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Purchasing a Dental Practice: Ideas and Suggestions
Banking
The purchaser should arrange for a personal and business checking account at the same bank that is lending the down payment, if it is in the same area. The purchaser should have a rubber stamp made for bank deposits with their name and account number. Another stamp with the purchaser's name should be used to stamp ledger cards, letterhead and other miscellaneous material until new supplies can be delivered.
Line of Credit
The purchaser should make certain that he or she has an adequate line of credit for working capital for the first six months of practice. It is common for a practice in transition to experience a slight downturn for the first six months after the closing (usually only for walk-away sales, not pre-sale transactions). In addition, the build-up of accounts receivable will cause a drop in immediate cash flow for the practice. It could take four to six months before the practice is throwing off enough income to allow the purchaser to draw some income from it. The purchaser should not panic when he or she sees this happening; it is very common and the situation will right itself.
Out-of-State Collateral
Most local banks will not accept out of state property as collateral for a loan. If the purchaser's family is from another state, and their property is to be used as collateral, then the most likely bank to loan the money for the down payment will be a bank in the same state where the property is located and where the parents have an on-going banking relationship.
Always Ask for the Boss
When the purchaser is applying for a loan, he or she should always ask to see the branch manager, a vice-president or president of the bank. They are the decision makers; low level loan officers are not decision makers and can seldom approve loans over $25,000. You will lose a lot of time working with loan officers. Ask for banking contacts from your family or friends since many times referrals are the best sources for a loan.
Say No to Bank Life Insurance
The purchaser should not take out bank life insurance for the down payment loan for it is usually much too expensive. Inform your banker that you will be making an assignment of your term life policy to cover the amount of the loan. Contact your agent for an assignment of your new or existing life insurance policy naming the bank as a loss payee for the amount of the loan balance.
Don't Use Bank's Attorney
Our experience has shown that the bank's attorneys are more interested in protecting the interest of the bank. Thus, the purchaser ends up paying the fees to protect the bank's interest, not his.
Second Mortgages on Your Parents' Home
If the purchaser's parents are applying for a second mortgage on their home for the down payment, and the parents are over the age of 60, the bank may be hesitant about making the loan because of their age. Therefore, the purchaser should apply for the loan, using the parents’ house as collateral, and let the bank put a second mortgage on the parents’ home for collateral.
How Was the Value for Patient Records Determined?
The purchaser should be aware that the seller's patient record value is determined by using the gross income of the practice combined with the seller's fee schedule and the age of the practice. AFTCO does not inventory or inspect the seller's patient records for quantity, geographic origin, average age or income categories.
Should the Purchaser Look at the Seller's Records?
The information available in these patient files has had little effect on the success or failure of a typical practice transition since the purchaser's method of treatment may differ substantially from that of the seller's. Therefore, any information other than patient name, address and phone numbers that can be gathered from the files has little measurable or determinable value when appraising a practice value. The letter of recommendation from the seller to the patients of the practice is the real value in this transaction. The purchaser may, however, ask the seller's permission to review the seller's patient files for whatever reason the purchaser may deem important.
Utilities
If the premises are to be used by the purchaser after the closing, then the seller should arrange for the gas, electric, water and telephone companies to send a final bill to the seller as of the date of the closing and receive credit for any outstanding deposits. The purchaser should then arrange to have the billing changed to the purchaser's name as of that same date. The utility company may require a security deposit to be made by the purchaser if he has had no prior business with that company.
Insurance
If the seller is financing this purchase, the purchaser should have a copy of the required life and overhead disability insurance policies, or assignments, to be given to the seller at the closing, or as soon as possible thereafter. Please check for adequacy of coverage. Purchaser should notify the malpractice and liability insurance carrier for the insurance to be in effect as of the day of the closing. Seller should notify his or her insurance companies to discontinue coverage for the office and equipment as of the date of possession.
Telephone
The seller may have to sign a consent form to have the telephone number transferred to the purchaser. The purchaser should immediately check for a yellow page listing to get his name in as soon as possible. All local yellow pages come out at different times; it's imperative that the closing dates for a yellow page listing is investigated at once. If the seller has an existing large yellow page ad, the purchaser will have to assume responsibility for it after the date of possession. The telephone should be answered using both doctors’ names if the seller continues to practice in the office after the sale.
Letter to Patients and Newspaper Announcements
The purchaser and seller should write and print a letter announcing the merger, association or sale of the practice (whichever is applicable) and have it available prior to the closing. An announcement in the local newspaper should be considered.
D.E.A. and License
The purchaser should obtain the Drug Enforcement Agency number or arrange to notify the D.E.A. of change of address. Also apply for a Medicaid number and Federal and State Employer's identification number and register his or her professional license in the appropriate county.
Notices
Seller should cancel or transfer all existing subscriptions; purchaser should obtain new subscriptions. Notify suppliers and laboratories of change of ownership.
Measuring First Year Results
Many times the purchaser misunderstands first year results. The purchaser should add the first year accounts receivable to the first year collections for the practice in order to measure the real first year results. The second year you would only use collections to measure results since the remaining receivables left over from the first year would be included in the second year collections, thereby off-setting the second year accounts receivable. Monthly installment payments for practice loans are not an expense, only the interest portion is an expense. Principal is off-set by equity in the practice.
Miscellaneous
The purchaser should inspect the premises for supplies and instruments that may need to be ordered. Interior and exterior signs bearing the purchaser's name should be ordered. The seller shall provide the purchaser with a key to the premises at the closing.
Employees
The seller and purchaser should have a frank discussion regarding benefits, salaries, bonus arrangements and vacation policy for the current employees. If this transaction involves a merger of two practices, then the seller and purchaser will need to decide which employees will be retained. We cannot emphasize enough the importance of maintaining current staff during the transition period. If some salaries seem high, it is better to pay them until you have firmly established yourself in the practice.
Salary History
The seller should provide the purchaser with a history of salary increases and all benefits for each staff member.
Fees
The purchaser should discuss fees with the seller and recommend adjusting the fees to reflect the current average for this marketplace. If the fees need to be increased substantially, the purchaser should raise the fees in reasonable increments, not all at once. The doctor, not the patient, is more fee sensitive. The purchaser will find that the income of the practice will increase considerably in a short time, with little or no patient complaint from raising fees.
Pension Plan
The seller should discuss with the accountant about rolling over this plan into an I.R.A. There are no additional taxes or penalties for this change.
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