I was recently participating in an online discussion where someone was considering buying their first practice. They asked if buying a practice that is 80% insurance participation would be a good decision. There are several questions to ask yourself before making this large investment:
1. Even if this pracice is profitable currently, what debt would you, as a new owner, have that the current owner does not. If the selling dentist is retiring, chances are they are relatively debt free and sometimes own the real estate on top of the practice making for lower rent. Because they have no student loans and/or practice debt, they may be able to create a profitable practice at a realistic pace due to low or non-existent debt. Be sure that your anticipated profits can do more than just pay your added debt levels and can also sustain profit needed for everyday living expenses. The insurance participation levels can have different consequenses for different owners of the exact same practice based strictly on the impact of debt level differences.
2. What expenses has the selling dentist been generous with that you may have to target for elimination? This typically means staff expenses. It’s not unusual for a retiring dentist to have a long term staff who is paid generously with top notch benefits. After practicing for 30 years, many dentists find that it’s well worth extra salaries to make their lives easier at the office and after 30 years they can afford it. A new owner, however, can rarely do the same and often finds themselves in a situation of unsustainable salary levels yet unable to make changes for fear of a mass exodus of staff or poor attitudes. Recommendations vary but the typical range of compensation benefits (including salaries and all benefits combined) is from 20-28%. If you determine you are unable to sustain the salaries of the selling dentist, be sure to tie necessary changes to the retiring dentist upon the sale of the practice (so they are the bad guy instead of you).
3. Analyze how the patient flow is working with 80% insurance participation. It is very possible to have a profitable, successful practice with high levels of insurance participation and provide quality service but you must make sure that the pieces making it work for the selling dentists are ways you want to work also. Are you willing to delegate to staff? Do you want to see one patient at a time or overlapping patients with higher volume? Do you like to find ways to multi-task and create systems that are constantly improving on efficiency? Are you good at managing both yourself and staff? Recognize the steps the selling dentist has taken to make the practice profitable and be honest with yourself about if it’s a good fit for your personality, practice philosophy and long term goals.
4. Take a look at the selling dentists insurance fee schedules. I tell dentists that I consistently see about 30 fee codes make up 90% of a practice’s revenues. The 30 fee codes vary from practice to practice, but it’s still a mix of 30 that determines the vast majority of revenues. Make sure that you know what your 30 are and then compare fee schedules of the selling dentists to see where you might have some negotiation room with the insurance companies. Remember it’s far better to get better fees on the codes that matter instead of a flat 3% increase the insurance company is more likely to offer. Call us if you want help with this process.
5. It is not unusual for a dentist to recognize they need insurance participation to fill chairs in the early years of practice ownership with a goal of dropping plans as the practice grows and becomes busier. For this reason an 80% insurance practice would not be a deterrent for many first time practice owners. It is important to be realistic in what your long term goal is in regards to insurance so that you do not pay for a practice that can’t be molded to the type you eventually want to have. Few buyers find a practice to buy that is perfect but the closer it matches your long term goals of practice style, the more likely you will see higher profits earlier in ownership.