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The Truth About Acquisitions: 4 Things You Need to Do Today to Avoid Getting into a Bad Deal

Whether you are a first time buyer or even a seasoned buyer, buying a practice is not easy when it is done the right way. Acquisitions are unique because on one hand, you are purchasing a revenue-generating business. On the other hand, you may be inheriting some history that you were not otherwise expecting. This is why a lot of doctors prefer start-ups: there are no ghosts in the closet. Everything is new and transparent.

This is also a chief complaint of a lot of buyers: the seller or seller’s brokerage team will not give the buyer adequate time or access to information to really dig in and expose any of the hidden skeletons. Most buyers complain that they feel that the seller is hiding something or not otherwise being forthcoming.

While there are pages and pages of checklists that a diligence buyer should look at, here are four basic concepts that buyers should consider:

  1. If the practice has an associate, check to see if they are a contractor or employee. Some state laws require that most staff be hired as employees. The IRS also has a set of rules that explains whether staff should be hired as employees or contractors. While the classification may not be immediately important to you, think about how this could impact you when you purchase the practice and try to on-board staff. If the seller treated the associate as a contractor, does that associate feel loyal to the practice or are they a traveling dentist? What does that mean when considering how the practice was priced? Perhaps most importantly, is there a valid restrictive covenant in place via a signed and valid contract? If not, are you willing to accept the potential ramifications?

  2. Remember the 3 “R”s: Review, Record, Report. Make sure you do not shy away from taking advantage of opportunities to meet the seller at the office to review the patient schedule, charts, pull various reports (example account receivables, patient credits, works in progress-- this is very important!), and also to do a walk through of the office. This is where a lot of buyers seem confused. Should you hire a dental equipment specialist? That’s up to you. Ask yourself: am I buying the practice with the expectation that the equipment will function as expected? Don’t forget to have a contractor do a walk-through of the space with you to identify any potential issues with the real estate (i.e., the heating, air conditioning, ventilation system [HVAC]). Finally, believe it or not, look at the supply closet. Make sure supplies are new, unadulterated and unexpired unless the seller does not plan to convey supplies as part of the negotiation. After you conduct your walk through (review) and record any issues, report to your attorney and to the seller to come up with a proper resolution.

  3. Stay tuned to the acquisition flow but don’t be overly sensitive. What does this mean? Understand that the seller will want certain things and that you will want certain things. Which of these are deal breakers? Stick firm to those and be willing to walk away if they are truly material. However, keep a temperature on the acquisition flow. Are you seeing trends in the seller’s behavior that make you question the integrity of the office, as a whole, and in any future dealings that you may have to have with the seller as you transition the office? Believe it or not, we can often pick up on difficult deals before they close and if the buyer was willing to listen to the practice flow and try to re-set or otherwise fully explore expectations, they would have never closed the deal. This isn’t to say that acquisitions should be emotion-driven. But there are common indicators that you need to be aware of and constantly re-focus on:

    1. The level of control the seller will have over you after you close;

    2. The level of involvement you need, want or otherwise will have from the seller after closing and the seller’s agreement or expectations about this. For example: do you need a transition period from a seller who refuses to provide any help? Alternately, do you expect the seller to peacefully walk away after the transition period but are facing a demand for continued employment well past the sale? How bad do you need this office? If you are willing to deal with demands that seem misaligned or unreasonable, what are your plans to overcome them? Will you have a substantial amount of post-closing exposure to your seller as it pertains to things like account receivables and how will you structure that process?

4. Understand each person’s role. You will save yourself a lot of headache if you can see your seller’s perspective and understand what role each person in the acquisition process plays. Understand that the broker is generally hired and paid for by the seller. Understand the broker’s job: his/her job is to sell the practice. It is not his/her job to spearhead your due diligence. Do not expect independent advocacy from any of the seller-side professionals. Conduct your own due diligence with the assistance of members of your own team based on subject matter expertise. Make sure that you connect all of the members and make sure that you are not demanding the wrong things from the wrong people. For example: your CPA should not file your entity, your attorney should. Conversely, your attorney cannot provide insurance information to your lender, your insurance agent should spearhead that. Should you allow the seller’s valuation team to exclusively decide what the practice is worth? You get the idea. By taking the time to allow your team members to conduct their specific jobs and report back to you, you will feel more knowledgeable about the process.

If you are contemplating a practice acquisition, let us know. We are more than happy to talk to you about the process to make sure you are educated on the process before you take the next steps to practice ownership.


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