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    Buying a dental practice? Avoid these five pitfalls to ensure a successful purchase and transition.
     
    Buying a Dental Practice?
    by Matthew Christie

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    I’ve identified five common pitfalls that caused problems and unnecessary stress. Avoiding them can ease the way for prospective practice owners.

    Pitfall No. 1: Credit Report Surprises

    Before you apply for a loan, it’s imperative to understand what your credit file says about you. Clients often say they have “A+” credit without knowing what that actually means. There is more to your credit score than on-time payment history, such as length of credit history, use of existing credit and how often you apply for credit. Historically, most dentists have extremely good credit, with many approaching 800. FICO scores may range from 300 to 850. The national average for consumers was 699 as of April 20161.

    Dentists move frequently in their young adult lives. Through all of the moves, you may miss a small bill, and it could turn into a delinquency. Small creditors may not be as diligent at collections as a credit card or bank, and may simply put a charge off on the credit report. Many times, the doctor is not aware this negative mark exists on his or her credit bureau report until it is uncovered during the underwriting process. However, a debt like this can usually be resolved by paying the outstanding amount prior to the bank funding your loan.

    To avoid situations like this, I recommend you do two things before you purchase a practice. First, take some time to review myfico.com, where you can learn more about how scores are derived. Having a general understanding will not only make you a better consumer, it may benefit you financially. On a side note, many insurers review credit reports and use credit scores as part of their algorithm to determine your premiums.

    Next, you should obtain a free copy of the three major credit reports, which you can do at annualcreditreport.com. As a consumer, you are entitled to reports from all three major credit bureaus (Equifax, Experian and Transunion) once a year. Each reporting agency charges a nominal fee to obtain your FICO score. It’s also worth noting this is considered a “soft” credit inquiry and doesn’t result in a reduction of your score.

    Pitfall No. 2: Inadequate Cash Reserves

    Today, most banks will finance 100% of the money you need to purchase a practice. The money banks will lend includes work­ing capital, which should be an adequate amount to cover the practice’s day-to-day operations. Often, first-time practice own­ers run into trouble when there are additional expenses above and beyond standard operating costs.

    Inevitably, something happens when you least expect it – and when it is most inconvenient. Your car will break down, your cat will need to go to the vet, an air conditioning unit will break or the roof will start to leak. None of these circum­stances are covered by the bank’s working capital funds, so it’s important to have a “rainy-day” fund for life’s unexpected events. Having personal cash reserves will prevent you from relying on credit cards.

    Pitfall No. 3: Unknown Production Abilities

    The size of the practice you purchase should be a reflection of your personal ability to produce and manage. Unfortunately, some dentists purchase practices that don’t match their abili­ties; the practice may be too large or too small, which leads to an uncomfortable situation for the new owner. I have probably seen more incidents where doctors wished they’d purchased a larger practice rather than a smaller one that they hoped to grow over time. Understanding your production will put you in a much better position.

    My recommendation is to track your production abilities as you work as an associate. The software some offices use can do this for you, while others require you to manually keep track of the amount and type of dentistry you are doing. Ask­ing your employer for a copy of your production reports may alert them to your intention of owning your own practice, so use discretion.

    Pitfall No. 4: Not Having Industry-Specific Representatives

    Too many dentists try to cut costs by having a family friend or relative work on the transaction—with poor results. I recommend hiring professionals who truly understand the business of dentistry, such as a dental-specific Certified Public Accountant and an attorney who specializes in the dental industry.

    Your dental CPA will understand if your costs are in line with industry averages and where you can cut expenses. A specialist attorney will understand the clauses in the purchase contract and lease. Items pertaining to retreatment/rework, work in progress, patient records and staff transfer should only be drafted by someone with expertise in your vocation.

    Case in point: I had a dentist who had a family friend and licensed attorney form the dentist’s LLC. Unfortunately, LLCs were not permissible in the dentist’s state. This caused undue headaches, as the dentist needed to re-file as an S-Corp. While this may not seem like a big deal, it did cost the dentist valuable time and money. This is just one example of where a dedicated team of experts may help guide you through these important issues.

    Pitfall No. 5: Not Having a Consultant or Mentor After the Sale

    So you have closed on a practice. Now what? You’ll likely have a slew of questions once the transition is completed, such as:

    • How will you transition the staff?
    • Do you have a plan for your patients to recognize you as the new owner?
    • Does the practice run as efficiently as it could?
    • How is the hygiene recall program working?
    • Is your fee schedule aligned properly?
    • How do you get all of these questions answered and run a practice?

    Leveraging a professional consultant can help alleviate stress and provide beneficial feedback designed to maximize results. Having a sounding board will go a long way toward—and could potentially ensure sustained success.

    There are so many moving parts to consider and things that can feel like they’re outside of your control when you decide you want to be a practice owner. These are five simple things you can control, and being mindful of them should help eliminate snags along the way. These suggestions also will help manage your personal stress levels before and after you close on your practice loan. A better overall beginning experi­ence can put you on a solid path to becoming a successful practice owner.

    Bank of America Practice Solutions is a division of Bank of America Corporation. Bank of America is a registered trademark of Bank of America Corporation.

    Note: Bank of America, N.A. provides informational articles for your discussion or review only and is not responsible for the information and materials third parties present. Please consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

    About the Author

    Matthew Christie is a Vice President and the Regional Sales Manager for Bank of America’s Practice Solutions division in Southern California. He is responsible for generating business in the medical professional field with a specific concentra­tion in dentistry.

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    Buying a Dental Practice?
    by Matthew Christie

    I’ve identified five common pitfalls that caused problems and unnecessary stress. Avoiding them can ease the way for prospective practice owners.

    Pitfall No. 1: Credit Report Surprises

    Before you apply for a loan, it’s imperative to understand what your credit file says about you. Clients often say they have “A+” credit without knowing what that actually means. There is more to your credit score than on-time payment history, such as length of credit history, use of existing credit and how often you apply for credit. Historically, most dentists have extremely good credit, with many approaching 800. FICO scores may range from 300 to 850. The national average for consumers was 699 as of April 20161.

    Dentists move frequently in their young adult lives. Through all of the moves, you may miss a small bill, and it could turn into a delinquency. Small creditors may not be as diligent at collections as a credit card or bank, and may simply put a charge off on the credit report. Many times, the doctor is not aware this negative mark exists on his or her credit bureau report until it is uncovered during the underwriting process. However, a debt like this can usually be resolved by paying the outstanding amount prior to the bank funding your loan.

    To avoid situations like this, I recommend you do two things before you purchase a practice. First, take some time to review myfico.com, where you can learn more about how scores are derived. Having a general understanding will not only make you a better consumer, it may benefit you financially. On a side note, many insurers review credit reports and use credit scores as part of their algorithm to determine your premiums.

    Next, you should obtain a free copy of the three major credit reports, which you can do at annualcreditreport.com. As a consumer, you are entitled to reports from all three major credit bureaus (Equifax, Experian and Transunion) once a year. Each reporting agency charges a nominal fee to obtain your FICO score. It’s also worth noting this is considered a “soft” credit inquiry and doesn’t result in a reduction of your score.

    Pitfall No. 2: Inadequate Cash Reserves

    Today, most banks will finance 100% of the money you need to purchase a practice. The money banks will lend includes work­ing capital, which should be an adequate amount to cover the practice’s day-to-day operations. Often, first-time practice own­ers run into trouble when there are additional expenses above and beyond standard operating costs.

    Inevitably, something happens when you least expect it – and when it is most inconvenient. Your car will break down, your cat will need to go to the vet, an air conditioning unit will break or the roof will start to leak. None of these circum­stances are covered by the bank’s working capital funds, so it’s important to have a “rainy-day” fund for life’s unexpected events. Having personal cash reserves will prevent you from relying on credit cards.

    Pitfall No. 3: Unknown Production Abilities

    The size of the practice you purchase should be a reflection of your personal ability to produce and manage. Unfortunately, some dentists purchase practices that don’t match their abili­ties; the practice may be too large or too small, which leads to an uncomfortable situation for the new owner. I have probably seen more incidents where doctors wished they’d purchased a larger practice rather than a smaller one that they hoped to grow over time. Understanding your production will put you in a much better position.

    My recommendation is to track your production abilities as you work as an associate. The software some offices use can do this for you, while others require you to manually keep track of the amount and type of dentistry you are doing. Ask­ing your employer for a copy of your production reports may alert them to your intention of owning your own practice, so use discretion.

    Pitfall No. 4: Not Having Industry-Specific Representatives

    Too many dentists try to cut costs by having a family friend or relative work on the transaction—with poor results. I recommend hiring professionals who truly understand the business of dentistry, such as a dental-specific Certified Public Accountant and an attorney who specializes in the dental industry.

    Your dental CPA will understand if your costs are in line with industry averages and where you can cut expenses. A specialist attorney will understand the clauses in the purchase contract and lease. Items pertaining to retreatment/rework, work in progress, patient records and staff transfer should only be drafted by someone with expertise in your vocation.

    Case in point: I had a dentist who had a family friend and licensed attorney form the dentist’s LLC. Unfortunately, LLCs were not permissible in the dentist’s state. This caused undue headaches, as the dentist needed to re-file as an S-Corp. While this may not seem like a big deal, it did cost the dentist valuable time and money. This is just one example of where a dedicated team of experts may help guide you through these important issues.

    Pitfall No. 5: Not Having a Consultant or Mentor After the Sale

    So you have closed on a practice. Now what? You’ll likely have a slew of questions once the transition is completed, such as:

    • How will you transition the staff?
    • Do you have a plan for your patients to recognize you as the new owner?
    • Does the practice run as efficiently as it could?
    • How is the hygiene recall program working?
    • Is your fee schedule aligned properly?
    • How do you get all of these questions answered and run a practice?

    Leveraging a professional consultant can help alleviate stress and provide beneficial feedback designed to maximize results. Having a sounding board will go a long way toward—and could potentially ensure sustained success.

    There are so many moving parts to consider and things that can feel like they’re outside of your control when you decide you want to be a practice owner. These are five simple things you can control, and being mindful of them should help eliminate snags along the way. These suggestions also will help manage your personal stress levels before and after you close on your practice loan. A better overall beginning experi­ence can put you on a solid path to becoming a successful practice owner.

    Bank of America Practice Solutions is a division of Bank of America Corporation. Bank of America is a registered trademark of Bank of America Corporation.

    Note: Bank of America, N.A. provides informational articles for your discussion or review only and is not responsible for the information and materials third parties present. Please consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

    About the Author

    Matthew Christie is a Vice President and the Regional Sales Manager for Bank of America’s Practice Solutions division in Southern California. He is responsible for generating business in the medical professional field with a specific concentra­tion in dentistry.

     

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