Most dental practice buyers have the notion that the A/R (patient accounts receivables) aspect of buying a dental practice is fairly straightforward. You either buy the A/R or you don’t. However, I will cover three nuances concerning the A/R if you choose NOT to buy them. First, let’s briefly summarize the main two points of buying them or not buying them.
If you decide to buy the seller’s A/R, it can certainly keep the posting closing A/R-related issues pretty simple. You bought them, you collect them, and you keep them. The risk though is overpaying for them. If you are going to buy them, you better do some specific due diligence on the A/R to understand how clean they are (or aren’t) and be prepared to place a value on them. I have seen situations (after the fact) where buyers did NOT do their due diligence and simply agreed to a common valuation method of applying a percentage to the various aged buckets (<30 days, 30-60 days, 60-90 days, 90-120 days, 120+). The problem here is IF a seller either intentionally or unintentionally prepares their aged A/R report with amounts in the <30-day bucket that are really older than 120+ days. It happens, I have seen it so be aware.
If you decide NOT to buy and collect for the seller, there are some pretty basic issues that the buyer and seller need to agree to
A. An admin fee for the buyer to help cover their costs to bill & collect,
B. how to handle collections when the patient owes both seller and buyer and,
C. the time period in which the buyer will collect for the seller. There are a few other pretty basic issues to cover if the buyer does not buy them, these are the main points.
However, here are some nuances I mentioned above with respect to A/R that every buyer should consider.
First, patient credits. I have seen practice purchase documents that require the seller to clean up their patient credits before closing by either issuing refunds or cleaning up the patient account. Personally, my preference is to require the seller to issue a check to the buyer at closing for these patient credits that may have to be refunded. Why? I want the buyer to be in control of these credits as they may provide a marketing opportunity for the buyer. Suppose a patient has a $100 credit that the seller would have refunded and now the buyer has the money to refund. Instead of the buyer issuing the refund, they write to the patient informing them of the credit and offer the patient an opportunity to come into the office and get some treatment that was planned and not performed, giving them 125% of the credit as an incentive to do this. Therefore, the practice would apply the $100 credit to this treatment AND provide an additional $25 credit against the treatment allowing the patient to come to meet the buyer as well. It’s a win-win for everyone. I have had clients provide up to 200% of the credit as an incentive usually with a dollar amount cap like $250 above their stated credit balance.
Second, how long should the buyer collect the A/R for the seller, and what happens after that period? Our preference is to collect for at least six months (six months is quite common) AND after six months, any remaining A/R reverts to the buyer, NOT the seller. Sometimes we place a value of $1 to show consideration for the remaining A/R. Why do we want this? As the new owner of the practice do you really want the seller contacting patients of the practice that still owe the seller money? What if you have an aggressive seller with a grudge because they never got paid? Can you imagine how patients might react to this? Guess who the patient will blame? The practice! The patient will view the seller and the practice as one and the same. With social media today, including business reviews, this is the very last thing you want to risk when you just paid a handsome sum of money for goodwill.
Third, what happens when a patient owes money to both the buyer and the seller? Who gets the money first? Most agreements will require the buyer to apply these payments on a FIFO basis (first in first out=FIFO) which means if a patient has an outstanding balance with both buyer and seller and they make a payment, that payment will get applied against the seller’s A/R first. This is pretty standard and fair for the most part. There are exceptions that I will not get into in this blog, however, there is one exception I rarely see in the purchase documents. What if the seller’s A/R is more than a year old, maybe more than two years old? Should the seller be entitled to a payment the patient makes when they have been seen by the buyer as well? I do not think so. In my opinion, if a patient’s balance is so old and the seller was not actively trying to collect it there was probably something going on with the balance and related treatment. The seller had their chance to collect for a year, maybe more, and chose not to. The exception to this might be if the seller had an agreement (maybe verbally) with the patient that they could begin payments after a year, or the patient was already making regular payments.
These are just a couple of A/R issues that buyers need to consider rather than dealing with the A/R during a practice acquisition.