Once you have determined you are ready to purchase another dental practice, it is time to begin the research process. Many doctors become addicted to this process and that is how so many young doctor/owners have created smaller group practices and DSOs. The search becomes a challenge to find a new location, evaluate the potential, and determine the risk or reward. The newest trend is for the young entrepreneur dentist to practice for a few years, acquire the skills necessary to run a very successful dental business, and then look outside the organization to grow and expand. When you add the 2020 Coronavirus to this equation, this trend seems to have grown in popularity. More mature doctors who are closer to retirement are looking to speed the process and established multi-location doctors are willing to acquire their practices to expand their enterprise. They are also willing to take more risk as well.
Once a practice has been discovered, the due diligence process must begin. The amount of information required to successfully recommend a dental practice for acquisition should be analyzed by professionals with a strong dental business background and additional clinical experience. Oftentimes, there will be needed construction after the transition, and an increased number of operatories. Having the knowledge to provide the due diligence and the clinical expertise to make recommendations of a practice’s health to provide a positive return on the investment of the purchasing doctor’s investmentI is essential.
There are 3 basic fundamentals of a Practice Acquisition Strategy:
1. Strategic Exposition – Assembled data will be evaluated and interpreted to show the market attractiveness, competitive position, integration catalysts, transaction justification, and revenue creation potential. Uncovered findings may make a difference on whether or not the purchasing doctor will want to move forward with the transaction or look for another opportunity.
2. Liability Outline – Comprehensive evaluation of the practice’s financial returns and KPI’s, along with the essential processes and fee analysis, etc. and will likely reduce or eliminate a liability concern. This information could be used in price negotiations and is usually outlined in this section.
3. Post Analysis and Declaration – Once these findings are exposed with recommendations outlined, their impact on the proposed acquisition can be negotiated with the selling doctor and his legal team. Some of the most common negotiating tactics include:
a. Price reduction: If the price of the acquisition depended on the findings of the “due diligence” this fact would allow for negotiations to begin. There must be documentation of the reason for the new negotiation as the original offer was already noted in the original LOI (Letter of Intent). Any change in this offer should be referenced back to the documentation that provoked the initial change. Some examples of these changes would be a change in the insurance standings and an exodus of patients, or impaired fixed assets and the transaction was mainly an asset based transaction.
b. Attorney representation: When the purchasing doctor is uncertain of how the outcome of the transaction will be mitigated, he should have appropriate representation from an attorney. Many times in the due diligence process indemnities and specific warranties will be negotiated, and the selling doctor will have to follow through with them in a Share Purchase Agreement at the closing of the sale. The purchasing doctor does have the first right of refusal and can walk away if the selling doctor will not uphold those provisions. This event would be an unfortunate event for all parties involved.
c. Closure: The final due diligence report to the purchasing doctor will have one of three recommendations: (a) move forward with the point of sale. (b) complete further investigations because there were misrepresentations of the selling doctor’s team or practice statistics or (c) identify issues that would prevent the sale and transfer of the practice to the purchasing doctor. An example of this would be uncovering embezzlement where an investigation needed to take place.
d. Post – Deal Negotiations: There may be instances where there were no deliberate intentions to withhold information or report inaccuracies during the initial information gathering process but after the liability outline there are new discoveries alerting the buying and selling doctor. In this case, both parties agree to negotiate in the best interest of the transaction to include these new findings without having to walk away from the transaction.
In any of these negotiation outcomes, DSO Success Consulting is prepared to advise you of the potential risk or reward for the journey you are about to embark. Collaborating to scale your business by making the appropriate decisions along the way will lead you in becoming a more fulfilling and balanced multiple location owner.