Acquiring a dental practice is a major financial and personal undertaking. It’s important to be prepared before you take the plunge. Here are three important steps to prepare for dental practice acquisition: understanding your needs, surrounding yourself with experts, and preparing yourself financially.
1. Understand your needs
Before jumping into practice ownership headfirst, make sure you know your goals and needs. Here are some questions to review as you start pursuing ownership:
- What are your short- and long-term personal, financial and professional goals?
- What do you hope to achieve in your career by the time you retire?
- Do you want additional education to enhance your clinical ability and expand your procedure mix?
- Where do you want to live? Is your desired area oversaturated with dental practices?
- What are your secondary options?
- How large of a team do you want to manage?
- Do you want to be a solo practitioner or work with a team of dentists?
- Do you hope to expand into a multi-location practice?
2. Surround yourself with dental experts
As you enter into the practice ownership process, set yourself up for success by building a team to help you. Especially as a first-time owner, you likely don’t have the experience needed to navigate more complex areas like financial review, negotiations and operations. A group of dental industry-specific experts can lead you through these aspects of the process.
Your core team should consist of:
A practice lender and banking partner to provide financing and guidance throughout the acquisition process.
An attorney to help negotiate the terms of your acquisition and review your lease and any other contracts.
An accountant to help prepare you from a tax perspective and help assess the financial health of the practice. They may also support you with bookkeeping post-transition.
An insurance agent to help you set up all business insurance needed for your practice to ensure it is protected. They also may support any personal insurance needed such as life and disability.
Depending on your needs, consider adding:
- Commercial real estate broker (if facility lease/purchase negotiation are needed)
- Consultants (practice management, credentialing, etc.)
- Local practitioner/mentor
- Equipment and supplies vendor
- IT provider
Find tips for finding a practice lender.
If you need help finding the right team, our Build Your Team program can connect you to our network of healthcare-specific experts to support you throughout the acquisition process. Get connected today.
3. Prepare yourself financially
Acquiring a dental practice is expensive. These transactions can involve hundreds of thousands of dollars or more. Review your finances to ensure your personal financial foundation is set.
Knowing your financial needs can guide you to the size of practice you should look for. More personal expenses mean you will need a more profitable practice to maintain your lifestyle. Review your personal financial statement, debt-to-income ratio, credit score, needed net income, and liquidity.
Personal financial statement
A personal financial statement will give you a snapshot of your wealth at a specific moment in time. This metric takes assets (what you own) and subtracts your liabilities (what you owe) to find your net worth.
Assets – liabilities = net worth
Assets:
- Liquid assets – assets that can easily be converted into cash in a short amount of time (cash, money market instruments, and marketable securities)
- Note: Rounding is okay
- Large assets (houses, cars, boats)
- Investments (bonds, stocks, CDs, mutual funds, and real estate)
- Retirement
Liabilities:
- Debts owed (cars, homes, credit card balance – if not paid off in full, student loans)
- Other debts
Debt-to-income ratio
Debt-to-income ratio compares how much you owe to how much you earn each month. Lenders use this metric to evaluate your lending eligibility.
Monthly expenses / pre-tax income = debt-to-income ratio
Credit score
Credit score is one of lenders’ main considerations when evaluating borrowers. Those with higher credit scores often qualify for lower interest rates and more favorable terms. If your credit score is lower, taking the time to improve it could be worth it.
Excellent: 800 to 850
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 300 to 579
Find tips for raising your credit score here.
Needed net income
Calculate the personal expenses you will need to cover with the practice’s cash flow, including:
- Family/living expenses
- Personal residence(s)
- Car payments
- Student loans
- All personal debt
The more personal monthly debt obligations, the greater the needed profit.
Liquidity
Liquidity is important to practice ownership because it protects from the risk that the practice doesn’t perform well right away. Especially when building a patient base and streamlining productivity and profitability, you have the means to use personal funds to maintain practice cash flow. While most practice lenders finance the working capital or liquidity needs of a practice, having cash to put to work if needed is recommended.
Additionally, it’s always wise to have 3-6 months of personal living expenses saved for you and your family as a cushion should any unexpected expenses arise. If you only have enough savings to cover a month or two of expenses, you may put yourself and your practice in a tough position.
Find tips for maximizing liquidity here.
Acquiring a dental practice
Acquiring a dental practice is a significant undertaking that requires careful preparation. By understanding your needs, surrounding yourself with experts, and preparing yourself financially, you can increase your chances of a successful transition into practice ownership.
We created a full guide to walk you through each step of the dental acquisition process from preparing for ownership to deal close and beyond. Access the free guide here.
