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  • Dental Group Practice Buy-In

    Long time reader via my wife

    Was given the opportunity to buy-in 1/6 share to a group specialty dental practice in the Tri-state area (NYC Metro)

    Valuation as follows

    supplies                                                                                      100K

    fixed assets (furniture,equipment,improvements) (30%)                 400K

    goodwill (100%) 3 yr average                                                       6M

    Rough estimate is my share is valued at ~900K (80% of total value of my 1/6 share of 1.125M ) which goes mostly towards a deferred compensation

    I have to buy 175k in stock post tax money due quarterly over 7 years ; 25k interest

    remaining ~700k is "sweat equity" taken out of my production pretax over 7 years

    My percentage ("Commision") of production ramps up from 35% to 50% during my buy-in years. I am (full?/voting) partner day 1

    My questions so far

    are these industry standards (supplies and fixed assets)?

    Is 100% goodwill (net fees collected) the norm?

    where does the 80% figure come in to play

    I am worried about being in a bull market and my practice plummeting over next decade and my valuation being inaccurate

    I will keep you posted as there is is a real estate component which is a separate buy-in - still waiting on the exact figures

    I have been advised to consult an attorney and possibly a CPA.

    Any thoughts, comment, critiques would be greatly appreciated.

    Cheers

  • #2
    That valuation is preposterously lopsided towards goodwill instead of depreciable hard assets.  Sounds like great terms of sale (for the sellers).

    Comment


    • #3
      “I am worried about being in a bull market and my practice plummeting over next decade and my valuation being inaccurate”

      Seller:
      Hard assets. $500k.
      Goodwill 6mm
      Selling price. 6.5mm

      Buyer:
      You aren’t buying goodwill. You are buying the future profitability. It’s what YOU agree it’s worth.

      Goodwill is an intangible asset. There is value, such as having an established business, contracts, location, customer base, facilitites, prestige the greatly enhances your future profits and earnings. How much are you willing to pay for that privilege?

      In the extreme, suppose you paid $6.5mm for the business and the other partners left. You have hard assets of $500k and a business to run. How much is the GW worth now? Illustration only (partnership agreements etc). No magic in the formula’s or financing agreements. The question is how do they determine the value of the business at $6.5mm, goodwill of 6mm is a plug. You will need help with that. They may have used a formula, that doesn’t mean it’s worth it for you.


      Comment


      • #4
        We have $0 goodwill at a very lucrative practice. Goodwill is a scam and golden parachute for senior partners. Our buyin is a multiple of EBIDTA averaged over the last 3 years.

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        • #5
          It seems to me like all these dental PP buy ins have a ton of "goodwill", whatever the heck that is

          Comment


          • #6
            Cut them a deal. Buy in to the hard assets only and let them keep all of their goodwill for the future.

            Comment


            • #7
              Hi Sonuva,

              I think if you are serious about the deal, you absolutely need advice from CPAs and attorneys experienced in dental deals.

              You are concentrating on the wrong things.  Purchase price allocation is kind of important, for depreciation schedule, but is very very low on the priority list and certainly isn't a deal breaker or maker.  Not just that, if you're buying "stock", as you mentioned, then it doesn't matter anyway.

              The relevant details of the deal are that you've shared so far - the practice is doing $6.5M and is valued at 80% Gross.  95% of dental deals are valued within 10% of that, so it's probably a good starting point.  Everything else is noise so far.

              What you need to know is:

              1. How many doctors does the practice have, and what are their hours?

              2. What is the average production per doctor?

              3. What is your compensation - I really doubt you will be getting 50% of your production, that's really high.

              4. How is the profit distributed - percentage of ownership, according to production, etc?

              5. What is insurance participation status - medicaid/hmo/ppo/FFS?

              6. What is percentage of hygiene/doc production?

              7. NP flow per month.


              Those are the issues you should be focusing on.  What are you buying?  A 6-FT doc $6.5M practice is one thing... but if it has an army of associates all chasing after patients, it's quite another.... is it a premium FFS or a medicaid/HMO clinic... does the practice style fit your personality...etc.

              How much you will pay for supplies and hard assets... irrelevant.

               

              Comment


              • #8
                I like the points others have brought up but I don’t think it’s irrelevant to look at the assets on the book. Tim is right. Look at things from an outsider perspective. If you are a large national company and want to buy this practice (or any practice for that matter) why would you care about Goodwill?

                The fact that their Goodwill is so high and high as a percentage of their value means there’s a lot of fudging going on. All of molar roller’s points are solid, but those details speak to the underlying mechanics of profitability and how that is distributed (after tax cash flows). Indeed you need to have an understanding of what is coming your way, but you need to understand the valuation better because that is your up front cost. Look at this as any other investment. What is your after tax buy in (cost) and what are the expected marginal future after tax cash flows? This will allow you to assess rate of return.

                Just from what you posted I have extreme skepticism about the Goodwill component of this.

                Comment


                • #9
                  I agree alot with Molar Roller.

                  I would also add two other important points:

                  1) Are the 5 other owners people you feel comfortable being partners with. It is very much like marriage, this can (and hopefully) last a long time. Trust, Honest, compatible personality and philosophies, etc...

                  2) Molar Roller wrote a little more detail, but overall what would be your estimated income after buy-in year one? Is it an improvement even after debt payments for buy-in? I tended to focus on what would happen to my income more than I focused on purchase price.

                  Extra) I'd also consider getting a loan from a bank/lender to purchase the 1/6 ownership outright from day one and receive the full compensation of being partner. I prefer to owe a lender and be equals with business partner then have my partner(s) be my lender.

                  I highly recommend a CPA, attorney, or even 3rd party dental broker to evaluate the deal too.

                  Good Luck!!

                  Comment


                  • #10
                    DDSonFIRE the loan situation only works in your favor if the after tax return on the investment is superior to the after tax return to the bank. The only variable here not known (or highly questioned) is the after tax return on the practice buy in. The buy in value is a vital component of that assessment.

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                    • #11
                      Many compliments on the suggestions for you conducting “due diligence” in making your investment. EBITDA can be useful and avoids structural bargaining. But keep in mind, your concern is the future, which is evident by your concern of future business drops. That is the risk ownership takes, unavoidable. Know what you own and do your homework.

                      Off the wall, suppose once you buy, a lawsuit results in a $10mm judgement (uninsured) for some previous action. Unless you are indemnified and/or requested disclosure, you will have your “fair share”.
                      You have work to do, but experienced CPA/Attorney may need a consultant regarding valuation. Then you have done due diligence, including entry and exit. Congratulations on being offered “ownership”. It could be a fair deal. The 10 year concern goes with the turf.
                      Minor concern unless you think it’s likely.

                      Comment


                      • #12
                        ENT Doc,

                        I don't know how familiar with dental deals you are, but you always buy goodwill and little else.  No one cares about hard assets.  They may come with a deal, and have to be accounted for somewhat, and MAY become a negotiating point for some REALLY REALLY picky buyers, but arguing over that is a good way to poison a well over an incredibly minute detail, and certainly doesn't portend well for a long term partnership.

                         

                        Comment


                        • #13
                          Mollar Roller, I have zero familiarity with Dental deals. But that doesn’t change basic accounting. What is Goodwill and how is it determined? Those questions and amounts, particularly in this case are not “minute”.

                          Comment


                          • #14
                            ENT Doc,

                            In the olden days, before PE-driven DSO deals were even a thing (like 2014 ) , and no dentist even knew what EBITDA was, all dental deals were valued as a percent of gross collections.  The dental brokers would try to use all kinds of formulas, but ultimately, 95% of valuations came in at 75% of gross, +/- 10% depending on desirability of the area.

                            That was all goodwill.  The practice could have had top-of-the-line equipment or stuff from the 50's, it might have moved the price a few percentage points here or there, but it really didn't matter much.  It costs a lot to outfit a dental office (about $150-300/sf), but once built, none of it is worth a ************************.  I recently merged 2 practices into mine.  It was all-charts, so 100% goodwill.  I didn't need their equipment or supplies.  Both practices ended up selling all their physical assets for $30K or so.

                             

                            So to answer your question, "goodwill" is the charts, and its value is some percentage of the past gross production off those charts.

                            Comment


                            • #15
                              Goodwill is the excess of purchase price over the FMV is assets purchased.
                              That is an asset purchase. If you are buying equity, you need the whole balance sheet at FMV, basically NW .
                              Goodwill isn’t the issue. The valuation of the business is the issue, GW is the result on the balance sheet.
                              Valuation- hard assets = GW,

                              Comment

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