Transitions Roundtable

Jan. 16, 2017
"I'd like to acquire charts from a local practice. What are the key numbers I should look at to see if I should go through with this?" Two experts address this question.

Question:

I'd like to acquire charts from a local practice. I don't plan to bring over the dentist or the staff, and I imagine that will have a negative impact on how many patients come over. What are the key numbers I should look at to see if I should go through with this?

Maria Melone, CPA, CVA

I have written about absorbing a practice into an existing location and merging two practices together. In each case, the challenge lies in transferring the patients to the new location. The traditional method of paying a certain figure per chart puts the buyer at significant risk of paying for something he or she will not receive, and for this reason I am not in favor of simple record purchases. The ideal scenario is to pay only for those patients who actually seek care in the new facility. Unfortunately, every state has antikickback statutes that prohibit direct payment for a patient referral. If Medicaid or Medicare patients are involved, Stark Law also prohibits direct payment for patient referrals.

If you're interested in acquiring records, I believe the most successful transitions result when the selling doctor works in the new practice for six to 12 months. The selling doctor enters into an employment agreement that pays him or her over market, say 75% of collections generated from the patients of record, during his or her employment term. This structure almost ensures patients will seek care at the buyer's practice. They will be eased into the new practice by having their familiar doctor continuing to provide care, and the buyer compensates the seller for only those patients who transfer.

The alternative approach to acquiring the charts is to develop a robust marketing and advertising campaign. Often, when a practice owner sells his or her charts, it's because the practice does not have significant value, and the person just wants to "get something" for his or her practice. In this case, if you're a young practitioner with a modern facility and a friendly and caring staff, it's likely that you can attract that patient base with a direct marketing campaign. So rather than pay for charts, invest in marketing and advertising!

Brandon Collier, JD, LLM

Merging a second office into yours may be one of the best business decisions you make. With many of your overhead expenses already in place, you will operate Dr. Seller's practice more profitably than he or she could. Plus, you will eliminate a competing dentist from moving in and taking over that office.

This is a "goodwill only" sale, and as you indicate, you won't inherit all of the patients. Even though Dr. Seller will send patients a letter of introduction on your behalf, and he or she might spend time in your office making personal introductions, the location change will hurt. That needs to factor into the purchase price.

If, as a general principle, goodwill value in a traditional sale is 125% to 150% of the doctor's two-year average annual profitability (including all of the doctor's discretionary business and personal expenses), then we would lower that to 100%. That should be a reasonable price under most circumstances, and Dr. Seller should be happy to be paid the entire amount up front.

Another option is for you to pay only for the patients who transfer. This might be 20% of the revenue generated from the seller's patients. This will be on the theory that if profits equal roughly 40% of collections, then half will go to the doctor doing the work (buyer) and the other half will go to the doctor who supplied the patients (seller). There needs to be a time limit to this, and 18 to 24 months is reasonable.

One caveat is that some states might view this as impermissible fee splitting. There are ways to deal with this. One way is to determine a certain dollar amount (e.g., 20% of collections) to be paid to Dr. Seller at the end of the 18- to 24-month period based on how many patients move to Dr. Buyer. This would be structured as a delayed goodwill sale with a price to be determined at the closing. Another way is to determine an overall price to be paid and have a portion deferred until the end of the 18 to 24 months, at which point it could be adjusted downward if the number of patients or anticipated revenue is below the initial estimated amount.

Maria G. Melone, CPA, CVA, began her accounting career at KPMG. She then spent 10 years working for one of the largest dental support organizations, handling all aspects of the buying side of dental transactions. She has helped facilitate hundreds of transactions and has valued even more. She is a founder of MORR Dental Solutions LLC and dentaldealmate.com.

Brandon S. Collier, JD, LLM, provides tax and business planning services to the dental profession through Collier & Associates Inc., a law and consulting firm representing doctors in all phases of practice transitions and appraisals, retirement plan services, and tax-deductible CE seminars. He is the editor of the biweekly Collier & Associates Doctors' Newsletter, which has provided tens of thousands of doctors with timely and practical wealth-building advice for 45 years. For more information, visit CollierAdvisors.com or call (216) 765-1199.

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