Ten Red Flag Practices to Avoid!
In my opinion, there are definitely practices that are good risks and ones that are bad risks. I’m going to go over my “Bad Risk” or “Red Flag Practices” here.
1. A small practice.
I’m talking about collection numbers, not physical space. If a practice is collecting less than about $300,000 per year – and you don’t have a plan to move an existing practice into the space or have some other way to get a massive influx of patients, I’d just move on.
Practices making a small amount of money take you a huge amount of time and effort to turn the corner to a reasonable profitability. If the seller couldn’t do it – don’t have such a big ego that you think you can do it. Doing “some marketing” isn’t going to help – it will take a whole lot more than that.
2. A practice that is less than 10 years old.
The first question I’d ask is: Why is the seller selling?
More often than not, the answer is a bad lease. A bad lease is a lease that is too expensive, a lease that cannot be renewed, or a lease that is just for too much space.
Yes, I know there are exceptions, but I’d look long and hard at the lease and use your common sense.
3. A practice where the seller has other offices, or is not retiring.
A practice where the seller has other offices is usually a problem. After all, the seller is not selling his best practice. Nor is he or she leaving the best employees or best stuff in the office he is selling.
If the seller is not retiring – what exactly is he or she going to do? It is a very important questions, because sellers can get bored pretty easily. It might be a practice you want to avoid.
4. A practice with more than about 10% of its revenue from Denti-cal.
Denti-cal revenue can be uncertain and unstable.
You can get into Denti-cal problems pretty easily - and end up on special claims review or prior authorization or with an audit - especially if you are new to the game. If that happens, almost all of your revenue basically evaporates over night.
5. A practice with primarily new staff members.
The first question, is, where did they all go? Now, if one employee is retiring with the seller, that can be normal. But all of them? That’s far from normal.
I’d worry about new staff members particularly if the seller has other offices. The “good ones” probably were moved to the other offices.
6. A practice where a practice sale broker insists that you use a particular attorney or a particular consultant or accountant to evaluate the practice.
This is supposed to be impartial, isn’t it? Here, I’d just walk away if you can’t use who you want and look at what you want.
Which doesn’t mean to take weeks or months which can definitely irritate all of us brokers.
7. A practice in which more than 10% of the patient base lives more than
five miles away from the practice.
This can happen if the seller lives in another community, is part of a religious or other group that draws patients in. Or, sometimes a seller is involved in a sport that draws patients in – I sold one practice where the seller was into racing cars, and a good chunk of his patients were in the car racing industry.
Patients would be very unlikely to continue on with you if they are bonded to the seller in some specific way, and in this case, better to walk away.
8. A practice that has been on the market for an extended period of time.
Most practice listings are seen by literally thousands of dentists in the practice buying market within a few days of being listed.
If everyone is passing a practice in a popular area by, just ask yourself why.
Sometimes the reason is a religious or other group orientation of the seller – and if you are that religion or belong to that group - it might be a great buy for you.
9. A practice in which the selling doctor will not give you a full range of covenants
(such as: a covenant not to compete, a covenant not to treat patients of the practice, a covenant not to derive income from patients of the practice, and a covenant not to hire employees of the practice, a covenant not to accept referrals from the practice’s referral sources.)
There are a lot more covenants that should be in a sales agreement in addition to the covenant not to compete – the covenant not to compete is only the tip of the iceberg.
I was an expert witness once in a case where a specialist sold his practice to another specialist, and there was a covenant not to compete. But there was not a covenant not to solicit referral sources, accept patients from referral sources, derive income from the referral sources. The buyer was basically out of luck – their non- dental attorney had not even known to add such clauses to the contract!
10. A practice in which a broker says you have to sign a sales agreement before even doing your due diligence.
You need to be able to clearly see and understand what you are about to buy – and to just think about it.
You are almost always ask to sign a letter of intent by brokers or sellers, but not a full sales agreement. And you’ll need a week or two for your due diligence, before you have to submit non-refundable deposit.
Ok, that’s my top 10 list for now. It isn’t a complete list, and I’d say to all of you – use your common sense. If something doesn’t seem right or feel right – it probably isn’t.
I don’t care how much you hate your associate job, hang in there a bit longer and find a good practice that will provide you with the income and lifestyle you want.
Here is my podcast episode where I go into more depth on this topic!
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