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Pre-payment Predicament (for Younger Practitioners)

The value of a practice is determined, in part, by calculating the available income for a purchaser after the practice expenses are considered. Usually, practice financial statements and tax returns are adequate to break down the financial condition of the business, providing a purchaser with a good representation of practice income and expenses. By examining the day sheets, deposit slips and bank statements, a purchaser should
find a direct correlation between the services provided to patients and the actual practice income.

New Patient Payment Vehicles Effect Transitions
Recently, though, we have seen some new trends in practices, propagated by the use of healthcare-specific credit cards and financing plans for dental treatment. These credit vehicles have been welcomed by practices, since once the patient is approved, the entire estimated treatment cost is advanced and paid immediately to the practice (less a pre-arranged percentage withheld by the bank).

So what’s the problem? When a dentist deposits the money received as prepayment for future patient services into the practice’s general bank account, that money becomes comingled with money deposited for services already performed.

While there is nothing illegal or wrong with this practice, if the money has gone into the general account, the due diligence review may not discover the credits. Without full disclosure by the seller, the purchaser may be walking into a practice where many of the returning patients expect their continuing treatment will be provided at no additional cost. Patients will expect that their money has been properly transferred to the new practice owner.

Outstanding Credit as Important as Receivables
When evaluating a practice for purchase, it’s important to take a look at the receivables report for not only the amount due, but how much is out as a credit. From there, within a transition, the credits should then either be paid back to the patient from the seller just before closing or transferred to the purchaser in conjunction with the sale. Generally speaking, the latter is preferable, to maintain the continuity of the practice with the patient.

After purchasing, the purchaser may consider using a separate bank account solely for prepayments, much as escrow accounts are utilized by brokers and attorneys. As treatment is provided, money can then be transferred to the operating account. This separation allows the owner to more accurately track the practice collections and profitability. Further, this separation protects the practice in the event that a patient decides not to complete treatment and requests

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