Tell Tale signs
When buying a practice, what do you look for in the accounts?
There are a number of areas which will shed light on the performance of the practice in a deeper way than the basic numbers. The income breakdown contains a wealth of important information. Is the practice is an NHS training practice? The income and expenses relating to a Foundation Dentist may be reflected in a variety of ways. The key is to consider the income without any inflation for the Foundation training. You cannot guarantee that the training will continue under your ownership, or indeed that Foundation Dentistry will continue in the same way as before. Nor can the seller.
Separate the FD income from the income generated from patients. Similarly, separate the expense associated with it -- the main one of course is the FD's salary.
If you are buying a training practice, do not underestimate the time commitment. Being a trainer can be a really rewarding role, but it can also be onerous and diverting of your time chairside, and an extra worry in running a new practice.
A deeper breakdown than simply private/NHS – one showing who specifically generates income -- can give valuable insight. You should be able to match the costs of the associates, hygienists, and specialist providers against the income they generate, which can illuminate the efficiencies of the operating procedures of the clinic. Comparison to the seller's analysis of their time spent in the practice will help you to envisage how it will look and feel under your ownership.
If you have the benefit of the Agent’s particulars, you will see that they have added back some expenses to arrive at a "fair maintainable profit" or “EBITDA”, or another descriptive phrase. The reason for this is to legitimately remove expenses which are subjective to the seller, and may not be relevant to the buyer. However some of the subjective removables ought to be replaced by your subjective expenses. For example, it is not strictly necessary to market or advertise a practice, or rework the stationery, so this is often added back. However it is very likely that you will want to do so, so you should include the associated costs in your own workings. The seller’s spouse often does a valuable administrative job or acts as the practice manager. Their salary would often be excluded; but you as the buyer will still have the cost of someone to do this job.
For examination of other expenses, NASDAL accounting firms have the benefit of our pooled accounting data, which we use to benchmark practices. Dealing with a large number of clients across the UK also gives us the ability to dig into geographical localities, where a practice may be a long way from the "average". (Incidentally, in over 25 years of specialism, we've never met an average dentist!) This benchmarking allows us to compare what the various overheads and expenses of the practice should cost. The largest is very often the salaries bill. Consideration of the mix of team, what they do and how they do it, and of course what changes you may be able to make, is a crucial factor in your decision.
After the accounts are pulled apart comes a time to put them together again, showing how the practice would run under you. This study of feasibility is a real pointer as to the sense or otherwise of the acquisition. By its nature, this should be done at a very early stage, as it confirms affordability and shows the sensitivity of the profitability and cash flow. The bank will very often require such a feasibility study, but in actuality it should be you, the buyer, who takes the benefit from this. It allows you to focus your pre-sale enquiries, target, forecast, plan, and after the acquisition, monitor the performance of the practice. You can then adapt your management and business direction accordingly.