Acquisition secrets that will have your new practice moving in the right direction from day one.
In order to move forward with an acquisition, you need to have a clear picture of where that practice has been. In a recent DSO Secrets podcast, guest host Ken Kaufman tackled the topic of acquisition strategy secrets. Kaufman recommends creating a 12-month, Go Forward Pro Forma. You could also call it a forecast.
“When you do your due diligence, you’re going to get a lot of different information, financial statements, reports out of the practice management software, and a lot of other anecdotal information about what’s happening in the dental practice,” he said. “You may be hearing all sorts of things about growth and opportunity and where the practice has been. This 12-month, Go Forward Pro Forma, is your best estimate. So day one, after you purchase the practice, what is actually going to happen in the practice? And under your leadership/ownership, where do you foresee it going?”
The following is a list of items to include in the Go Forward Pro Forma:
Gross production. What are you expecting the gross production of the practice to be? Questions to ask include: What are the insurance companies that the practice is credentialed with? What are those contracted reimbursement rates? How much of the patient base is fee-for-service? What are the patient visit numbers? What does that patient flow look like? How many first visits are coming in each month on average? What is the recare base, and what is the retention from a historical perspective up until that point? What you are going to do as the new owner needs to be captured in the Go Forward Pro Forma.
Reductions. Are there any insurance write-offs or bad debt from patients you won’t be able to collect? Often, one dental practice that doesn’t have a sophisticated revenue cycle system may be collecting 85% to 90% of its gross production. Maybe you have a billing team or solution that when you look at who the payers are, and the contracted rates, and what types of claims are being denied and what issues you might find in your due diligence around the billing side, you might be able to collect an extra 1% or 2%, or 5%. In your 12-month Go Forward, forecast out what you think collections are going to be relative to the gross production that’s being generated.
Provider. Who is going to be the provider? Is the current doctor an associate? If so, will they convert to your associate agreement? Or will they keep their existing situation, and are there any challenges with that? You need to think about what their skill set is, and how long they want to stay. Will they be unmotivated if ownership changes? If it’s an owner-doctor who’s also functioning as a chairside doctor or what we call an associate role, then you have to think about whether the doctor wants to stay, and if so, what their compensation will be. If you’re in a situation where the doctor is going to exit in a few months, then you’ve got to put that in your Go Forward Pro Forma.
Practice staff. When a new owner comes in, it’s realistic to assume that some staff may not buy into the new vision and decide to leave. It’s important to account for staffing turnover in your Pro Forma. Even if you have a beautiful facility, everything’s working, a great doctor, but if it lacks the right support staff, you will have challenges in maximizing what the practice can be from a financial perspective. You need to answer the question of “What will the culture of the practice be under your leadership” and then account for how that will impact the overall staff cost as well as how it will ultimately impact your patient flow. And this needs to be captured in the Go Forward ProForma
Supplies and lab fees. What are those costs historically? How are those going to change over the next 12 months after you become the owner?
Occupancy cost. What are the rent, utility, and other costs associated with the practice? You may want to bring a dedicated data pipe to the practice to support your IT and data access needs or make other important improvements. You will need to build those costs into your Go Forward Pro Forma so that you can understand the true cost of the acquisition.
Marketing. What spend has existed in marketing, what activities have been put towards it, and how effective do you believe it’s been? Do you want to increase marketing activities for a short period of time to drive first-time visits?
Centralized services. Is there anything you’re going to centralize that they’re not centralizing? Billing and call centers tend to be the most common centralized services. Billing is pretty broad and covers everything from insurance verification, EOB payment posting, claims quality assurance and submission to even running an in-house patient finance program. How will these costs impact your Go Forward Pro Forma?
Tour the facility. Are there upgrades or improvements that need to be made to drive a great patient experience? Perhaps there are even some things from a compliance perspective that might need to be changed, or that you care about more than the prior owner. All of that needs to be looked at to understand what the costs are to maintain the facility moving forward.
Other Miscellaneous costs. You want to look at any other credentialing costs, compliance costs, IT expenses, HR expenses, recruiting, etc., You will want to layer these costs in payroll costs, contractors, so that you can be really clear about profitability over the next 12 months compared to the revenue you expect the practice to generate.
Once you have this information, you have an effective way to track the practice’s performance.
“What happened before you became the owner doesn’t matter anymore,” said Kaufman. “What matters is that you understand the benefit and value that your investment will bring you on day one and thereafter, once you are the owner of the practice.”
With the Go Forward Pro Forma for the first 12 months in-hand, your confidence surrounding the potential acquisition should go up dramatically. You may decide not to move forward, or you may decide to pull the trigger. Either way, you will have all the confidence you need to make an educated decision.
One of the main drivers of that confidence is what the Pro Forma tells you will happen in Year 2 and beyond. With clarity on the first 12 months, you can now realistically put your plan together on how the practice will grow and evolve into the future. You can layer the financial outcomes of all of your strategies into the Pro Forma, exponentially increasing your confidence on whether or not the acquisition is your best use of capital to grow.
To listen to the full podcast, visit https://dsosecrets.libsyn.com/98-acquisition-secrets-with-host-ken-kaufman