Accounts Receivables in Dental Practice Valuations

Let’s talk about Accounts Receivable (A/R). Sound boring? Okay, let’s put it another way. Let’s talk about free money.

Account Receivable is the money owed to a practice by its patients, which the patients have not yet paid. Often, the A/R is available to purchase along with the practice itself. The question is, should you buy it?

In weeks past, we’ve given you defined benchmarks for office collections and expenses, i.e. where those numbers generally should be. Unfortunately, there is no “right” number for outstanding A/R. 

However, to really get a sense of if the office is efficient and effective at collecting payment, look for trends.

The most current outstanding balance, between 0-30 days, should be the highest. Ideally there will be a significant drop during the 31-60 day and 61-90 day range. This will tell you that the office is very proactive and talented at collecting those payments promptly. 

There’s usually a spike in the 90+day category. This is simply because 90+ days really focuses on that “plus.” These are outstanding balances from the dawn of time…well, the dawn of the office ownership.

Compare the amount outstanding to the collections. If it seems like this office really needs the outstanding money, especially in the first 90 days, that’s a sign that maybe the front office (or person responsible) isn’t doing a good enough job.

After you look at the accounts receivable, consider something else: When was this report pulled?

Sometimes sellers will bill at the first of the month and pull the report at the end so the balance looks larger. If it seems high to you, ask. 

(In case you haven’t noticed a common thread of advice over the last few weeks, I’ll be a bit more obvious: Just because you see something concerning, don’t run for the hills yet. Always ask follow up questions. You may just ask the right ones and get your dream practice!)

Other than assessing the office’s efficiency, why should you care about A/R?

Because it can be very beneficial for you to purchase them. Not every seller wants to sell the accounts receivable, but many do.

I recommend that if you have the opportunity to purchase them, you should. If done correctly, it’s like buying cash for a discount. 

For example, if the 0-30 day balance is $120,000 and you buy that at 85%, you just bought $120,000 for about $100,000.

The same reason I recommend purchasing is often the same reason sellers don’t want to give them up. The seller may not want the lower rate so they opt to have you collect them on their behalf for a fee, usually about 5%.

If you’ve ever gone through the process of buying a home, you know that you are approved for how much house you are allowed to buy (and these days, they’re very expensive). 

If you’re approved for a $500,000 house, that doesn’t include the new couch you want to buy because you have space for an upgrade. It doesn’t include the cost of removing that wall so you have that ever so sought after “open floor plan.” 

It starts to add up! 

There is good…no… great news for you as a dental buyer. The wonderful thing about a practice loan compared to a housing loan is that a bank will typically give you working capital in addition to your purchase loan.

This working capital is either extra cash or money to buy the outstanding accounts receivable, but not both.

The accounts receivable are purchased in about 50% of sales for any number of reasons, such as seller preference, the buyer hitting their lending capacity, or the buyer deciding to use that working capital towards something else or keep it if they’re concerned about inefficient staff members.

Often we hear concerns, “What if the patient doesn’t want to pay me because I’m the new guy?” 

This is not a common scenario; however, there are always some rotten apples. If there is a difficult family that will only pay the doctor that has provided their care the last 12 years, you can opt to buy all the outstanding accounts receivable excluding that family’s.

Whether you choose to purchase or collect for a fee, make sure those terms are written very clearly in your offer.

However, at the very least, just look at the outstanding accounts receivable. You can find very helpful information about the office even before spending a few days shadowing.

I was talking to a broker recently and learned something so mind-blowingly stupid that I was literally speechless. You should know about it, too, in case it comes up in a transition you’re involved in.

In almost every dental transition the decision of whether or not to purchase the accounts receivable (or “A/R” – the money owed to the practice by patients who had work done by the seller, but didn’t pay before the buyer bought the practice.)

Usually, the buyer gets the A/R at a discount and is happy to pay extra because it’s like buying a stack of cash with a shorter stack of cash. The seller likes it because it’s a clean break from the business. They get the price of the practice PLUS some extra for the bills they haven’t collected, and they can walk away into the retired dentist sunset.

But some sellers didn’t want to sell the A/R. And on some deals, it didn’t make sense to me. I was confused.

Until I learned something new about brokers.

Some brokers will charge the sellers EXTRA for A/R that are sold as part of the deal.

Most brokers charge a percentage of the sales price of the practice. The standard amount is 10%, though that number can vary. Thus, if a seller pulls a deal together at a sales price of $1 Million, the broker’s take would be $100,000.

Some brokers say that if you, the buyer, purchase the A/R…that amount gets tacked on to the sales price.

So, if the sales price of the practice was $1 Million, and the A/R cost was an additional $75,000 – some brokers apply their 10% fee to the $1,075,000 … bumping up their fee by $7,500.

Ridiculous.

But now it makes more sense why some sellers don’t want to sell the A/R.

I’m still trying to decide if a broker doing something like this falls into what I’m calling the bad broker category. Either way, it’s dumb.

And now you know an additional question you can ask a broker or seller if you’re having trouble negotiating the A/R on your deal.

Read More:

What Overhead SHOULD Be | Is It a Good Practice to Buy?

Why Sellers Sometimes WILDLY Overvalue Their Practice – And What To Do

How Due Diligence Works in Dental Transitions

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