TAKING THE PULSE OF A DENTAL PRACTICE BEFORE PURCHASE
When buying a dental practice, having your own advisors are essential. You wouldn’t consider buying a home without a 3rd party inspection. After all, this practice is most likely the largest and most important purchase of your life!
When purchasing a dental practice, you want to know that its operational systems are functional and sound. You want to take the pulse of the practice to ensure it is as healthy as the seller claims.
To that end, many experts over the years have advised dentists to conduct a “chart audit” prior to purchasing a practice. A chart audit is a review of about 10% of patient charts to determine the frequency of visits and work performed.
However, a chart audit does not always show the whole picture. A more thorough approach is to complete what is called a Comprehensive Practice Assessment. This includes reviewing reports in the following six areas of operation:
- Procedure code reports. Reviewing the procedure codes assigned in financial reports is important for understanding the types of dentistry being performed, and whether your services are compatible with the existing patient base.
- Are you able to perform the same types of dentistry currently offered?
- Can you provide some of the treatment that the seller was referring out?
- Does the practice offer your particular type of specialty?
Be sure to analyze the ratio of prophys to X-rays, periodic exams to crowns, and new patients to Perio Scaling/SRP. For example, a recent seller was taking BWX and anterior PA images every six months. However, the buyer did not agree with the imaging frequency and preferred to take check-up x-rays annually. She therefore felt that the level of hygiene production reported by the practice was inflated.
- Accounts Receivable. Even though you may not be purchasing the practice Accounts Receivable, we recommend that you obtain a detailed Accounts Receivable Aging report – both with and without credits. Credits are a liability of either money or dentistry that is owed to the patient. This report will give you an overview of actual income received by the practice.
In addition, since the seller most likely does not have student loan debt and very little, if any, practice debt, he or she may be able to afford more lenient in-office patient financing. This is an important management system to understand so that you do not inadvertently offend existing patients or reduce the perceived goodwill of the practice by demanding payment where alternate arrangements exist.
- Patient Retention Index. The Patient Retention Index (PRI) is a key vital sign of the health of the practice. Of the new patients seen 12 months ago, how many returned for follow-up treatment? It’s one thing for a practice to see new patients, however, patient retention is essential to ensure sustained growth. We have seen practices that use Groupon, Living Social or other social media channels to bring in a new patient – only to never have them return for treatment. When reviewing patient records, note the date of the first and last visits to determine the strength of the relationship with the practice.
- Pre-appointment system. Determine if patients are being pre-appointed for their next hygiene treatment. While the lack of a pre-appointment system is not a make-or-break deal, you want to institute this procedure quickly after taking possession of the practice so that patient follow-up is easy and successful. In addition, your transition to the practice will be smoother if current patients are pre-scheduled for the next follow-up appointment.
- Case acceptance report. Ask for a list of treatments presented and not completed for the last 18 months. Understanding the seller’s success level with case acceptance will provide further insight into the numbers generated by the practice.
- Trend Analysis. The practice prospectus most likely will give you patient data for each year. However, we recommend that you also obtain trend reports for the last 24 months showing each month’s gross production, adjustments, collections and number of new patients. This will give you a more accurate picture of seasonal traffic flow through the practice.
For example, a recent practice for sale advertised it averaged 20 new patients per month. However, when we generated a trend report, we noted that the practice saw 30 new patients in January, 23 in February, and 18 in March – averaging about 24 patients per month. But in the last three months of the year, the average was 14 new patients per month, with 13 in October, 15 in November, and 10 in December. This information is important for accurately projecting income from new patients.
With the completion of a Comprehensive Practice Assessment, you will have a thorough understanding of the operations of the practice you wish to purchase and can proceed with greater confidence.