Wes Read, a CPA and financial planner, explains why dental practice buyers and sellers need a specialized team. A dental attorney handles contracts, a buyer representative protects against broker conflicts, a dental CPA challenges inflated valuations, and a practice-focused bank lends on cash flow. Without them, you risk hidden costs like non-transferable insurance contracts and overstated seller add-backs.
One of the comments that we get at practice CFO from doctors who join us later in their career, and we weren't there at the beginning when they brought their practice was, boy, I wish we had known about you guys 20 years ago. And the reason for that is. And it's kind of hard to appreciate because what we do is so customize the value of a professional team member. And the parallel that I'll make is it's hard to give, you know, just general advice on a tax perspective or buying a practice because each one is like a mouth and a set of teeth. They're all unique. And until we get into the details, it's hard to offer advice. But during transitions, that is one time at the very least, that you should seek help because the roots and the foundation of your practice are going to be planted then. So one thing that you really need to have on your side is a dental attorney, because the, and especially if you're creating a partnership or something complex like that, because there are so many tax implications and legal implications of.
Practice transition that get captured in what's called the purchase and sale agreement or the asset purchase agreement. They use both terms. And that dental attorney has seen the pitfalls of things not being done the right way. For example, you know, who gets the accounts receivable, which is the unpaid amounts from. From patients. How is that going to get collected? What percentage does the buyer get for doing that? You know, how is the asset price going to be split up, which has tax consequences? The dental attorney really is an integral part of that process and needs to be used. And even though it may cost you a little bit, it's going to pay for itself, particularly by avoiding pitfalls. Buyer representatives, that's somebody who's on your side. As I've spoke about in another module.
Brokers represent sellers. They don't represent buyers, they represent get paid by sellers and they get commissioned more highly, the higher the sale price of the practice. And at the end of the day after the trip, the moment that transaction is gone, so is the broker. So you want some sort of buyer representative. There are not many buyer representatives in the dental space. Practice CFO is one and I'm sure that there are others out there. But that person should have experience in the dental industry and is looking for business deal points and financial proof that this practice is going to perform well for you and also forecast with you what kind of cash flow you might expect. They also are able to sift through the information that the seller is giving them and look for pain points or issues that could come up in the practice. So for example, one of the common ones is Delta Premier, which is a form of insurance premium offered by Delta Dental, which is non transferable when a practice sells. But the problem is Delta Premier has rates that are about 45% higher than what's offered to new buyers. So you need to dig into what percentage of the practices production is getting financed or being covered by Delta Premier because you can have an overnight revenue drop, which really, it doesn't often get disclosed or at least only as a caveat emptor in brokerage documents. But that buyer representative should be able to act as a coordinator between the dental attorney, your banker.
And any other parties and even the seller's broker to make this thing happen. A dental CPA is kind of an overlap with number two. But that dental cpa, if well trained like ourselves, can do a full valuation of a practice and also forecasting of how much cash that will throw off. And they'll also challenge the numbers that are being given by the broker because many times what'll happen is the broker will present the financial statements and add back to the profit all these other kind of personal expenses and whatnot. But the truth is some things shouldn't be added back. I'll give you an example. And this is a problem when practices grow too big. Oftentimes a practice will get to maybe 2, $2.5 million of collections. And.
It really is not typically possible for a regular GP to deliver that with two hands. An associate is needed to deliver that. But often what will happen is the seller's broker will not only add back to the profits that the.
Doctor or seller salary, but also that of the associate. As if. And what they're trying to present to you is you're doing all the dental work, you keep all those profits. And the truth is that's probably not possible in that situation.
The bank obviously is key. There are a number of banks that have specific practice finance arms. You should go with those. Sometimes your smaller banks are not cut out to do cash based lending. And what I mean by that is the value of the asset is based on its cash flows rather than like home buying lending, which is based on comparable.
Price per square foot or other multiples.
Based on the collateral. The dental practice is slightly different because there's no real physical collateral that can be repossessed. So they really have to value it based on cash flows. And a real estate broker, one thing that goes hand in hand with the bank's loan and it may not seem that important is the lease. A lease can be.
A key component of you getting a deal done. And I've seen a number of deals fall apart because oftentimes landlords don't care because they've got the seller locked into an agreement and they don't care if he leaves. He just he's the landlord is going to get paid. But the key thing is that the lease typically has to extend at least as long as the term of the loan. You're getting to buy this practice because the bank doesn't want a 10 year loan with you and you get thrown out of your space after two years and you can't find new places place you know or somewhere far away and it really damages your practice, they want to make sure you can stay in the same space. There can be lots of zingers, especially with really sophisticated landlords. For example, like if you sell your practice, sometimes they can write into the lease agreement that they get a percentage of the sale price of your practice. So you really want to watch for that kind of thing, okay?
