What am I buying when I purchase a practice?
In our recent blogs, my colleagues and I have been unpacking the elements of selling a practice. Recently, Mike McAninch took a deep dive into just what it is the seller is selling. In this post, I will explore what you are buying when you purchase a practice. Having an understanding of the various practice elements will help a buyer understand what assets they have purchased and how to make the most of them from a cash flow perspective.
For a typical practice purchase, the assets are broken down into tangible and intangible assets. Below are definitions for the various components of these two asset categories and potential concerns and opportunities for the buyer:
Tangible Assets: These are the physical items associated with the clinical execution of dentistry and operating a business. It is important to note this does not include the building or the lease. The ongoing operations of the practice location is a separately negotiated transaction with the owner of the building, which may or may not be the selling dentist. Tangible assets are commonly broken down into three categories:
- Tangible Personal Property: This consists of machinery, equipment, improvements, apparatus, furniture, fixtures, inventory, office supplies, tools, computers and hardware, patient charts and all spare parts.
- Records: This category includes copies of all books and records, patient lists, sales and promotional materials, and service records.
- Supplies: This is a tangible assets category for the remaining clinical and administrative supplies that pertain to the business but are too minor to separately identify as tangible personal property.
As a buyer, you should review the Asset Purchase Agreement for completeness and inspect the state of the equipment being purchased. Incomplete, damaged or outdated equipment may not be a deal killer, but it may introduce a need to purchase equipment when you take over the practice. You should be conscious about what additional costs and leaseholder improvements you need or want to take on, exclusive of the practice price itself, and factor this into your purchase plan.
Intangible Assets: While intangible assets are more difficult to describe, they generally represent the larger allocation of the purchase price than tangible assets. If tangible assets are the physical elements of practicing dentistry and running a business, intangible assets are the drivers of patients and thus revenue.
- Goodwill: This comprises the intangible rights and benefits associated with the business — the reputational value measured in cash flow. This subcategory generally receives the highest valuation allocation of the purchase price.
- Intangible Property: This consists of telephone and fax numbers, websites and website content, email addresses, software and data.
- Noncompete Agreement: This is generally not outlined in a practice valuation but is separately identified and valued in the Purchase Agreement. A noncompete is needed to ensure the transfer of goodwill is retained in the practice sale.
As a buyer, you should review patient lists and gain a deep understanding of where and how new patients are finding the practice. For specialists, referral networks are a big source of patient flows. Referral relationships have been developed over the years with the selling specialist and are often personal in nature. For general dentists, their brand reputation, patient referral ask process and advertising approach are primary drivers for patient flow.
Depending on the practice you are purchasing, you should have a clear idea of how you plan to attract new patients while maintaining the patient list you purchased. If your marketing and advertising plans differ significantly from the seller’s, this should be a consideration. The Purchase Agreement will include terms for the selling dentist to support the purchasing dentist by introducing them to referral sources and providing a warm hand-off of patients.
As a buyer, you should have a sense of how the seller will ensure a smooth transition for the benefit of patients and to retain the value of goodwill. Part of ensuring you capture goodwill is understanding the terms of the Noncompete Agreement. If a selling dentist remains in clinical practice and is in geographic competition with your practice, their patients will be significantly less likely to remain with the practice if they can remain with the dentist with whom they have already formed a relationship.
The buyer of a dental office should know what they are buying, what condition it is in, and how they retain the value of patient flow. It is common for a dentist to purchase a practice and then invest in modernizing it or seek to expand name recognition or change/grow referral sources. In order to optimize the value of a practice purchase, the buyer should have a clear understanding of the investment they will make beyond the practice itself.
This commentary originally appeared March 8 on DentalTown.com
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