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Issue #38 - 2.05.08
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Purchasing a Practice?—Buyer Beware
For those of you who are considering purchasing a practice, there are many factors to consider. Analyzing practice overhead and the ramifications on your future financial success is essential as part of your due diligence. The most problematic inherited expense can be staff expenses. Purchasing a practice, particularly one where the owner is retiring, requires even more careful due diligence.
Many practices have long standing and loyal staff. This can be a two-edged sword in your purchase decision. Along with the great staff is high overhead. If you will be on our own, your staff will be the key ingredient in the successful transfer of many patients. They’ve had established relationships with patients and can be a significant bridge in the patient transfer. However, highly compensated staff may come at high price.
Conversely, it is our experience in valuating many dental practices that those practices with staff overhead ratio in excess of 30 % are discounted appropriately to reflect the lower potential cash flow that the practice may generate in the future. However, if the practice you purchase has great upside potential the existing staff may be very instrumental, if properly directed and motivated to grow the practice. For example, if revenue increases by $100,000 in 12 to 18 months, then that 30% overhead ratio will be history!
Some advisors recommend a complete staff turnover of highly compensated employees, especially if it means retaining high overhead ratios. We have found that strategy to be risky in cases of a retiring owner. Keep the staff and measure their effectiveness over the first six to nine months of employment. If they are good team players, retain them, if not, hire new staff.
The team members that usually have the greatest impact on practice’s transfer of good will are receptionists(s) and hygienist(s). So, if you have to make critical choices be prudent on whom you replace. Beyond the hourly rate or salary of your newly inherited staff are their fringe benefits. Careful analysis is necessary to avoid any surprises. Listed below are several benefits to review and take possible corrective action.
Health Insurance
Most dental practices provide health insurance, and, with ever increasing premiums, you may have to introduce some cost cutting approaches such as transferring some of the premium burden to the staff. Sharing the financial burden is a better alternative than entirely losing this necessary benefit. Corporate America has been doing this in increasing frequency.
Vacations
This can be “killer”. Especially, small practices employing long term team members that are getting three or four weeks paid vacation. As a new employer you are not obligated to continue the same vacation package, but from a practical point of view, you have to provide some financial alternatives, otherwise that employee may leave. Offering increased compensation for trading down vacation time may work in some instances. For example a hygienist who gives back a week’s vacation in lieu of a higher pay rate will add 4 to 5 days of hygiene production to your annual revenue. So it may be a workable strategy. In today’s economy more money may be a viable alternative to more time off. Most, employees aren’t going to give up anything unless they get something equal in value or better in return.
Retirement Plan
When the practice is sold, the Seller’s retirement plan is terminated. You may have to consider providing some form such as a 401 K retirement plan ( which is a voluntary plan) coupled with the possibility that you will establish a profit sharing retirement plan in the future if the practice reaches certain financial goals. The pension plan issue may be more of a problem when inheriting older staff whose retirement is on the horizon.
Special Deals
We have also found instances, especially in smaller sized practices, where the Seller had made special “side deals” with individual employees, such as child care, travel expense, special bonuses, etc. Again, these all should be discovered in the due diligence phase.
Staff Incentive Plans
Are there any staff incentive plans in place? Ask your advisor if it makes economic sense to continue and, more importantly, are they structured to continue motivating your “new employees” to perform at high levels.
Summary
At the end of the day, after reviewing the overall personnel package, you may find that this practice purchase may be more than you can handle, and so you may pass on this particular opportunity. Knowing the facts up front end is better than having a “surprise” after you purchase the practice.
The Snyder Group provides a vast array of practice transition services including practice valuations. Please visit their website for details.
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