There are several ways in which dentists can grow their practices. Some of these methods range from expensive marketing campaigns to expanding services or products offered to patients. Although these methods may prove to be effective, we have found that the best and most profitable way to grow a practice is a “practice merger”.
In essence a practice merger entails the complete movement of a seller’s practice into a buyer’s facility. Even though these practice mergers can be extremely beneficial to both parties, there are certain fundamental elements that should be in place in order to maximize the benefits of a practice merger.
First, the buying doctor must have a facility that can accommodate the additional patients and/or dentist. Secondly, the purchasing dentist must have the personnel and ambition to accommodate the additional patients being acquired.
From the selling doctor’s perspective, it is best when the selling doctor is without a lease or on a short-term lease obligation. In addition, if the selling doctor’s equipment has little or no value, it is not detrimental since the acquiring doctor is not necessarily interested in the “hard assets”. (Nevertheless, even if the selling doctor’s equipment for the most part is ultimately discarded by the buyer, the buyer may be able to deduct the “allocated value” of the discarded equipment). Finally, the two practices need to be “fairly proximate” to one another since the goal is to have the selling doctor’s patients end up at the buying doctor’s office.
If the above criteria are met, a practice merger can be amazingly beneficial to both parties. From the selling doctor’s perspective, it may be the best and only way in which to sell his/her practice. For example, if the selling doctor has an older facility and equipment but still has a substantial number of loyal patients, a practice merger may be the selling doctor’s only feasible way to sell the practice. Selling the practice as a turn-key operation would most likely diminish its value and possibly make it unmarketable. From the buying doctor’s perspective, these practice mergers are self-evident from an economic standpoint. The following example will illustrate this point.
Assume that Dr. Buyer’s practice collects $500,000 with a 70% overhead (i.e. $150,000 profit). Dr. Seller’s practice collects $300,000. If Dr. Seller’s practice is successfully merged into Dr. Buyer’s practice, the end result will be Dr. Buyer’s practice collecting $800,000 annually. Most importantly, Dr. Buyer’s practice’s relative overhead will go down significantly. In essence, Dr. Buyer is simply “stacking” Dr. Seller’s practice on top of his/her existing practice and overhead structure. The net effect is that only Dr. Buyer’s variable expenses will go up (e.g. supplies, lab fees, assistant’s and hygienist’s salaries), and the remaining fixed expenses will be more efficiently utilized. In this instance, Dr. Buyer’s profit should increase from $150,000 to over $300,000.
Best of all, this additional cash flow becomes future annuity of revenue for Dr. Buyer year after year. Moreover, the additional production increases Dr. Buyer’s practice value to a greater extent than the purchase price he/she paid to the selling doctor. Naturally there are variables, however our experience reveals that most practice mergers actually see an increase in the production from the selling doctor’s practice after the merger. If it is handled properly with the expertise of a competent transition specialist, a “Practice Merger” can be a very rewarding and profitable acquisition for a dentist.
By: Kevin Shea, President of Shea Practice Transitions, P.A.
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