In the course of my career, I’ve advised many new buyers as they navigated purchasing a dental practice. Typically A/R is not included in the overall purchase price, and rather is a separate value agreed upon by both parties. How much do you know about what you’re agreeing to? Below I’ve highlighted some common myths about dental practice A/R.
- Large balances are noncollectable.
False: Sometimes, large balances can indicate a longer than usual insurance reimbursement or that patients have an extended line of credit.
- The seller will almost always want to sell A/R.
False: The seller may think the collectability will be higher than whatever terms he or she would agree to with the buyer. A/R can be a source of cash flow post-sale.
- A/R balances can fluctuate over time.
True: A/R tends to be higher January through April. This is partly because patients’ dental benefits kick in at the beginning of the year, and also could have something to do with holiday spending: patients may not have as much cash on hand. Remember to average collections over the course of the year.
- A high A/R balance is a bad sign for a potential buyer.
False:: A large A/R balance could simply indicate that a practice is heavily insurance-based. Fee-for-service practices would only have balances if they offer in-house financing. Another consideration is that if a dentist recently brought on many new patients, it could be normal for A/R to be higher during that time period.
- Balances in the 0-30 day bucket are current.
False: Not necessarily. Some software starts the aging process when an invoice is issued, not at the date of service. Rejected claims can get pushed back into the 0-30 day bucket. Always double check.
- Balances over 90 days old are delinquent.
False: Again, double check. If payments are being made timely, the account is not delinquent.
- When buying A/R, it’s all or nothing.
False: A buyer can choose to purchase some of the A/R balance, depending on his or her view of the risk and collectability.
- There are tax implications when buying A/R.
False: Because a buyer is assuming proceeds from a liquidated asset that’s already been purchased. The seller, on the other hand, pays ordinary income tax on any A/R he or she collects post-sale.
- Written policies for collections won’t help reduce A/R balances.
False: Generally, when there are written financial policies, the process of collecting outstanding balances is easier and more straightforward. While this isn’t true for all practices, having a written collections policy should help.
- The goal is to have a zero A/R balance.
False: While it seems like a nice thought to operate without any patient debt on a cash-only basis, carrying an A/R balance means that case acceptance is high and patients have options to pay their bill. Carrying an A/R balance is normal; just be careful it doesn’t get too high.
Remember when looking at an A/R balance, the type of practice matters. Whether a practice is in-network with several insurance carriers and what specialty it is can both impact the relative value or risk of an A/R balance. When in doubt, I think a good rule of thumb is that the A/R balance shouldn’t be more than one month of collections.
ABOUT TIM LOTT
Tim provides consulting services to dental professionals and practices. He provides expertise in start-ups, mergers, transitions, tax and retirement planning, financing assistance and budgeting. Some of the specific areas of consulting are associate, partner, and shareholder arrangements; practice management, practice purchase, sales, buy-ins, and buy-outs and related tax issues.