Buying a Practice When Seller Has More Than One Location

As multiple location owners have risen over the past five to ten years, it was a matter of time before we would start seeing more transactions where the buyers are looking to purchase one of the locations, NOT all of them. While this may not seem like a big deal or add any complexities, it may, and this blog will cover some of the issues you may see when buying one location from a multi-location seller.

The main problem could be where the seller has commingled income and/or expenses with multiple locations. This can occur when the seller only has two locations, and a buyer needs to be keenly aware of this concern and stay on their toes to make sure they have considered all the possible what-ifs.

I suspect if there is a commingling of anything by the seller, it will likely be on the expense side and most likely unintentional. That said, I am sure there are situations where sellers may have purposely commingled income or expenses to make one location look better than the other for sales price purposes. However, this blog will assume any commingling is inadvertent and provide a buyer with some tips on some of the main areas we see the problems.

  • The seller may have one or a few employees servicing both locations, yet their wages may be paid by only one of the locations. It would be best to look at the employee info and wage info to make sure things appear reasonable. I have seen situations where the location has $200k in hygiene production with only $20k of hygiene wages.
  • The same can happen with dental supplies and lab expenses. The seller may have one account with their vendor, and expenses from multiple locations get paid from one location when they cover multiple locations. Again, you have to make sure these expenses appear reasonable.
  • The seller may report the locations under one entity and sometimes one set of books. This situation will make it VERY difficult for any buyer and their buyer representative to verify the cash flow of the location that is for sale. The same can occur with patient production and collections.
  • The seller may operate the locations under one “trade name” though under two separate entities for tax reporting purposes. The problem is, what if they have paid for marketing and advertising expenses from one location? They likely have not been allocated to all the locations. Also, this will impact your legal agreements since part of the goodwill you are buying, and the covenants usually include the seller’s name and practice name.
  • Which entities pays the seller’s malpractice premiums? If they have all their insurances with one vendor, are they allocating the expenses properly? The same applies to other expenses like mobile phones for emergencies…who pays that phone bill if there is only one phone?
  • The seller may have patients that have been seen in more than one location. What happens to that patient and the related revenue when they have been seen in the location you are buying? How is that protected in your covenants with the seller?
  • What happens when the seller has a hygienist working at both locations and may have patients who prefer to see them at the location they are working? This can be very problematic.

As I said, I suspect many of these issues are likely unintentional; however, they are real, and they can generate an inaccurate cash flow report for a location.

At the end of the day, if you, the buyer, is looking at a practice where the seller has multiple locations, you have to scrutinize every aspect of the practice financials in which you have been presented. You may think the broker or seller advisor has done an excellent job preparing accurate cash flow analysis to arrive at their asking price, but do not bet on it.

Remember, they are NOT charged with the due diligence task; the buyer and their advisors are. Often, the brokers and seller advisors will run with whatever they have been provided and/or told by the seller. They will not spend a lot of time looking at the financials for reasonableness nor do a lot of digging to make sure everything has been reported as accurately as possible. That is the buyer’s job!

Good luck and Happy Buying!