The Practice Purchase Initial Analysis: Overview

Welcome back, associates. We are in fuel cell number two, fire up a successful transition. We're at that point now in your experience as an associate, where you have identified a practice to buy. And now we're going to formally put on the engagement ring with the seller and move into potentially buying that practice. Now we have divided the practice purchase process into three stages. And in this short module I want to just outline at a high level what each of those stages is, to set the stage as we go into future modules, to really dive into those stages at much greater depth. So these three stages, these at the high level, number one are first the profitability analysis and asking price review. This is us walking around the car, kicking the tires, looking for significant scratches. We're not opening up the hood yet, we're not drag racing down the street to see how it runs. We're just looking to see if this car feels fits our basic profile as an automobile and as a practice, a dental practice. There are three questions really that we want to answer out of stage one, profitability analysis and asking price review. And they're very, very basic questions and that's good. I want you to be asking basic questions. Number one is, should I buy this practice? Does it fit me? Do I like the location? Is it the right number of operatories? Is it the right amount of revenue? Does this fit my idea of a practice that I want to work in now? If so, if it is the practice that I want to buy, how much should I pay for it? Now we know the sellers listed it at a certain price, but how much should you pay for it then that's number two. And then number three is if I pay that much, how much will I take home? After overhead, after debt and after taxes, all the dust settles. How much am I actually going to be able to transfer from my corporate account to my account, either through payroll or a draw, to my personal account as take home to pay for my personal lifestyle needs and my savings? And I guess you could say there's technically a fourth question. Does it make sense for me given the price and the cash flow? So that's stage one. Now you can get a prospectus from a broker, you could get the profit and loss statement from the seller and you can put it in exchange. Excel, you can look at it in a PDF, you can look at it on your screen and somehow you've got to sift out a lot of the garbage. And we're going to talk about this. A lot of the garbage in those numbers that don't apply to you. Once you step in to ownership, this is really important to remember that you are buying the assets of the seller. You are not buying the stock of the seller. Now we may repeat that a few times throughout the associates on program fire because it's just that important. You're not buying the stock of the seller of the seller's corporation, you're buying their assets. And the analogy I've always used is seller rolls up their garage door and you're walking in and you're saying, I'm going to take these dental chairs, I'm going to take the X ray machine and I'm going to take the cabinetry and I'm going to take all that stuff. And whatever the price value is above the market value of all that tangible equipment is called an intangible asset. An intangible asset or goodwill. And you are going to move those assets from the seller's corporation and you're going to plunk them right into your own corporation of which you are a shareholder. Now if you're a partnership, then you would move it into a partnership with your partner. And there's other variations, but I'm just assuming here that, that you're a single doc doctor corporation and you're moving the assets into your corporation. Now this is better for you than a stock sale because guess what, you get to take a tax deduction for the whole purchase price over a period of years. But it's, yeah, it is years, but you get that full deduction. So your taxes are going to be lower if you bought the stock. It's like buying Apple stock or Amazon stock. You don't get a tax deduction for that. So that's actually good. That's what, that's what you want. Now we have a module in this, these three stage process where we're going to talk about when you buy those assets, what value do you place of the total purchase price? How much do you place on the dental chairs? And how much do you place on the furniture and the computers? And then how much do you place on the goodwill? There's a bit of a tug of war between you and the seller on that, what's called tax allocation of the price. So in this phase, this stage, stage one, profitability analysis and asking price review. We're just sort of looking on the surface at the numbers as they're given to us. We're sifting out some garbage that doesn't relate to the sellers corporation because we're not buying their stock. And so we're not going to take on their Debt, we're not going to pay their car costs, we're not going to pay their kids that are on payroll for tax purposes. We're not paying any of that stuff that's going on in their corporation. We're just buying the assets. Then we're going to have our own cash flow and we want to make sure that that cash flow makes sense. So the answer to these questions should be yes, yes and yes. If I buy the practice, should I buy the practice? Yes. And if so, how much should I pay? Well, the answer isn't yes, but yes to the right amount. And then lastly, if I pay that much, how much will I take home? That's the bottom line we want to get to. Alright, let's say the answer is yes. This is the practice I want to buy based on the numbers as I see them in the financial reports of the seller. Cash flow looks good. I'm taking home enough to take care of my needs and it's given me the lifestyle that I want and the practice profile fits me. Now we go into stage two. This is the due diligence. So back to our car analogy. Now we're really lifting up the hood, we're going to pull on some cords in there, we're going to see how clean it looks, make sure that this thing can actually run. We're going to take it on a drive maybe and we're going to fill, you know, we're going to really go into this thing under the layers to make sure that the numbers that were reported to you in stage one are legitimate numbers. Because dentists, I love you dentists, but dentists aren't trained on accounting, unless of course they take some of our associates on Fire program modules. But generally speaking, the accounting records for a dental practice can oftentimes mislead a person reviewing those financial statements because they don't account for it. Right. And they don't understand perhaps QuickBooks correctly. Now many dentists will outsource that of course to a CPA firm to handle that, in which case they're probably more reliable. But even then I've seen plenty of errors on tax returns and financial statements that were even created by the professionals. So you still, no matter what the context is, need to do your due diligence on that practice before you actually put pen to paper and acquire it. So the two questions here are, are the numbers reliable? That's number one and number two is do I need to adjust the offer price for anything that I'm finding? Imagine you lift up the hood of that car and you realize that even though the car looks brand new on the outside, it's a piece of garbage on the inside. You're they're going to walk away or you're going to adjust the price lower for the fact that you're going to have to get a new engine in that thing or you're going to have to repair this or that part of it. That's what your due diligence is intended to uncover is areas where you may need to tell the seller, I've got to pay you less because I didn't know about this, it's not listed in the prospectus and you didn't bring it up to me. And now suddenly we got to go put a bunch of money into this in order to make it be where it needs to be or your revenue, your collections weren't what they were or your overhead was actually a lot higher but than what you stated on your financial statement. So we need to adjust the price accordingly. That's stage two due diligence. Now due diligence, we actually break it up when we explain it to you in our module. Between financial due diligence, which is really the side of the cpa, that's the work of the cpa, the accountant will do that for you and we'll explain exactly what's happening there. There's the, what we call legal diligence, due diligence, which is where your attorney, believe me, don't go into this without a dental specific CPA looking at the numbers. A dental specific attorney and the. So the attorney is going to look at all the provisions of the contract. It's the seller's attorney who is generally in most cases the one who prepares the initial draft. So your attorney is going to do the due diligence by reading the whole darn thing and letting you know if there are provisions that should be considered that should be a concern for you and then your attorney will talk about that with you. That's the legal due diligence. And then there's what we call the clinical due diligence. Those three, the clinical due diligence is go look at the patient records. How much work is left to be done. Did this seller over treat leading up to the sale, which is going to be a serious problem. And I've seen that firsthand and it can be pretty devastating for the buyer. How does all the equipment look? What software are they using? How clean are the records of the patients? Is it even digital? Got to go in and look at all of that clinical stuff. To understand what you're inheriting when you buy this practice. So financial due diligence, legal due diligence, and clinical due diligence, that's stage two. If the due diligence checks out, or if it doesn't and you adjust the price and you still want to move forward, now you get to stage number three, and that's preparing for ownership. And you're really answering the one question, am I prepared to be a practice owner and run it as a business? Now, in our Associates on Fire program, we've got a lot of modules in our fuel cell number three that are going to help you do that. And we have downloadable resources as well that may be helpful for you. For example, our template business plan for business owner for practice owners, which is separate from our template business plan for associates. Now it's time to pull that out and start thinking about your marketing, your patient experience, your HR, and a lot of other things that you haven't had to think about as an associate. Are you ready and prepared to run your dental practice? So we're going to talk about each of those stages in length. Gear up, because the first one, profitability analysis and asking price review. We've got a great exercise that we're going to do for you, so stay tuned for that.