Dodging Bullets and Defying Gravity

There are times that one must look deeply at "the numbers" of a practice before completing a sale. This case-in-point may prove instructive:

A nearly retired orthodontist and his wife were helping their son, a new orthodontist, get set-up in practice with the purchase of an existing office. They had asked us to do a demographic report on two sites (including the one for sale). The "other" site proved to be much better in terms of competition, referral base, growth, demographic character, and the other things one would hope to find. Still, they had received "the numbers" including the tax return of the practice they had considered for sale. The money was fantastic! The overhead with less than 30%! The sale price was reasonable! Why would we NOT recommend this area (even though the demographic picture looked poor and declining). Surely the money that this doctor was bringing in would make the sale a "no-duh."

So, we looked at the numbers behind "the numbers" and found a few interesting truths. For one thing, the doctor was selling to move to a different state to start all over again. One has to ask "Why would this doctor leave such a 'cash cow?' " The other question we need to ask was ,"How can one operate with such low overhead in what was a fairly normal-to-expensive place to practice?"

We learned that the seller had put NO money in the practice for a very long time. The physical facility was awful. The equipment was worse. We also got wind that the staff was underpaid and not happy about it but they thought a new boss might bring a desirable change to their situation.

The selling doctor was a very shrewd investor and he has every right to be. So, assuming that his numbers were correct, was he being dishonest? Absolutely not!

We have to assume that if the young buyer (and his parents) pursued practice in just the same way as the seller, this practice would probably be profitable. But in discussing the issue with this young buyer, his parents revealed that it was his plan to invest in the building and the equipment. He had an idea that if he could invest some of the "big money" coming out of the practice, he could easily afford to make things better. Of course, the staff would be expecting more money AND there are myriad other places that would need money as well.

It is also our assumption that the seller saw the curtain falling on the demographic stage and thought to make a timely exit. Smart people often do that.

The lesson here is to young buyers: if you assume that you are going to make a "silk purse out of a sow's ear" it is going to cost you more than a silk purse AND a whole pig to do it. When you look at numbers, you are looking at more than cases that have potential or patient records. You are looking at a practice philosophy and a business model. If you can improve upon either or both, you will be profitable. But keep in mind that all the information you have gotten on the practice such as overhead, production, and collections will all go out the window and have NO value to you in evaluating the practice's potential for YOU.