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Practice growth-what are your options?

May 19, 2016
You're a dentist who has started or purchased a dental practice. You're ready for practice growth. Your options include acquiring a second dental practice location, growing organically, or acquiring dental patient records.

Maria G. Melone, CPA, CVA

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You've started or purchased a practice. You have a few years under your belt and you're feeling comfortable with your clinical skills, staff, and ability to manage your business. Now it's time to focus on growth. Your options include acquiring a second location, growing organically, or acquiring patient records. The decision is never easy, but here are some thoughts to guide you.

Acquiring a second location

The path to acquiring a second location, while potentially very rewarding, can be filled with any number of challenges. The first step in the process is to determine if you should buy an existing practice or build from the beginning. Both come with pros and cons, the most significant of which is cash flow. Purchasing an existing practice provides you with immediate cash flow to cover your expenses and service your debt payments. Building from scratch, on the other hand, is a drain on cash as you borrow the money up front to build an office and cover your initial expenses without any patient flow and associated revenue stream.

In either case, having a second location can be a huge drain on your time as the owner of the business. You will need to hire additional staff, train them in your systems and processes, and likely split your clinical time between the two locations. If you can manage the strain on your time and eventually grow both locations to be able to hire one or two associates, you can be very successful financially in this scenario.

Growing organically

Growing organically is likely more profitable as you will be increasing your revenue stream while limiting the increase in your costs. Growing organically may be accomplished through expanding your service offerings or increasing hours (for example, by adding Saturday, early morning, or evening appointments). Choosing this path is more profitable as you will have already covered your fixed costs, and you will have limited variable costs associated with the increase in revenue.

Acquiring patient records

The last option is the acquisition of another practice's patient records. This option also has the potential to be rewarding from a top-line revenue perspective, as well as a bottom-line profitability perspective, but it also comes with risks and challenges. The most critical element is the determination of the value of an individual patient record. I've seen any number of methods used, and the range of value I've seen is from $25 to $150 per record or a discounted percentage of historical collections.

I have yet to see a sound method that supports the value conclusion, whether a per-record figure or the percentage of historical collections is used. If you choose the per-record method, you then need to consider what records you will be purchasing:

• All records in possession of the seller?

• Records of patients of a certain age range?

• Active patient records (how is this defined)?

In any of these scenarios, the buyer makes a payment up front to the seller, therefore taking all the risk, because there is no guarantee that patients will actually transfer their care. Typically, a seller will send a letter to his or her patients indicating that he or she is entering retirement. The seller then shares the deliberative, thoughtful decision he or she made to transfer his or her patients' care to the buyer. The letters should be kind and warm and strongly encourage the patients to seek care with the buyer. But ultimately, there is no guarantee that patients will seek to be treated by the buyer. Patients always have the right to choose where to seek care, and there are any number of reasons they may decide not to be treated by the buyer.

How do buyers protect themselves in this situation? The ideal scenario is to pay only for those patients who actually present to the buyer. The problem with this approach is that every state has anti-kickback statutes that prohibit the direct payment for patient referrals. In addition, if Medicaid or Medicare patients are involved, the Stark Laws also prohibit direct payment for patient referrals.

One alternative that protects the buyer and might also provide a financially rewarding transition for the seller is the blended approach. The economics involved will largely be determined by the actual size of the revenue stream at the time of transition. For discussion purposes, we will assume the seller has a practice that historically generates $450,000 in annual collections. If this revenue stream transfers to the buyer, it comes over at a higher profit margin as there are no associated fixed costs, and therefore it has more value to the buyer. In this scenario, I would recommend an up-front payment to the seller of $75,000. The seller would also enter into a one-year employment agreement with the buyer and then see patients at the buyer's location, for which the seller would be paid 75% of all collections generated from the patients of record. This structure almost ensures that patients will seek care at the buyer's practice. They are eased into the new practice by having the familiar face of their doctor continuing to provide their care, and the buyer is compensating the seller only for those patients who transfer.

From the seller's perspective, this scenario results in a higher purchase price and a gradual transition from patient care. In a traditional practice transition, the practice in this example would likely sell for $300,000 to $325,000. In the records sale that I outlined, the seller would receive a total of $412,500, provided all the patients transitioned.

The last item to consider when looking at the option of acquiring patient records is the distance of the seller's practice from the buyer's practice. The ideal radius depends heavily on the demographics of the market, in addition to whether it's located in an urban, rural, or suburban area. The main consideration is the drive time for patients. Try not to increase it significantly when moving them to the new location.

If you have excess capacity in your practice or just want to increase your revenue stream, acquiring the records of a retiring dentist is something you should consider. Using an appropriate deal structure will ensure an economically rewarding transition for all parties involved.

Maria G. Melone, CPA, CVA, began her accounting career at KPMG. She then spent 10 years working for a large dental support organization handling all aspects of the buying side of dental transactions, ranging in size from $50,000 to $90,000,000. She has helped facilitate hundreds of transactions to private buyers, dental group practices, and private equity firms, and has valued even more. She is a founder of MORR Dental Solutions LLC, and dentaldealmate.com.

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