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Issue #6 - 11.7.06
A Fast Track to Growing
Your Practice
You are not fully booked and you’ve tried various marketing strategies and you’re still not satisfied. Perhaps you’ve met a young doctor who you feel would be a perfect “fit” for your practice, but you don’t have enough patients. A proven method to grow your practice rapidly is to acquire the patient list of a retiring doctor.
There are several ways in which patient records can be purchased. Two methods are: Production Acquisition Method or Individual Records Purchase based upon patient retention.
Production Acquisition Method
In the Production Acquisition Method, you need to set a purchase price for the patient base. Typically, the value varies between 40% to 50% of last year’s gross receipts. Since the majority of dental practices sell in the range of 60% to 65% of last year’s gross revenue, this multiple weight is fair since you are not purchasing any hard assets of the practice other than the patient list (records) as well as the goodwill of the Seller.
We recommend a down payment of 20% to 25% of the purchase price. The balance of the payments are made over a two to three-year period. Once the Seller’s patients visit the practice, then he or she is paid a percentage of Net Production for those services rendered. This is done each time that patient visits the practice over a two or three year period from the date of sale. If it is a two-year buyout, 20% to 25% of net production is used or, if you extend payments over three years, 15% to 20% is applied. Payments are typically made on a quarterly basis. Using this method requires trust between Seller and Purchaser, since the Seller is relying on the integrity of the Purchaser to ensure that appropriate credit is given to the transferred patients. A Patient List Purchase Agreement is typically prepared. In the agreement, the Seller has the right to conduct an annual audit to ensure everything is correct in calculating Net Production and payments due.
Once the purchase price has been met, payments then cease. On the other hand, if the patient transfer is not what was anticipated and the net production has been below expectations so that payments have not reached the level of the purchase price, no further obligation to pay the Seller is required after the expiration of the payment time period. Here is an example of how it works:
| CASE STUDY | ||||
|---|---|---|---|---|
| The Transition | History – Net Production x 20% | |||
| Gross Revenue | $240,000 | 2003 | $260,000 | $ 52,000 |
| Market % | 50% | 2004 | $280,000 | $ 56,000 |
| Purchase Price | $120,000 | 2005 | $290,000 | $ 12,000 |
| Term | 3 years | Total Payout | $120,000 | |
| Payout | 20% | |||
This method can be a win-win for both Seller and Buyer because it rewards the Seller for assisting the Buyer in motivating patients to visit their new doctor and reduces the risk to the Purchaser of paying for something that may not be there.
Individual Record Purchase
Another method to value patient records is to place a value on each patient record based upon the patient’s retention behavior. Most dentists would agree that a patient who visits a practice two or more times a year for their recare appointment is more valuable than the patient who visits once a year or even less frequently, given the long-term annuity of the recare fees. Under this assumption, we utilize a weighted methodology to calculate a patient record value. We consider patient activity for the last three years while conducting a complete chart audit. Each patient is then assigned a weight based on their recare visit frequency.
Below is our weighting scheme with a sample calculation of a patient’s record using an average recare fee of $120:
Example Value |
||
|---|---|---|
| Recares greater than twice per year: | 3.0 x average recare fee | $360 |
| Recares twice per year: | 2.0 x average recare fee | $240 |
| One recare within one year: | 1 x average recare fee | $120 |
| Twice in past two years: | .75 x average recare fee | $ 90 |
| Once within past two years: | .5 x average recare fee | $ 60 |
| Once in past three years: | .25 x average recare fee | $ 30 |
This method works best for a smaller patient base due to the time required for the audit and calculations. Once the value is calculated, the Seller should receive the full value of the retained patients. A down payment of 20-25% is made with the balance being paid over an 18-month period. Payment is made after the second patient visit, thus ensuring that they have accepted the new doctor. However, the amount paid for an individual patient is based upon the original value calculated established during the audit.
At the end of the day, purchasing patient records is an excellent way to jump start a practice, not only for integration of an associate, but just for growing a practice as well. Finally, the real winner is the Seller who may have had no hope to finish his career and just simply close his or her doors.
Dr. Thomas L. Snyder, is Managing Partner of The Snyder Group, LLC, a nationwide practice transition and financial management consulting firm. With over 75 years of experience in the field, The Snyder Group can provide you a full range of services relating to practice transition matters and retirement planning. They can also be reached directly at 1-800-988-5674.
If you would like additional help regarding implementing an associate into your practice, email Dr. Snyder at Drsnyder@thedentistsnetwork.net.
Interested in having Dr. Snyder speak to your dental society or study club? Click Here.