Hidden Pitfalls of Practice Acquisitions
- Keywords:
- business acquisition
The purchase of an established practice offers some assurance of steady patient traffic and earnings production. Once dentists have identified such an opportunity, an acquisition may seem relatively easy. However, there can be challenges in evaluating a practice’s health and getting the acquisition closed. Here are some common bumps in the road:
Information overload
Setting expectations early as to timing and document collection will help temper frustrations. Sometimes, the practice owner has little formal business training and has limited time to devote to operational aspects of the practice. An owner may be surprised by the amount of information requested during a normal due diligence inquiry. It may take several weeks to compile the data and then more time to address, resulting in questions.
Insufficient data
Many practices prepare cash-basis financial statements, so year-to-year comparisons can be skewed if the practice’s average collection rate varies. For example, billing issues could result in misleading financial statements. It is essential to involve practice acquisition team members, particularly an accountant and lender, to ensure the buyer has an accurate picture of the practice’s health.
Valuation expectations
Many dentists assume that practice values are similar to real estate values, resulting in unrealistic sale price expectations. As a buyer, having a valuation prepared by a third-party expert should be high on the list. In BMO Commercial Bank’s experience, depending upon the practice type, practices generally sell anywhere from 60% to 85% of one to three years’ average collections. However, a valuation expert will apply several more factors in determining a qualified value.
When considering a practice acquisition, buyers should outline a clear path to purchase, including the preliminary financial review. The acquisition team will help determine the business viability of the practice. However, as the ultimate decision maker, dentists should stay actively involved.
This article originally appeared in New Dentist News.
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View Full Profile >The purchase of an established practice offers some assurance of steady patient traffic and earnings production. Once dentists have identified such an opportunity, an acquisition may seem relatively easy. However, there can be challenges in evaluating a practice’s health and getting the acquisition closed. Here are some common bumps in the road:
Information overload
Setting expectations early as to timing and document collection will help temper frustrations. Sometimes, the practice owner has little formal business training and has limited time to devote to operational aspects of the practice. An owner may be surprised by the amount of information requested during a normal due diligence inquiry. It may take several weeks to compile the data and then more time to address, resulting in questions.
Insufficient data
Many practices prepare cash-basis financial statements, so year-to-year comparisons can be skewed if the practice’s average collection rate varies. For example, billing issues could result in misleading financial statements. It is essential to involve practice acquisition team members, particularly an accountant and lender, to ensure the buyer has an accurate picture of the practice’s health.
Valuation expectations
Many dentists assume that practice values are similar to real estate values, resulting in unrealistic sale price expectations. As a buyer, having a valuation prepared by a third-party expert should be high on the list. In BMO Commercial Bank’s experience, depending upon the practice type, practices generally sell anywhere from 60% to 85% of one to three years’ average collections. However, a valuation expert will apply several more factors in determining a qualified value.
When considering a practice acquisition, buyers should outline a clear path to purchase, including the preliminary financial review. The acquisition team will help determine the business viability of the practice. However, as the ultimate decision maker, dentists should stay actively involved.
This article originally appeared in New Dentist News.
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