Drilling down: Tips for buying a dental practice

This article, written by attorney Jason Gregoire, was originally published by the NH Union Leader and seacoastonline.com and can be found here.

The COVID-19 pandemic has fueled an unprecedented level of dental practice transaction activity. Corporate and private buyers have continued purchasing dental practices in record numbers given the speed with which most practices rebounded after the brief 2020 shutdown. If you are looking to purchase a dental practice in the near term, here are some tips to help you prepare for the acquisition process.

Talk to Banks Early.

Unless you find the rare seller who is willing to finance the transaction themselves (e.g., accept a promissory note), you will need to find a bank to finance your purchase. Dental-specific lenders know how to underwrite these transactions and can usually lend most, if not all, of the purchase price plus necessary working capital. Network and build relationships with bankers early at dental school functions, study clubs, trade events and through shared connections so they can learn more about your situation and potentially prequalify so you can move quickly when you identify an acquisition target.  Many of our buyer clients developed relationships with lenders in dental school that they have maintained through their associateships.

Engage a Team of Experienced Industry Advisors.

It is extremely important to assemble a team of trusted and experienced dental advisors to guide you through the acquisition process. At a minimum, you should retain an accountant and an attorney familiar with dental practice transitions. Other potential advisors include a dental-specific due diligence consultant and an insurance broker. These advisors will counsel you on due diligence inquiries, common deal points, deal structuring options, tax implications, insurance options, and more. Find your team early; do not wait until you receive the draft purchase agreement to start your search.

Be Flexible.

Buyers often have a long list of “must haves” for their ideal dental practice and pass on good opportunities while in pursuit of the “perfect” practice. Be flexible and keep an open mind as you evaluate practices. Although office space might be tired or equipment might outdated, many practices generate incredible revenue streams for their owners and can be updated in the future. Prioritize your wish list and be nimble when you enter the market.

Do Your Homework.

Many dental buyers accept the word of the seller or broker when assessing whether a potential practice is a good buy. This purchase is likely one of the biggest you will ever make in your life. You would not buy a house without conducting an inspection so do not purchase a practice without doing your financial, clinical, and legal due diligence. Work with your attorney, CPA, and due diligence advisor to examine the target practice to ensure there are no questions, defects, problems, or concerns. Do you do the same types of dental procedures as the seller? Does the seller have litigation or investigations pending against them? Has the active patient count of the practice nosedived in the last year or is it being artificially inflated in practice reports? Ask questions and demand answers. Issues that are discovered during due diligence may be resolved through risk-mitigation provisions in the purchase agreement, but you need to know about these issues to decide whether to proceed and, if so, how to protect yourself.

Make Sure the Timelines Align.

There are many timelines associated with buying a dental practice. How quickly do the parties want to close? How long does the seller want to work at the practice, if at all, following closing? Make sure your desired timelines align with the seller’s desired timelines. For example, if the seller wants to stay on as an employed associate for three years after closing but you want them gone in three months, this may not be the right opportunity.  Similarly, if your associate contract requires you to give your existing employer 90 days’ notice of intent to terminate but the seller must close in 30 days, the deal may be plagued from the start.

The list above is not exclusive but is a good starting point. Find your team of advisors, outline your priorities, and get planning. By following these steps, you will be better prepared for what is ahead and position yourself for a successful transaction.