25 May Practice Mergers
The continued growth of a solo practice is becoming more difficult every year. With increased competition, the influx of capitation programs, insurance clinics, advertising retail centers and an unpredictable economy, a general practitioner must be prepared to consider ways of expanding their patient base. Many practitioners make the mistake of joining various low fee programs in order to add more patients to their practice and discover that these fee conscious patients will leave the practice as soon as someone else offers them a lower fee.
A practice merger (acquiring a practice and moving it into your office or moving your practice into the seller’s office) is by far the best way possible to immediately expand the production and profits of a dental practice. Patient retention averages more than 97% in a practice merger (if the transaction is handled properly). A practice merger instantly adds profitability and assures a strong position in the future marketplace.
Practice mergers can be structured with the seller working for the buyer full-time, the seller working for the buyer part-time or the seller retiring immediately and the buyer absorbing all the seller’s production. The structure you need obviously depends on your needs and goals.
You have made a considerable investment in your practice and perhaps it’s time to maximize its potential. With a practice merger, you will not incur any additional fixed expenses, such as rent, utilities and telephone. You may have to increase your staff depending on the seller’s production volume but those staff members are generally found in the seller’s practice. All other expenses of the merger will be directly related to production of the acquired practice: lab fees, supplies and commissions paid to the selling dentist or associates (unless the buyer will be absorbing all the seller’ production).
The projected merger example provided on the next page is based on the selling dentist continuing to produce ALL the merger practice production. The buyer is not increasing his or her clinical load at all in this example. We chose to use this as our merger example in this article because the buyer’s merger profits would be the absolute lowest in this merger scenario… yet still extremely profitable for the buyer!
As you will see in the example, mergers provide the opportunity to derive passive income from your dental practice (income generated without additional clinical production by you). As the seller phases out of the practice, the resulting overflow of patients allows for the addition of an associate, thereby further eliminating “Solo Economic Dependency” and increasing passive income.
A practice merger will reduce competition by two-fold in your area. The seller is no longer a competitor. You also prevent another, possibly more aggressive competitor, from purchasing the seller’s practice and establishing a foothold in your marketplace.
A practice merger works like this… A buyer acquires a practice and merges the practices together into one facility (either the seller’s, the buyer’s or a new facility). There is an immediate savings of overhead on the acquired practice (one facility rent is eliminated; some staff costs are eliminated, telephone expenses reduced, etc.).
The following is an example of what can be expected after the first 12 months of a practice merger structured for the seller to continue to work as the buyer’s associate and continue to do 100% of the seller’s production.
PRACTICE MERGER EXAMPLE:
Buyer acquires a practice with gross annual collections of $200,000; purchase price is $150,000. The buyer borrows $180,000 ($30,000 for working capital to cover the physical merger of the practices and transition closing costs) at 7.5% for 7 years. Seller remains with the practice and produces 100% of acquired production at a commission rate of 40% of the seller’s collected production ($160,000, remaining $40,000 is hygiene).
Buyer will incur merger expenses of $106,000 as follows:
- $ 18,000 Additional Assistant (part-time)
- $ 16,000 Lab Fees (8%)
- $ 8,000 Supplies (4%)
- $ 64,000 Seller Commission (40%)
Buyer will experience an immediate cash flow increase of $60,859 as follows:
- $ 200,000 Additional Collected Production Acquired
- $ 106,000 Less Additional Expenses (above)
- $ 33,131 Less Annual Acquisition Debt Service ($2,760.89 / month)
- $ 60,859 Net First Year Increase in Cash Flow for Buyer
NOTE: If the seller had cut back by 50% and the Buyer picked up the other 50% of the Seller’s production, the buyer’s first year cash flow increase would be $92,859. Had the seller retired and the buyer absorbed 100% of the seller’s production, the buyer’s first year cash flow increase would be $124,859.
Practice Mergers are extremely profitable and the buyer reaps the financial benefits immediately! Every year that passes without a practice merger is another year of or lost income that could have been yours!
If you would like information concerning merger opportunities in your area, or if you would like to speak to another doctor who has completed a practice merger, contact PARAGON today and arrange for a personal consultation to discuss your options.
