The Need for a Proforma
A Proforma is a tool that can be used to help a seller or buyer make many of the important decisions regarding the sale or transition of a dental practice. It must be based on the actual practice income and expenses for the past 3 years; not national average expenses or potential profit centers.
For the seller:
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It can help decide if a 100% outright sale or a slower type transition is best financially.
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It can help decide if the asking price is reasonable in the eyes of a buyer.
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It can help determine what needs to help make the practice ready for transition
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It can help determine if the selling price is in the market
For the buyer
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It is an educated guess on whether he/she will have enough money to pay all office expenses after purchasing the practice.
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It tells the buyer if he/she will have enough money to service the debt obligation and still have a take-home income adequate to live on.
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It can help determine whether the buyer should buy the practice outright or do a buy-in type transition.
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If the buyer is working in the practice as an associate the proforma can tell the potential buyer when it becomes profitable for him/her to purchase into the practice.
If you have not done a Proforma before, you may want to solicit the help of someone with the necessary experience — your accountant, dental consultant, or a dental-practice broker like Southeast Transitions, LLC.
You will need to start by gathering information on the practice needed to construct a valid proforma. Look for my next article on data needed to construct an accurate proforma that is based on actual practice numbers. |
What is needed in order to create a useful practice Proforma?
Start by gathering the following information:
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The income-and-expense reports (or tax returns) for the office for the past three years.
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A COMPUTER LISTING of ADA procedure codes that itemizes the number of units done and the dollars generated for the past year for each procedure code.
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A COMPUTER LISTING of Production and collection by each provider in the practice
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The production, adjustments, and receipts, by month, for the previous three years
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The number of hygiene visits and hours worked by the hygienist per month for the past year
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The monthly debt-service payments for the purchase of the practice
What the Proforma tells you….
Once you have gathered this information, you can determine what a reasonable gross production would be for the practice andthe take-home income needed by the buyer. This is an educated guess based on your knowledge and experience, as well as that of your accountant, consultant, and broker. You then project, on a monthly basis, what the income and expenses are going to be for the practice and the dollars necessary to service the debt and pay the seller a reasonable salary if he/she works in the practice post sale.
What is needed other than an accurate Proforma
In addition to an accurate practice Proforma and to determine if the transition will be successful obtain the following:
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The number of new patients the office has generated, by year, for the previous three years
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Type of new patient; if the patients are fee-for-service, managed care, or Medicaid
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The demographics for the office area, and projections — done by the city- or county-planning commission — for the next 10 years
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Number of active patients, broken down by fee-for-service, managed care, and Medicaid patients
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The number or treatment rooms available and whether there is room for expansion
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The number of doctor-patient visits and hours worked by the doctor per month for the past year
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The accounts receivable aging report
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