Buying a dental practice is likely the most important professional decision you will ever make. There is a lot more to this decision-making process than looking at the physical environment of the practice.

It may look nice and seem to be in a good geographical area. The selling dentist may be polite, seem to be liked by the team, and have nice pamphlets on various topics to give out to patients. But there is far more to evaluate before going through with a purchase.

Although non-economic considerations are important, such as how the physical structure and office environment look and feel, economic considerations make a difference in the success or failure of the dental practice you purchase. For assistance in this purchase project, you need to start by assembling an advisory team. You will need a dental lawyer, a financial planner, a certified public accountant (CPA), and perhaps a consultant.

Your CPA will be the primary professional assisting with the financial due diligence process you must conduct prior to purchasing the dental practice. Your neighbor’s aunt’s father-in-law's second cousin may be a fine general CPA, but you need a skilled dental CPA who works primarily, if not exclusively, with dentists.

You need a CPA who knows how to look at the financial statements and interpret the value of a dental practice. One who knows the tax implications and how to assist your lawyer in making sure you get the best deal when you purchase your dental practice.

Your lawyer may be able to refer you to a good dental CPA or you can ask other dentists for recommendations. You can also ask your lender for names.

After you have narrowed your list of potential CPAs to work with, you need to interview a few of them to be sure they will be the right fit for you. Selecting the right CPA can help you avoid pitfalls that others have landed in when buying a dental practice.

To help you with this process, here is a list of questions you may want to ask the CPA at the interview:

What Financial Documents Will You Request from the Seller?

The main reason buyers have regrets and find the practice is not performing as well as expected after the purchase, or is even failing, is that the seller did not disclose all the material facts. This could be intentional or unintentional.

It could also be because the buyer did not know what documents to ask for and failed to consult with proper professionals to assist in the purchase. The CPA may request, and then review and evaluate, some if not all of the following:

• At least three years of tax returns.
• Recent profit and loss statements.
• Current balance sheets.
• Fee schedule.
• A list of all practice expenses.
• A list of all employee expenses including salaries of each employee, benefits, retirement plans, payroll taxes, etc.
• Revenues that are broken down by procedure and practitioner.
• A list of all vendor contracts and recurring payments.
• A list of the number of new patients each month.
• A list of all active patients.
• The history of production versus collection.

If the CPA you are interviewing is unaware of the financial documents that are necessary for review and analysis, and you buy the practice without that expertise, you may discover too late that:

• The practice does not produce enough income for you to provide for the practice overhead, your personal expenses, and the payment of the loan you took out to buy the practice.
• You overpaid for the practice.
• The team is overpaid and have enforceable contracts you cannot legally change.

The more information you have before buying a practice, the better off you will be and the more likely your new practice will be all you expect it to be.

How Will You Evaluate the Financial Documents?

Your CPA needs to look carefully at the history of the practice and the trends of the revenue. The CPA should know whether the trends are normal for the demographics of the geographical area.

Other questions that need to be answered by evaluating the financial documents include:

• Is the office lease such that the practice is profitable? Rent and associated expenses should be about 5 to 7% of annual revenues. Those expenses should definitely not be more than 12%. Although an attorney will review all contracts, it is the CPA’s job to analyze and report on whether buying the practice will be a financial success.
• What about the income and expenses? Is the cash flow of the dental practice such that it can provide the income you need for your support, including the payment you will be making for the purchase of the dental practice and the practice's expenses?
• Is the practice overhead within industry standards?
• Is there patient attrition that will affect the cash flow?
• What percentage of revenue comes from insurance, HMOs, PPOs, Medicaid? Will you be able to contract with them? What amount of revenue comes from fee-for-service?
• If the practice has experienced substantial growth, is that for a short period of time? Does growth appear to be sustainable, or was it due to marketing that cannot be repeated since they do not attract recall patients?
• Is there still room for growth? How about bringing in an associate in the future? Does that seem viable?
• How are bad debts handled? How many write-offs are there annually? Is the production appropriate for the number of team members?
• What are the tax implications I may experience as a result of this purchase?
• What is the valuation of the practice? Is it within my financial reach?

How Do You Manage Your Practice?

Questions to ask the CPA in this category include:

• What is your experience with dental practices? How many dental practices have you worked with? What percentage of your practice is dedicated to dental practices?
• What is your fee structure?
• What kind of accounting software do you use?
• What is your preferred way for me to initiate contact?
• If I call or message you, what is your response time?
• Are you local? If not, how will you meet with the advisory team and make this purchase work?
• Are you able to negotiate with the seller’s CPA for the allocation of the purchase price?
• Will you be able to continue advising me and working with me if the purchase of the dental practice is successful? File my tax returns? Prepare my quarterly IRS reports? Advise me of steps I should take now to minimize my tax liability? Find out how I can get tax credits?

How to Determine Which CPA to Hire?

Of course, you want satisfactory answers to your questions, which means you want a dental CPA who will be able to value the practice and provide you with all the information you need to make sure buying this practice is in your financial best interest. You want one who is dependable and with whom you have good communication.

You want a CPA with whom you have a rapport and who you trust so that he or she can continue to advise you on financial issues and prepare your business and personal tax returns in the future. Your conversation should flow easily, and you should feel comfortable working with this person in the future.

You want to be assured of a quick response time. You do not want to get a letter from the IRS and not have to wait long for advice as to how to respond.

Contact Dental & Medical Counsel

Purchasing a dental practice is a unique experience. You need to work with a CPA and an attorney who are both experienced in the sale and purchase of dental practices. Our attorneys at Dental & Medical Counsel have that experience. We will work with the CPA you choose to form a team of advisors who will all help you navigate through the dental practice purchase process.

To learn more about how we can assist you, call Dental & Medical Counsel at 925-999-8200, or send us a message via our contact form to receive more information and to schedule your complimentary consultation with dental attorney Ali Oromchian.