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Practice Values in Decline? (as printed in Today’s FDA – Nov/Dec 2011)

Declining Three-Year Revenues
It’s the case all over. Practice collections have been declining for many reasons. To purchasers, this downward trend generally indicates that a practice is dying on the vine. Since purchasers are looking to spend as little money to get as much practice as possible, and since they have heard many times over that “three years of declining revenues indicates a practice in decline,” their immediate inclination is to significantly discount an offer–if not walk away all together. Beyond that, once a deal has been made, it has become increasingly difficult to convince credit analysts with lending institutions that a practice is truly viable going forward.

So what does this mean for you if you are considering the sale of or are currently trying to sell your practice?  You have to be on top of your game with analytics, reports and practice management. If you are not tracking details of your practice with practice management software, reviewing reports and/or using an overlay product like Sikka Software to track your practice statistics, then you need to start immediately.  Further, when it comes to your transition, it’s that much more important to have an educated, experienced advisor that knows how to peel back the leaves and find out what is truly going on in the practice. With the right questions come the right answers, thereby ensuring the highest possible price and level of financing.

For those of you looking to purchase a practice, in the interest of full disclosure, I have, in the past, written that purchasers should seriously consider and evaluate the purchase of any practice that has experienced three years of declining revenues. The general sentiment and reasoning behind this is that a practice experiencing this sort of decline may have issues that are a true detriment to the practice. The revenue trend may be caused by a combination of any number of factors.

The foundations of this assertion remain unchanged. What has changed with the economy is that just because a practice has declining collections over three years does not automatically make it bad opportunity. Further, it may not even indicate a practice is truly out of its element or prime. At this point, answers to questions about patients and patient flow, treatment presentation and acceptance, and staff processes and procedures become extremely important to the viability of the opportunity. Ask the questions and get the answers. While a good transition specialist should have already asked these questions and have the answers, your in-office due diligence should focus on detailing answers to questions on those topics.

Another point that I briefly mentioned earlier: Generally speaking, purchasers will significantly discount a purchase offer or simply walk away from a practice that has shown a trend of decreasing revenues. This may be penny-wise and pound-foolish. For a practice where there are acceptable and logical answers backed not only by reason but fact and evidence, the “value” of a practice has already declined due to the decreased revenues. Assuming overhead has remained stable and collections have decreased, net income has, as well. A smaller practice supports a smaller asking price. So, just because a practice may be priced where price-to-gross is 67%, this does not mean that a decline in “value” has not already been accounted for.

Location, Location, Location
Unfortunately, this is one piece you as a seller really have little control over. When you started or acquired your practice, you obviously acquired the location as well, whether it be the city or area, or specific building or rental space. This is affecting value. As mentioned earlier, practices in rural areas or in dilapidated or out-of-date facilities are deemed less valuable in the current market. Purchasers are looking for opportunities to pay as little as possible, and this is a point sellers cannot patch over. What sellers can do is take advantage of the market yourself. Are you three to five years (or more) from a transition? Take a look at your facility and equipment, and consider an upgrade. If you own your building, fix it up to like-new standards, as much as possible. If you are leasing, ensure your lease is assignable and the rate is well-negotiated. This will make things easier not only on your bottom line, but on a potential purchaser’s, as well. If you are a few years out, and your equipment, furnishings or décor are out-of-date, consider a refresh or upgrade with new flooring or paint or even quality used equipment. Bring in a set of fresh eyes and ask them to look around and give some feedback. A little time and money goes a long way and can most certainly help.

If as a purchaser, you are out looking for a bargain, rural practices continue to represent the “Best Value” in the marketplace. While gross collections may be lower and the number of PPO plans a practice serves may be higher, overhead is generally lower and personnel need is also lower. Just as when the economy is good, your willingness to step outside of an urban area can prove to be a boon to purchasers as a practitioner.

General Scarcity
With the shrinking of retirement funds over the last few years, the number of practitioners transitioning to retirement has declined. Realizing that there is not enough remaining in their investments to sustain a desirable lifestyle for 20-30 years of retirement, the phenomenon of “I’ll just work one (or two or even five) more year(s)” has ruled the marketplace. As a result, there has been a persistent scarcity of strong practices on the market. While some brokers may ‘list’ a large number of practices that they insist are for sale, this simply is not the case. A good number of practices that have sold recently have been due to the seller’s disability, death or relocation.

This current scarcity could be a boon to you as a seller if properly planned. If you are one of those who have looked and said you may extend your career, particularly another one or two years, it may be worthwhile to look closely at your retirement egg and see where a sale may put you.  Since your colleagues are in a similar position and are not selling right now, opportunities have been small in number and we all know how supply and demand works.

Of course, as a purchaser, you either already know or won’t be surprised to hear there’s a lack of quality ‘inventory’ on the market. If you are set on an urban locale, you have seen that sellers have been reluctant to sell. As mentioned above, their loss in retirement fund has resulted in them holding their practices, with new plans to sell one, two, even five years further out. Because of this, options to purchase are limited and options to associate or continue associating have also continued to be limited. What does all of this mean for you, then? When a practice becomes available and has “cash flow” with ample net income and a purchase price amortized over a seven-year period, act responsibly, but quickly.

Further, it has been increasingly important to conduct proper ‘due diligence’ when purchasing a practice. The importance of really looking and asking questions cannot be understated. This is not only to find out basic information about practice history, patients and staff, but also to consider what it will take to maintain the inherent strength of the business itself. If purchasers are looking at purchasing a practice with declining or stable practice revenue, it is reasonable to seriously question a purchase price predicated on projections showing consistent three, five or ten percent growth over several years, or a deal that requires longer financing terms to be reasonable profitable (10, 15 or more years). A practice that is an historic producer, on track or slightly dipping this year, may be that safe bet for stability, if not future growth, even if only from the pent-up need to complete accepted treatment. And isn’t everybody looking for the safe bet?

In all, whether you are considering a sale now or in the near future or are looking to buy, these are just a few of many factors to consider. The market for practice sales is still strong, and financing is still readily available for purchasers with good credit history. Dental practices have been recession-proof over the long term, as dentists provide services that cover not only cosmetic needs, but health care needs, as well. Owning a practice not only provides job security, but a business that has inherent control, lifestyle and economic benefits that do not come with working for someone else.

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