a dental practice.  You may want to research demographic data, such as how many dentists are already practicing in the area, the ratio of dentists to the population in the area, average age and average household income.  Much of the general demographic information can be found for free through searching U.S. Census data.

You can also research your potential competition by searching online review sites such as Yelp.  For more detailed demographics, there are also companies that provide fee-based  reports, which advertise being able to track factors like the number of dentists per person or household.

You also want to have the resources available to help you find the right practice.  Practice brokers are a good resource in finding available practices. However, brokers typically represent the seller, and will not owe you any fiduciary duties.  Additionally, most brokers are not lawyers and are not trained in drafting and interpreting contracts.  You may want to consult with a CPA for financial  due diligence, as well as attorneys to help you and the seller prepare the asset purchase agreement.

You can also find opportunities in classified ads and through networking.  Getting involved in organizations like the Arizona Dental Association can be a great way to find doctors who may be looking to sell their practices.  The Arizona Dental Association may offer other resources to assist you with practice management.

How Do I Value The Practice?

Evaluating the purchase price of a dental practice can be a difficult task.  Potential lenders often conduct their own valuation of the practice as part of the underwriting process.  But banks are risk-averse by nature and will often undervalue practices in their underwriting.  In fact, in many cases, the bank will require that the seller carry back some of the purchase price.  In these circumstances, the seller will essentially loan the buyer a portion of the purchase price, so that the buyer makes payments to both the lender and the seller over time.

There are several rules of thumb for looking at what a practice should sell for. The most common being to use a percent of collections over a period of two to three years.  You should remember that this should not be the limit of your valuation.  To get a more precise market value, you should consult with a business valuation specialist (such as a dental CPA or a dental practice broker).  Remember that ultimately, the decisions of whether to sell and at what price remains with the seller.

What Is A Letter of Intent And Do I Need One?

The next step will likely be negotiating the terms of the purchase.  Although the initial contact and preliminary negotiations can be through verbal discussions,  it should be documented in a more formal letter of intent.  Letters of intent are usually short synopses of the final terms of the sale that often include the following:

  • Purchase Price, with any reductions for the earnest money deposit.
  • Allocations, showing how much of the purchase price is allocated to goodwill, versus tangible assets.
  • Due Diligence period, letting the buyer know when and how he can inspect the assets of the practice.
  • Closing Date, which is the date on which the practice actually changes hand.
  • Contingencies that have to occur before the sale can happen.
  • Non-compete agreement, with the radius and duration.

In addition to the letter of intent, the seller may require that you sign a separate confidentiality agreement and a business associate agreement.  The confidentiality agreement will generally require that you only share information you obtain about the practice with your advisors and that any information you receive will be returned in the event the transaction does not close.  The business associate agreement may protect the practice from liability under HIPAA if you review protected health information about the practice’s patients during the due diligence period.

Our next post will discuss the due diligence period in more detail.  If you are considering buying a dental practice and have questions, please feel free to reach out to one of our attorneys directly.