Practice Mergers - The Fastest and Best Way to Grow Your Practice!

PRACTICE MERGERS
By Mark Diekmann, D.D.S.

The continued growth and success of a solo practice is becoming more difficult every day. With increased competition, the influx of capitation programs, insurance clinics, advertising retail centers and an unpredictable economy, a practitioner must be prepared to consider ways of expanding his patient base. Many practitioners make the mistake of joining these programs 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 (buying a practice and moving it to your office or your practice to the seller’s office) is by far the best possible way to expand a dental practice. Patient retention averages more than 95%, if the transaction is handled properly. A merger adds instant profitability and assures a strong position in the future marketplace. The Seller typically will stay and work for you as an independent contractor until retirement.

A practice merger will allow you to increase the use of the facility, have a reason to hire an associate and overcome “Solo Economic Dependency” by enjoying an income derived from the associate’s income. 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 will get more work out of your existing staff, and will perhaps have to add only one or two additional staff members (generally from the seller). All other expenses will be directly related to production: lab fees, supplies and commissions paid to the selling dentist or associates. This maximizes income and minimizes risk.

The projection provided in this article is based on the selling dentist (or an associate) producing ALL the additional production resulting from the merger. The purchaser is doing NONE of the additional work.

This presents 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.”

You will reduce competition in the area (the seller) and will also prevent another, possibly more aggressive competitor, from purchasing the seller’s practice and establishing a foothold in your marketplace.

Every year that passes without a merger is another year of unrecognized (or lost) income that could have been generated. Also not completing your initial merger is preventing you from completing your second, third, fourth, etc., etc.

A practice merger works like this - the buyer acquires a practice and merges 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 is eliminated, telephone expenses reduced, etc.).


The following is an example of what can be expected after the first 12 months of a typical merger.

EXAMPLE: Buyer acquires a practice with gross annual collections of $200,000 - selling price $150,000. The buyer pays a $30,000 down payment (borrowed from bank). Seller provides seller note for remaining $120,000. Seller remains with the practice and produces 100% of acquired production at a commission rate of 40%.

RESULTS: the purchaser will incur additional expenses of:

$ 16,000 Additional Assistant
$ 20,000 Lab Fees (10%)
$ 12,000 Supplies (6%)
$ 80,000 Seller Commission (40%)
$ 128,000 Total Expenses

SUMMARY: the purchaser will experience immediate positive cash flow:

$ 200,000 Gross Collected Income
$128,000 less Expenses
$27,200 less annual debt service

(lender and seller notes)

$ 44,800 Net First Year Cash Flow

NOTE: If Seller had not remained and the Purchaser had produced all of the acquired production, the first year cash flow would be $124,800. This equates to a 416% return on the original investment of $30,000.

Paragon, Inc. All rights reserved. For more information on this or other PARAGON articles contact PARAGON at 1.866.898.1867 or via email info@paragon.us.com. Other articles are available for review on PARAGON’s website: www.paragon.us.com.