The latest installment of my new Q&A with dentists deals with practice acquisitions and the decision to purchase accounts receivable. Sellers typically want to unload A/R with the rest of the practice sale, and for good reason: it’s a clean transaction and a seamless transition for patients. Buyers of A/R need to do their due diligence, though. Buying A/R can be risky, especially if they don’t understand what they’re getting into. Dentists, if you’re looking at buying your next practice and have questions about A/R, read this first!
Make sure to catch up on my posts about Buying a Dental Practice: There’s More To It Than Price.
My contact was looking at a dental practice with A/R of about $80,000 that was less than 90 days. She said the seller mentioned it would be easy to separate providers for collection when she transitioned in. My contact was hesitant about purchasing the A/R. What should I do?, she asked.
Based on her situation, my advice was to collect the A/R for the seller for six months after the closing. This would also mean she would be responsible for billing and collection. Then, after six months any remaining A/R would become her property. This scenario would be less risky than, say, buying the entire A/R balance outright. Here’s why.
Buying A/R: Analyze Carefully
When purchasing A/R, it’s important for potential buyers to audit the balances very carefully and conduct a thorough valuation. Some sellers and brokers mistakenly believe that you can take a percentage of each bucket (0-30 days or 30-60 days) and assign a value to it. This is bad business!
A real-life example for you: some years ago, I helped a buyer with a purchase wherein the seller suggested selling the A/R. We weren’t consulted, and the buyer ended up paying way too much. What happened was that they agreed to allocate 90 percent to 0-30 days, 75 percent to 30-60 days, 60 percent to 60-90 days, and nothing for balances older than 90 days. Seemed generous, so our buyer went for it.
Over time, the buyer learned that the seller was posting charges without posting the appropriate PPO/insurance adjustments, or at least an estimate of what the PPO/insurance should have been. The buyer also found out that the billing software retained any insurance A/R as a 0-30 balance, even after 30 days.
Assessing the Value of Dental Practice A/R
The first step in auditing A/R balances is to eliminate any suspect accounts like neighbors, friends, and old balances. Remove all credits, make sure the buckets are aged by date of service, and check to ensure that balances have been adjusted for actual or estimated PPO/insurance adjustments.
The next step is to perform a valuation of the A/R. Current balances can be worth 95 percent of the balance, and the older the bucket, the less value is assigned. Expect to pay higher for A/R that is considered to be easily collectible. Make sure to look at whether accounts are making timely payments, not only that payments are being made.
Buying the dental practice’s A/R can be a source of immediate cash flow and help a new buyer ease into practice ownership. As long as the buyer does his or her due diligence and recognizes how A/R is analyzed and valued, it’s a win-win. But proceed with caution and always work with a knowledgeable dental CPA.
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. Contact him at tlott@dentalcpas.com.