For those of you unfamiliar with dental practice financials, you may be forgiven for thinking that if you’ve seen one, you’ve seen them all. That they all follow a similar structure or template, and that the practice’s income and expenses will always be labelled somewhat consistently from practice to practice. The truth of it is that the structure and quality of dental practice financials can vary enormously.

• Dental practice structures sometimes utilise service entities or engage with dentists using Service and Facility agreements (SFA or FASA), which change how the financials should be interpreted.
• Expenses that buyers/banks often want to see separately (like lab and consumables or clinical and staff wages) are often lumped together.
• Expenses are sometimes put into non-specific/non-descript expense categories, like “consultants” or “professional services”, which are a shorthand that makes sense to the person doing it, but not to outsiders (like prospective purchasers, or their financial advisers).
• Personal expenses may be mixed into the financials, diluting the profit of the practice (personal insurances mixed in with practice insurances, personal mobile phone and travel mixed in with those of the business). **
• Many non-recurring expenses may be mixed into the financials, diluting the profit (one-off repairs, signage, website creation, etc.). **
• The owner may not be paying themselves market-rate rent, or a market-rate salary (@40% of (collections less lab)).
• Sometimes, other financial interests may be going through the same financial entity (investment property, other practices or businesses run out of the same ABN).

When we are involved as dental brokers, it is our job to work with the vendors and their accountants to provide clear financial statements to a prospective purchaser that best represent the practice and facilitate the sale.  But how can you navigate a practice’s financials when this isn’t the case?

As a potential buyer 

If you are assessing practice financials that are not clear, it is almost always a mistake to become suspicious or upset. The seller has almost certainly not deliberately created a ‘fog’ to misrepresent the practice. Realise that:

1. When an owner shows a buyer their financials, it is often the first time they have shown them to anyone outside their innermost circle. There are feelings of exposure, sensitivity and sometimes embarrassment that come with this exposure.  Be sensitive to this and don’t criticise the quality of the information provided.
2. Sometimes, it is the inexperience of the buyer’s accountant with dental practice accounting that is causing the issue (for example, we often get questions about the financials when dentists are working on SFA/FASA agreements, because under this structure the dentist’s salary can then be missing from a Profit and Loss report).
3. A dentist practice owner sometimes puts their head down to focus on practice operations and delegates and/or abdicates responsibility for the financial documents to the bookkeeper/accountant, who is allocating expenses, with little oversight and direction.
4. It is not uncommon for raw practice financials to need clarification and expense add-backs**, in order to be able to see the true profit.

While some owners are intimately aware of all of their practice’s figures, don’t put them on the spot with questions when you meet them, point to an expense line on a Profit and Loss that seems strange, and expect them to have answers.  Politely email any questions or necessary clarifications afterwards.

As a Practice Owner:

Often, for the sake of expediency, a practice owner will send out their raw financials to a prospective buyer to progress a deal, without realising that:

• How they name expenses and structure their financials is not how everyone does it
• A Profit and Loss report often shows a lack of profit for tax purposes, and this can lead an inexperienced buyer to believe there is a lack of profit, where profit actually exists in abundance
• A lack of clarity can lead to a lack of confidence
• Sometimes, a buyer will be too embarrassed to ask questions when they don’t understand financials and will just give up.

Before you put your practice on the market, make sure that you take the time to ensure that your financials are up to date, clear and that you can account for all add backs. If you aren’t sure, send them to a practice broker or valuer for their opinion. While spending this time and expense may be frustrating and might slow things down initially, it will be worth it when your buyers are able to see the true value of what you have built.

(**For more information about personal and non-recurring add backs see this article: https://practicesalesearch.com.au/dental/articles/when-profit-isn-t-profit-how-to-boost-your-practice-valuation-by-understanding-add-backs)

t hasn’t been fully realised yet.

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