Andrew of Calgary Canada asks

I am a businessman looking to invest in a dental practice but I understand that the laws in some US States do not permit a non dentist to be an owner of a dental practice. I am looking at the State of Washington and this is one of those Sates. My question is under these laws are there any scenarios that permit ownership in dental practices?

Different states have different laws regarding non-doctor ownership of practices. This matter is widely discussed amongst healthcare attorneys and is usually referred to as the "corporate practice of medicine."  Many states expressly prohibit the doctor (i.e., physician, dentist, veterinarian, etc.) from entering into partnerships, employee relationships, fee splitting, or other situations with non-doctors where the practice of medicine is in any way controlled, or directed by, or fees shared with a non-doctor.  Similar prohibitions may exist for the practice of telemedicine across state lines.  Some states have explicit exemptions for hospitals.

Some attorneys tell me there is a legal way to structure corporate ownership/control to allow for non-doctor control.  Other attorneys disagree saying that the structures proposed by other attorneys are not a legal workaround.  I've only seen one summary on this topic; it can be found at http://www.nhpco.org/files/public/palliativecare/corporate-practice-of-medicine-50-state-summary.pdf. If someone knows of another summary please let me know and I'll add the link here.

Even if you and your attorney find a way for a non-doctor to own the practice, another issue that comes into play is financing the practice acquisition.  Virtually all of the practice acquisition/startup loan programs are available only to buyers who are licensed to practice medicine in the state in which the practice is located.  This means a non-doctor buyer will need to have an independent source of money or be able to secure financing on something other than the practice itself.

Dr. Jeff of Sunrise FL asks

I am a manager of a multi practice group in South Florida.  We are considering the purchase of a practice where the physician died suddenly.  Do you have any statistics regarding the ability to maintain the patient base in this type of situation?  The practice has been without a physician for three weeks now.

Obviously, a solo practice is affected the most by a provider leaving.  The more providers in the practice the less the impact of any single provider leaving the practice, for any reason.

In the case where an owner doctor of a solo practice dies suddenly, the practice value will usually drop 40%-60% overnight when trying to sell on the open market.  After a month of being closed practice drops again to 20%-30% of pre-death value (or tangible asset value whichever is higher). And then drops to asset value (i.e., equipment, furniture, leasehold improvements) thereafter.  Though, on the bright side, after 3 weeks only about 6% of the patient base has been affected directly.  How fast word spreads and its impact on the practice depends a lot on the size of the community and the level of competition in the area.  In a small rural community, 100% of the town probably knew that "Old Doc Smith" passed away within 48 hours.  In a major metropolitan area, patients might not find out until they come in for the next appointment.

One option to consider in purchasing a distressed practice where you are unsure of the patient retention risk  is to structure the purchase using an "earn out."  An earn out is a term used to describe a formula being used to determine the purchase price deriving from pre-determined business levels.  Usually, it is based on gross revenue (or number of returning patients) for a specific time period post sale.  For example, instead of paying 100% for the practice, an earn out might be structured where you pay 50%-75% of total value up front.  And then over the next 12-18 months, the buyer will pay the seller a earn out bonus of $xxxK every 3 or 6 or 12 months if the practice meets or surpasses some predetermined results (the earn out comprising the remaining 25%-50% of the purchase price). 

An earn out allows both buyer and seller to share the risk.  If the practice does poorly and patients don't come back then the buyer pays less for the practice (perhaps only asset value).  If the practice does well (as the seller usually promises) then the seller will end up getting more money than they would have been able to get for an all cash deal. 

Dr. Garcia of San Antonio TX asks

I'm an associate at the practice where I work.  The owner is thinking of selling?  How can I know if he is asking too much money?

Before spending $200K - $500K - $1MM to buy a practice most buyers want us to do a thorough analysis of practice characteristics, income, expenses, and render an opinion of value in a detailed valuation report.  Though some buyers are just looking for a little advice--not a formal report, and want to bounce some specific questions off an experienced broker/appraiser.  For these buyers, sometimes just hiring us at an hourly consulting rate is all they need/want.

We also find that other business brokers will hire us for 1/2 hour - 1 hour of consulting time to help them properly price a practice they are considering listing.

Dr. Jasik of Seattle WA asks

I still am paying on my student loans.  Can I buy a practice?

What is more important is how much money the practice has been making in recent years, and if that practice cash flow will support your current life style and monthly debt payments.  If you have

• been out of school practicing for a minimum of 1-2 years
• half way decent credit score
• 0% - 15% of practice purchase price for down payment

You can usually buy a practice.  Parameters vary depending on what type of practice (i.e., medical, dental, chiropractic, veterinary, etc.) you want to buy.  But don't let having student loans stop you from buying.

Dr. Ronald of Provo UT asks

I have heard that there is very little value to the practice other than the Asset value since there is a high likely hood that patients will not stay with the practice when their doctor leaves.  Is this true?

How much goodwill value, and if there is sellable goodwill value, will vary practice to practice.  How much of the goodwill is transferable to a new owner/practitioner also varies practice to practice.  Though most primary care practices tend to have more transferable enterprise goodwill when compared with a specialty practice.  As to how many patients will stay with the practice post sale depends on several factors: number of providers, competition, services provided, support staff, location, buyer-seller compatibility, etc.  In general, most patients will stay with a primary care practice post sale and give the new buyer a chance.  If after the first visit with the new owner doctor they like the doctor they will probably stay.  Patients are like water or electricity...they follow the path of least resistance. The next time the kids are sick with the flu they will call the same office phone number on their refrigerator or phonebook, talk to the same receptionist, the same practice that already has their medical record and history on file, that already has their insurance information on file.

Dr. M of Denver, CO asks

Is this a good time to sell my dental practice?

From a financial standpoint, this may be an excellent time to sell your practice.  There are fewer dental practices for sale then there are prospective buyers.  That makes this a "sellers" market.  Likewise for a new buyer who qualifies in this market, the interest rates are low and lenders with professional funding divisions are eager to lend.  Practice values are still holding steady, but with the downturn in the economy, that may shift as well.  Future lending environments, loss of comparables, and risk increase could mean lower values over the next couple of years. Also, the capital gains taxation is going to change.  It may be that a seller in this market will avoid the higher rates, if selling now.

Dr. W of Dallas TX asks

How long does it take to sell a practice?  Can it be done quickly?

In general, most full time practices with sufficient income/profitability in a major metropolitan area will sell in about 6-12 months.   Part time practices, practice with low gross incomes, practices located in rural areas may take 1-3 years to find a buyer.

Dr. X of Denver CO asks

Does the sale price include A/R?

Most of the time the practice sale price does not include accounts receivable.   We find about 60% of time buyers will buy a practice without A/R, and will get a "working capital loan" to cover operating costs in the beginning of ownership.  This is because of a very practical reason--lenders don't like to lend against A/R.  Since most buyers can't get a loan to buy the A/R they don't buy it.  The seller retains A/R.  The buyer may continue to collect the seller's A/R and deposit it into the seller's account post-sale.  Often the buyer will charge a 5%-15% administration fee on Seller's A/R collected post sale.

Dr. W of Dallas TX asks

I own the building, but want to lease space and want to sell the practice, furniture, and fixtures.  What about A/R?

A minority of buyers won’t consider purchase unless they can own the real estate.  Most are okay with renting.  The main issue with renting is that the rent amount charged to the new owner needs to be an amount that the practice can afford.  As part of our analysis we will tell you the maximum amount of rent we feel the practice can reasonably afford.   Most solo practices sell as an asset sale that included goodwill, furniture, fixtures, and everything else.  A/R is typically not purchased and can be handled in a number of different ways.

Dr. Ronald of Provo UT asks

What are the Pro's and Con's of using the Discounted Cash Flow Method to evaluate a medical practice of a solo practitioner in family practice?

If practice revenue is already stable or reliable projections are not available DCF is probably not be the best method to use in determining value.  Additionally, if the practice is very asset heavy relative to income then other valuation approaches or methods may be better.  Or if one is trying to determine liquidation value then other methods will probably render a more accurate value.

Be wary of any appraiser who say that they "always use" DCF in determining value or they always project out 5 years.  No one method is best in all situations.  If there was one best method then the other numerous valuation methods would not have been developed and taught.

Dr. Vicky of (Confidential) FL asks

I run a very efficient practice and am looking to sell.  I have no clue though what the market value is since most of the income for the practice comes from a capitated plan.  I have not been able to reap most of the benefits since any surplus payments are several months behind. Mostly they will come in Jan 2010 due to our MRA.  I have several people approaching me, and we want to sell, but we don't want to lose what will come to us next year.  How do we calculate?

To calculate value of the surplus payments would be matter of looking at things such as the collection ratio for that payer or the MRA contract to see how payments are calculated.  Then adjust for time value of money (difference between getting the money today vs. 6 months from now).  Pull out your old college text book or use one of the many free "Present Value Calculator" tools available on the Internet to calculate the present value.  If the MRA is financially sound and there is little to no risk that the surplus payments would not be paid, then you can just calculate a present value using what would be considered a risk-free rate of return.  In this case I'd probably peg the discount rate to a 3 or 6 month U.S. Treasury bill.  If there is some question about getting the full payment in 6 months then you might want to use a higher discount rate to adjust for the increased risk of not getting paid.  Maybe a discount rate equal to the 20 year T-bill, or some other rate as appropriate.

Regarding your comment that you "don't want to lose what will come to us next year" that is simply a matter of structuring the terms of the transaction.  One option is to build the value of the surplus payments into the deal and the buyer pays you now for the payments to come in January (see present value calculation above).  Another option is to have the buyer segregate out the portion of the January surplus payments and send that portion to you when they receive the payment.  If the practice is sold as an asset sale then often the buyer has to renegotiate all new contracts with payers.  In that case, the buyer would have a separate agreement and the MRA would pay each of you separately (you for your earned portion, and the buyer as a separate practice from a MRA contractual viewpoint)...so you may not need to do anything to get paid.  Practices are often purchased without purchasing the A/R.

Another option is to have the entire practice valued by an experienced practice appraiser.  Buyers and sellers frequently use a disinterested 3rd party to determine the fair market value of a practice.  Sometimes one side will engage an appraiser, sometimes both buyer/seller will split the cost.  If you just wanted a third part to value one component (such as A/R or MRA surplus payments), many appraisers will do that on an hourly bill rate.  So that might only cost 15 or 20 minutes of time.

Dr. Miller of Seal Beach, CA asks

What do dental practices sell for?

General dentistry practices typically sell for between 50%-80% of annual gross collections, with the national average being 62.7%.  As you can see from the below chart, there is quite a spread of sale price ranges.  This is due to various factors the influence practice value such as profitability, location, equipment, facility, number hours worked by the owner doctor, etc.

Dr. Mahmood of NY, NY asks

Is Discounted Cash Flow the proper way to value a practice? This is what my CPA used to value my practice.

DCF, like all valuation methods, has advantages and disadvantages--and is NOT APPLICABLE in all cases.  So if you have someone telling you that they "always use DCF" to value a practice you should suspect the valuation background and credentials of the appraiser.  Application of DCF should be balanced by considering and applying other valuation methods from all three valuation approached (Asset, Market, Income).

One of the big problems in applying any method under the Income Approach is to determine the correct level of a future sustainable benefits stream (i.e., income/expenses).  Like most valuation methods there is a lot of room for subjectivity by the appraiser that can dramatically increase/decrease practice value.  So ultimately you are relying on the judgment and experience of the appraiser to make the proper selections of different variables to arrive a value conclusion.

Dr. T of Lakewood CO asks

Does a broker really help in the process of selling my business?

Dr. W of Dallas TX asks

What do you charge to sell a practice?

Our normal brokerage fee is 10% of the final sales price which includes all marketing and advertising, preparation of an extremely comprehensive buyer’s information package, screening buyers, negotiation, standard documents preparation, communications, advice, coordination with attorneys/accountants and lenders, and closing.

Our brokerage fee may vary depending on the specifics of the practice opportunity, risk/probability of selling, and minimum commission floor.  We also occasionally work an hourly "pay as you go" fee instead of a commission.

Dr. Jasik of Seattle WA asks

I still am paying on my student loans.  Can I buy a practice?

What is more important is how much money the practice has been making in recent years, and if that practice cash flow will support your current life style and monthly debt payments.  If you have

• been out of school practicing for a minimum of 1-2 years
• half way decent credit score
• 0% - 15% of practice purchase price for down payment

You can usually buy a practice.  Parameters vary depending on what type of practice (i.e., medical, dental, chiropractic, veterinary, etc.) you want to buy.  But don't let having student loans stop you from buying.

Dr. Pratt of Denver CO asks

How much should I be spending for rent for my companion animal veterinary practice?

The facility expense range for a small animal practice typically ranges between about 5%-9% of gross income.  It doesn't really matter whether this expense is for rent or for a mortgage payment.  Once facility expense exceeds 9%-10% of gross then it becomes increasingly difficult for a practice to achieve sustainable profits.

If you are buying a practice and the rent is high then carefully consider if you can realistically expect to increase income enough to bring rent expense back down to a more normal range. 

If rent expense is lower than 5%, then consider yourself lucky.  I often see rent expenses down in the 2%-3%-4% range in the Texas market.  I'll see it higher in resort areas--but then a practice should be increasing its fees if a high cost of living/rent has the facility expense too high.

Dr. Doctor of Anytown CO asks

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