Dental practices that come up for sale present various business opportunities for buyers. Some practices have stable finances and operations, enabling buyers to generate steady revenue through careful management. Other practices offer avenues for expansion that may allow buyers to increase the value of their investment significantly. But which type of dental practice should you buy?
Understanding Turnkey Dental Practices
A “turnkey” dental practice refers to a fully operational business with stable revenue, low staff turnover, a loyal patient base, and tested systems in place that make running the practice smooth. Some of the primary characteristics of a turnkey dental practice include:
- Comprehensive financial records that document a stable or predictable cash flow
- Owned facilities or long-term leases with favorable renewal terms
- An active patient base
Buyers may prefer to purchase a turnkey dental practice for various reasons. Turnkey practices have predictable income, which enables buyers to value the business and calculate their return on investment. Their financial stability can also make obtaining financing easier and less expensive. A turnkey practice will also have established operational procedures, which can make the ownership transition easier for patients and staff.
However, some downsides of purchasing a turnkey dental practice include a higher valuation due to the practice’s financial strength, limited growth upside given the business’s maturation in the market, and the risk of overpaying for goodwill.
Understanding Growth Opportunity Dental Practices
A “growth opportunity” dental practice refers to a financially underperforming practice or a newer practice with expansion potential. Some of the top indicators that a dental practice has growth potential include:
- Facilities that go partially unused
- Misdirected marketing efforts
- Outdated equipment or technology
- Owners who focus primarily on clinical work rather than operations or growth
Buyers may prefer growth-oriented dental practices because they offer the potential to increase revenue and profitability through expansion and optimization, providing greater upside to the purchase. Furthermore, the practice’s lack of size or financial stability, or its inefficient operations, can lead to a lower valuation, making the business a less expensive purchase opportunity. However, some drawbacks of purchasing a growth-opportunity dental practice include less predictable cash flow, higher operational or financial risks, and the need to invest time and money to grow and stabilize the business.
Key Legal and Financial Considerations When Comparing Turnkey and Growth Dental Practices
Buyers will have various legal and financial considerations when deciding whether to pursue a turnkey dental practice or one that offers growth opportunities. Some of these considerations include:
- The allocation of the purchase price between assets and goodwill, which can lead to various tax implications
- The practice’s lease obligations (if any), which may require a buyer to negotiate a new lease with the landlord rather than receiving an assignment of the existing lease, and the lease’s flexibility to facilitate expansion efforts
- Whether a turnkey operation has inflated financials or hidden liabilities that may undermine the practice’s stability
- The ability to ensure staff retention, either to maintain the stability of a turnkey practice or to facilitate the expansion of a growth opportunity business
- The seller’s participation in transition, including through post-closing employment or contractor agreements
Choosing the Right Type of Practice
Various factors may influence your decision between a turnkey dental practice or a business that offers a growth opportunity, including:
- Your risk tolerance, as growth opportunity practices have a higher chance of failure
- Management style, including your aptitude for creating robust operations versus preferring to operate a stable business
- Your career stage
- Your access to capital or financing
- Your preferred work-life balance
Consulting legal, financial, and professional advisors can help you determine whether a proposed dental practice acquisition aligns with your goals.
Contact Our Firm Today
Understanding the differences between a turnkey and growth opportunity dental practice can help you assess the suitability of a potential purchase. Contact Polished Legal today for an initial consultation with a dental attorney to learn more about the pros and cons of a turnkey dental practice versus a practice that offers growth opportunities.
