Let's Buy a Dental Practice

[yappy]

Dang, it's like Uncle Sam is always one step ahead lol. It's too bad it didn't let people do that though. It would help alot of people out who earn income as a result of their education. That's a good path IMO. Get educated, gain value, do useful work.

nice try but the govt thought of that one. you cant do that because your student loans have nothing to do with your current business. The funds used to pay for d-school are associated with being a dentist, not operating practice XYZ. Yes i know that w/o the schooling there would be no business, but you cant go back and claim expenses before the business was established. If it was that easy, everyone would do it.

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[little Buddy]

Yet practice xyz can give these same benefits to a new associate dentist i.e. give them 15k a year towards their loans in addition to their salary and benefit package. Can't you claim a financial burden or something that is affecting your performance as "CEO"? At least you can use company funds to purchase that vila in Tuscany lol.

 

[donefordds]

I am involved with a real "piece of work". I work for the owner of a dental corporation that provides school based mobile dentistry. (ie exams, cleanings and sealants nothing more) He insisted that all of the doctors that work at the schools incorporate him/her self in order to avoid paying payroll taxes. And when tax time comes around he deals with us as corp to corp transactions. Meaning no w2 no 1099. We do, however, get to see how much money he's collected from Dentaquest when we receive our 1099 from them. All billing is done under our license and our corporation. He, somehow, cashes all the insurance checks and then pays us for our "production" minus "expenses". Which usually equals to less than 20% of collections. And this is just one part of our working relationship. He approached me with the option to buy into an existing practice within his brick and mortar office. Somehow, once again, private insurance companies are paying for services billed under my NPI and corporation tax ID yet, he cashes all checks. The problem with this is I've decided there's no way I want to purchase into this practice after working 2 months and he hasn't paid me the agreed upon 40% of collections. Nothing is in writing for this "business transaction" I did sign an independent contract agreement for the school /mobile job. Is there anyway I can get paid for the services I've rendered. Is there anyway of reporting this the IRS?

 

[HawkNelson]

Is buying a dental practice fresh out of Dental school a good idea? Would an initial associateship for two/three years be a better idea so you'd have experience before buying a practice?

I'm just curious, because if I bought a practice, I'd want to get it paid off asap. Get my loans out of the way quickly. Although this won't happen for years to come

 

[Sublimazing]

Is buying a dental practice fresh out of Dental school a good idea? Would an initial associateship for two/three years be a better idea so you'd have experience before buying a practice?

I'm just curious, because if I bought a practice, I'd want to get it paid off asap. Get my loans out of the way quickly. Although this won't happen for years to come

Pretty much all dental finance consultants will tell you that your end game should be owning your own practice with associates who produce for you.

so yeah it'd be great to buy a practice as soon as possible (assuming it's worth buying at all)...but with student debts at 200k+ and offices running from 300k-1mill+ you'll be in a unique position if you can afford that

I would not recommend opening up your own practice unless it is in a very particular geographic location/market

 

[HawkNelson]

Pretty much all dental finance consultants will tell you that your end game should be owning your own practice with associates who produce for you.

so yeah it'd be great to buy a practice as soon as possible (assuming it's worth buying at all)...but with student debts at 200k+ and offices running from 300k-1mill+ you'll be in a unique position if you can afford that

I would not recommend opening up your own practice unless it is in a very particular geographic location/market

So would you be better off financially after buying a practice right out of dental school? I wouldn't consider opening up my own. Only buying a pre-established one.

 

[Sublimazing]

So would you be better off financially after buying a practice right out of dental school? I wouldn't consider opening up my own. Only buying a pre-established one.

Buying a practice is a big step and requires a lot of pre-meditation. And running a practice is a developed skill that can be learned. But if you can find a practice that would be worth buying at any point in your career and feel you have what it takes to run a dental practice without being an associate first, then yes buying a practice is a good idea financially.

 

[Deadpool]

nice try but the govt thought of that one. you cant do that because your student loans have nothing to do with your current business. The funds used to pay for d-school are associated with being a dentist, not operating practice XYZ. Yes i know that w/o the schooling there would be no business, but you cant go back and claim expenses before the business was established. If it was that easy, everyone would do it.

Can you use any extra working capital from a business loan to pay off your student loans? I'm guessing the interest on the business loan can be written off while a student loan can't?

 

[wired202808]

Can you use any extra working capital from a business loan to pay off your student loans? I'm guessing the interest on the business loan can be written off while a student loan can't?

I'm not a tax preparer or tax lawyer, so I dont want to give the wrong advice. But you should probably stay away from any questionable deductions esp concerning student loans. From what I do understand, you pretty much have to pay them off and the only thing you can deduct on your regular taxes is the interest, but its often negligible in the grand scheme of things and doesn't yield that much of a savings.

 

[odontoblast]

hammer this thread has been quiet for some time, thought i will jolt it up a bit ..... as there are quiet a number of successfull dentist watching the thread including DR. hammer. i would like to request all of you guys if you would be willing to shed light on how to fill in this strategic position in your office,what has worked for you and how to negotiate their salary......
also things like UCLA (orthodontist) commented $ 20 for case acceptance, how can u implement similar tactics for a General Dentist where not every case is at least $ K..... its only few hundreds.

 

[Frank22]

OK its time to talk practices. So we'll start with practice 1


"The Sure Thing"

Practice 1:
Avg Gross: $583,000
Operative: $450,450
Hygiene: $132,550
Days: Mon-Fri 8-5
Active Pt: 3400 (80% insurance, 20% cash) general dentistry some endo, no ortho
Building: Rent with option to buy. Freestanding
Equipment: Purchased within the past 10 years. Computers w/EagleSoft, no digital x-ray
Price: $429,000 ($394,000 plus $5000 agent fee, $30,000 working capital)

Most of you pegged this one as "The Sure Thing" and you were right. This is an ideal situation to buy into. Mostly regular insurance, no reduced fee plans with the exception of Delta Dental, no medicaid and a fairly health hygiene recall. The practice has been there for decades so it is very well established, the equipment is not brand spanking new but nothing will need replacing for several years. And the price $394,000 is 67% of production which is OK. You could even haggle them down some. You have the option to buy the free standing building which is always a good thing, especially with an established practice.

Now lets look at numbers: The loan for this practice will be $429,000 at 7% for 7 years. So your note per month for the practice will be $6474.76. The practice on average makes $48,583. With a 65% overhead this leaves you with $ 17,004 to service your debt. After paying off your monthly practice note you have $10,529.24 for living expenses. But remember of your practice debt $30,000 is just cash for working capital. This is pretty doable and this is assuming that you will only produce the exact same amount for the next 7 years. Chances are as your skill level increases so will your production.

This is a good deal and is a lot like the first practice that I bought. When I bought my first practice in 1995 the yearly average was about $399,000. At the end of my seventh year there the yearly production was about $890,000. If I can do it you can do it too. If one of you were to ask my opinion on a practice like this I would personally drive you to the bank to get the financing going before someone else bought it out from under you. This practice was my first choice until I unearthed the practice that I am currently buying.

Shouldn't you be taking into account that collections aren't 100%? (If I recall correctly they're usually 98%).

So ($583,000 x .98)/12 - (583,000 x .98)/12 x .65 = $16,664.08 - $6,474.76 = $10,181.32/month

I also found it interesting to read that that the cost of paying off the loan for your practice isn't included in the overhead (so with your monthly note your overhead is closer to 78%). No wonder dentists make so much more when they're done paying off their practice. I hope I'm not coming off as argumentative, as I wouldn't be surprised if I'm wrong on the above, I'm very inquisitive and interested. Great thread BTW a lot of interesting information (as others have noted).

QUESTION: is the final value reached (in this case, $10,181.32) the "pre-tax net income?" I'm know little about finances so sorry if the answer should be obvious.

 

[KAIN DDS]

OK I am going to take a sidetrack and go over how to get past the front desk when you are looking for a job. I actually am going to talk to the bank, my lawyer, my account, the practice broker, the owner/seller, my equipment rep, my computer guy, my cable guy, my phone guy, my new front office lady, my new assistant, my interior designer and meet a woman I met at an online dating site. So I am going to be pretty busy between now and Saturday so just be patient with me and I will answer everything

Your funny and helpful

 

[corymartin2012]

This is more of a bump, because this thread is drifitng into a place of dormancy. Just trying to jumpstart something.

I have a question concerning opening satellite offices, second practices and such. How do you operate two at a time? Do you hire a complete other dentist and work part time or how does this work? Thank you ahead of time.

 

[Frank22]

Hammer can you tell us if you're happy with the practice that you picked now that you're working in it?

 

[fouyboy]

Bump

I can't seems to find the final interview advice. Anyone know which post number it is?

 

[DrivingCruising]

I love this thread @_@

me too !!!!!

 

[ThatgirlFriday]

No, no, no. Dont write a book, Ham. That would make life far too easy on us.

Maybe you could
write a nice thick pamphlet.

 

[Najma Rubi]

OK who wants to hear about buying a dental practice in the real world? Well join me as I venture into the world of debt, a retiring owner/dentist, practice brokers, issues with the remaining staff, retaining patients, talking with the bank for a loan, pouring over financials, demographic surveys, production predictions, future overhead calculations, interior design, logo design, practice rebranding, advertising, patient recruitment, staff recruitment, debt management and having a hostile ex-wife who still lives in the area. Plus I will try to address issues that are unique to recent grads looking to go into practice and to answer any questions that you might have. Also I am going to use real numbers but I will change just enough information so that I don't violate any confidentiality agreements that I have already signed. So lets get started

it's really a fantastic post............

 

[majdi]

This is a great thread, Thank you guys for sharing your expertise, its really helpful especially for us, newbies in the teeth industry

 

[thebigrisky]

You need a branded practice sales team that leave their practices Thursday and fly to a campus dental school clinic for a 3 to 4 hour biz-nass 101 lecture on the practice types you talked about. The ability to analyzable debts when purchasing a practice, advertising etc... Alll that stuff packaged and power-pointed and taught to some 4th years on Friday. You convince dental schools to pay you for that service. Its a niche that needs filled. Dental Buisness Stormtroppers invading the galaxy with thir knowledge and strait talk. \

I saw a realaeste conference one time back in the 90's market hey day and this guy cursed, cried, revealed truth and told great stories. He was a machine gun of ideas and improv.He sold lots of materials that day and he is a regular now in that biz. I HOWEVER, learned stong principles from the guy because they were coming frm the heart and where direct in the analysis. His nubers made sense and he sold them to the masses.

THATS what you need. Dentistry isnt service......its a show!

AMBIEN IS WORKING>>>>>AMBIEN>>>>>beats>>>>>Lunests; Hands Dow>>>>>>

 

[CanadianDDS]

Hammer hasn't posted here since September 2011. Hammer, where'd you go?

 

[Talondriver]

There is so much to learn about so many aspects of beginning a dental career. Most of them don't have much to do with clinical procedures.
How do I know if this associate position I've been offered is right for me?
Will I make any money? Will I be able to meet my financial responsibilities? Can I really buy the practice in a couple of years as promissed?
Here are a few #s that can help you. An Active Patient (AP) is any person who's been in the practice in the last 24 months. It takes 300 APs to fill one doctor day each week. So 1500 APs = 5 doctor days. So if your host is working 4 days and wants you to work additional days, there need to be enough APs to handle the total # of doctor days you are both planning. If you are going to be working 4 doctor days, you need to insist on having 1200 patients assigned to you as their dentist. Having the staff schedule unassigned patients for you when they choose won't work. They will always choose to keep the "boss" busy.
Your compensation should be 30% of your restorative collections. If the host tells you he/she can't afford to pay you 30%, show them that since restorative is only 70% of total collections (hygiene should be 30%), he's really only paying you 21% of that patient's total collections (30% of 70%). Since most practices operate at 50-55% overhead (without doctor compensation) that 30% to you is not only affordable, it's a good deal. He makes 20% on your patients without touching them.
Here's another number: An AP should average $500-600 per year in collections to the practice. So a practice with 2000 APs should be grossing $1M in collections. If it is grossing less, the practice is inefficient and there should be more than average dentistry left in those records on the shelf to be done. If the average is higher than $800 or so, most of the dentistry on APs may have been done already requiring a higher new patient flow.
More to follow. Questions are encouraged.

 

[flatcamelbak]

Talon is taking over it looks like. Can we have some background on who you are?

 

[Talondriver]

I help dentists buy and sell dental practices with the aim of reaching their financial goals. That includes the full range from associate to buy part or all, to buy part or all without associating first, to sell and stay on as the associate, to sell and walk away, to mergers to entrepreneurial dentistry. I coach buyers and sellers so that they fully understand what an opportunity is and isn't. I instruct them on what the other party needs for it to be a successful transition so that each side wins. The seller reaches or moves closer to financial security and the purchaser gets full benefit from the seller's goodwill.
When you buy a dental practice, you are buying the goodwill that exists between the doctor and staff, doctor and patients, and staff and patients. The equipment you are buying is insignificant compared to the value of goodwill. When goodwill is successfully passed on to the purchaser, 95% of the patients will stay if the purchaser treats them and their time with respect, and does not cause them pain. When you buy a car or a home, you don't have a post sale relationship with with the seller. So negotiate to your hearts content. When you buy a dental practice, you do have a post sale relationship and negotiating with the seller is apt to have significant negative results. Keep in mind that this seller has put his/her life into this practice and is very proud of it, whatever "it" is. I suggest you are much better off walking away from the opportunity and finding another if you believe the practice is not right for you for any reason, including the total investment amount. When you invest in a practice opportunity, you are not shopping on line for the best price. You are determining where you will practice for the coming years and you must look at the cash flow in comparison to your associate income. If your associate income is $150k and your projected owner cash flow after all expenses and after debt service on the practice is $250k, think about the time value of money. Every 6 months you wait for a better deal is costing you about $50k or about $8k/month. That's money you'll never get back unless you find a practice netting you $300k from the beginning. That's possible, but not probable. More to come. Questions are great.

 

[LeoK]

Thank you for the alive info, Talondriver. I am just wondering if your type of financial consulting service is common in the market or not. I think it is very specific and unique.

 

[Talondriver]

Our information is specific to dentistry. It is only unique because most in the business will not go the lengths to educate you completely on practice associating and purchasing.

Here are some norms when looking at a Profit and Loss statement:
Variable expenses that vary directly with production as a % of collections:
Lab 5-8%
Dental supplies 4-6%
Office supplies 1%
Fixed expenses that are just that, fixed and do not vary with production. As a % of collections
Staff salaries/tax 20-24% (<20 means higher staff turnover, >24 means low turnover, older employees)
Rent 4-6% (the high end generally means the practice is under producing for the space, If well over 6% then the space was leased at the top of the market, probably in 2007)
Total variable and fixed expenses:
That total should be in the 45-55% of collections range. Higher in large metro areas, lower when rural.

So if variable expenses total about 13% (above), then when you increase production $100k, about $87k of that should be profit to you as the owner. In addition, you increased the value of your practice and thus the equity about $75k, since an average value for practices is in the range of 65-85% of a years collections.

How do you know the collections in the system are not artificially inflated? If the Collections Report from the system matches the Profit and Loss statement, and it matches the income on the tax return, you've probably got accurate data. Many owners claim higher than actual expenses, but I've not seen one yet that tells the IRS he/she had more income than actual.

Questions encouraged. More to follow

 

[CanadianDDS]

good info Talon, I am associating now but looking to purchase a practice in 1-2 years, this is a good resource, thanks.

 

[OhioDMD]

I have a practical question for you Talon.
Given the negative net worth of most recent grads and new associates what ratio of profit to purchase price or perhaps better yet profit to total indebtedness will most lenders look for (tolerate) when purchasing a practice assuming 100% financing?

 

[Talondriver]

Very good question. What banks are most concerned about is exactly what they should be concerned about - cash flow. They will look at the practice you are applying for and analyze the cash flow. They will assume the practice is going to collect what it has been collecting. Then they will look at the practice expenses, normalizing some that tend to be inflated by the owner ( I hope the IRS is not watching this). Then they will subtract payments on the loan for the practice, payments on buyer debt (school, auto, credit cards, mortgage, etc) and buyer reported living expenses. If there is enough wiggle room after everything is paid for it's going to be a go. But there is an if, a big IF.
The bank will evaluate your actions concerning money. Doctors are notorious about living beyond their means. The last ADA study on retirement showed that only 5 % of dentists could retire at age 65. That's after 35 years of above average income. The problem seems to be the doctor supporting his/her family in a way that doctors "should" be supporting them. I.E. the best cars, big home, best vacations, best private schools for the kiddos, best colleges, you name it.
Here's what the banks want to see. Cash in savings, $25-50k. No credit card balances. Reasonable cars, maybe even without car loans. Renting a home, not a mortgage. The amount of school debt only matters in the cash flow exercise above.
So get some $ into savings. It doesn't need to be yours. They won't ask you where it came from and they are not going to expect you to use it for a down payment. They want to loan you the whole enchilada. Use your credit cards, but pay them off every month. Don't go out and lease two big $ cars. Wait for the house and cars until after you buy your practice. I was trying to help a young dentist buy a practice. When we got to his bank application, I found out that just one year out of school, he had bought a $440k home, had over $100k debt furnishing it, had over $1100/month auto lease payments (2 cars) and almost $400k school debt. His property taxes on his home were almost $9k per year and when you added it all up he couldn't get a practice that cash flowed enough to make all the payments.
So bottom line: Get your finances in as much order as you can. Continue to live on beans and tators and pretend you are not a doctor. You didn't want to hear any of that, I'm sure. Just lead a reasonable modest life that won't require you to work until you are 80 to get any time off.
Questions encouraged. More later

 

[Cold Front]

This is interesting, I wrote in red ink where my numbers fall as a GP with a practice open for 2 years, 2 doc + 1 hygiene. I used ranges too, as expenses vary from month to month for variable cost.

Our information is specific to dentistry. It is only unique because most in the business will not go the lengths to educate you completely on practice associating and purchasing.

Here are some norms when looking at a Profit and Loss statement:
Variable expenses that vary directly with production as a % of collections:
Lab 5-8% 3-4%
Dental supplies 4-6% 4-6%
Office supplies 1% 0.5%
Fixed expenses that are just that, fixed and do not vary with production. As a % of collections
Staff salaries/tax 20-24% 34% (<20 means higher staff turnover, >24 means low turnover, older employees - very low turn over, hence better salaries).
Rent 4-6% 6% (the high end generally means the practice is under producing for the space, If well over 6% then the space was leased at the top of the market, probably in 2007)
Total variable and fixed expenses:
That total should be in the 46.5-50.5% 44.5- 50.5% of collections range. Higher in large metro areas (in metro), lower when rural.

So if variable expenses total about 13% (above), then when you increase production $100k, about $87k of that should be profit to you as the owner. In addition, you increased the value of your practice and thus the equity about $75k, since an average value for practices is in the range of 65-85% of a years collections.

How do you know the collections in the system are not artificially inflated? If the Collections Report from the system matches the Profit and Loss statement, and it matches the income on the tax return, you've probably got accurate data. Many owners claim higher than actual expenses, but I've not seen one yet that tells the IRS he/she had more income than actual.

Questions encouraged. More to follow

 

[Talondriver]

If you are using a CEREC for your crowns in-house, your lab bill will be lower, and your supply bill will be a bit higher. Good to hear your numbers are in line. Your staff costs are high, I expect it's because you are metro where they tend to be higher. You may have some long term staff or you may be staffed up for higher productivity that has not caught up with the staffing yet.

 

[Cold Front]

Again, you are on the spot on all this based on my research. Again, my red ink below.

Very good question. What banks are most concerned about is exactly what they should be concerned about - cash flow. They will look at the practice you are applying for and analyze the cash flow. They will assume the practice is going to collect what it has been collecting. A trend in growth is very positive, specially if there is good equity in the office, makes banks more confident about their lending. Then they will look at the practice expenses, normalizing some that tend to be inflated by the owner ( I hope the IRS is not watching this) Net profit is usually hard to inflate, as collections and expenses both have receipts/documentations attached to them (i.e. bank statements). Then they will subtract payments on the loan for the practice, payments on buyer debt (school, auto, credit cards, mortgage, etc) and buyer reported living expenses. If there is enough wiggle room after everything is paid for it's going to be a go. The formula is usually 70% of the office collections minus all office debts (practice loans, etc) = What the practice is worth (owner's equity). Ofcourse there is other personal debt than can lower that equity down when personal financials are added to the picture. But there is an if, a big IF.
The bank will evaluate your actions concerning money. Doctors are notorious about living beyond their means. The last ADA study on retirement showed that only 5 % of dentists could retire at age 65. That's after 35 years of above average income. The problem seems to be the doctor supporting his/her family in a way that doctors "should" be supporting them. I.E. the best cars, big home, best vacations, best private schools for the kiddos, best colleges, you name it.
Here's what the banks want to see. Cash in savings, $25-50k. Yep. No credit card balances At least small balances, otherwise your FICO score is hit hard due to high utilization. Reasonable cars It's best to have a car under the business, so it doesn't show on your credit report as a debt, maybe even without car loans. Renting a home, not a mortgage. The amount of school debt only matters in the cash flow exercise above.
So get some $ into savings. It doesn't need to be yours. They won't ask you where it came from and they are not going to expect you to use it for a down payment. They want to loan you the whole enchilada. Use your credit cards, but pay them off every month This is referred to as "no late payments" and a big part of building credit/great scores.. Don't go out and lease two big $ cars. Wait for the house and cars until after you buy your practice This is probably the most important factor of all. I was trying to help a young dentist buy a practice. When we got to his bank application, I found out that just one year out of school, he had bought a $440k home, had over $100k debt furnishing it, had over $1100/month auto lease payments (2 cars) and almost $400k school debt. His property taxes on his home were almost $9k per year and when you added it all up he couldn't get a practice that cash flowed enough to make all the payments. Because he had no "Equity", and exposed himself to maximum risk.
So bottom line: Get your finances in as much order as you can. Continue to live on beans and tators and pretend you are not a doctor. You didn't want to hear any of that, I'm sure. Just lead a reasonable modest life that won't require you to work until you are 80 to get any time off. You can live a little too, it's all about planning and convincing banks to work with you if you have a vision and a record of success.
Questions encouraged. More later

 

[Cold Front]

If you are using a CEREC for your crowns in-house, your lab bill will be lower, and your supply bill will be a bit higher. Good to hear your numbers are in line. Your staff costs are high, I expect it's because you are metro where they tend to be higher. You may have some long term staff or you may be staffed up for higher productivity that has not caught up with the staffing yet.

But why spend $100k+ on CEREC? It's a total waste of investment unless you are cutting 15+ crowns a month for a good ROI.

I recently increased my staff, but it was below your fixed cost range for your payroll %'s. It was 18% before the increase, making the total overhead in the low 30% range. It almost doubles in the first couple of months, then comes down to the norms after productions catches up.

Good on all points. :

 

[suarez 7]

Really useful info from Talon and the senior dentists here, thanks all and I hope the discussion can continue.

 

[Talondriver]

Okay. We've got some apples and oranges mixing going on here. My post from 2/22/13 was edited in red. Some of the red was completely off track with respect to an associate buying a practice. Here's the problem area:
Cold Front discussed owner equity. That does not matter for the purchaser at all. It does matter for the owner/seller. He net from the sale will be the selling price, less closing costs, less any debt payoffs on the practice. The bank, when loaning to the buyer, will insist on paying off the seller's notes to clear liens on the practice. All that matters to the bank and the buyer are cash flow (income less expenses) less the buyer's practice note payment, less personal and school note payments, less living expenses.

Let's talk hygiene capacity and how it effects the practice.
70% of active patients (remember: that's anyone who's been in during the last 24 months) should be in hygiene recare with two appointments per year.
New patients during the year will need 1.5 hygiene appointments, two if they start in the first half, 1 if in the second half.
Let's look at an example:
Active Patients 1500
70% of 1500 is 1050
1050 APs in recall times 2 appointments each is 2100 hygiene appointments needed for APs
New Patients last year: 210
210 new times 1.5 appointments each is 315
Total appointments needed (at least) will be 2100 + 315 = 2415
Most practices have 8 appointments in a hygiene day sot 2415/8 = 300 hygiene days needed in the year
300 hygiene days divided by 50 weeks = 6 hygiene days per week needed right now for 70% of your APs and all of your new patients. So two hygienists each working 3 days would get you the 6 hygiene days.
Most practitioners believe they have a strong hygiene program if it's full. They don't bother to figure out if it's the right capacity. If the schedule is full, no one in the office is motivated to call APs to get them in for recare. So the owner is spending $ on marketing to bring in new patients and each new patient pushes an AP out the back door. When a patient has not been in for 18 months, they no longer consider you their dentist. They are susceptible to specials by your competitors. When you upsize your hygiene schedule to meet practice needs, then you get more hygiene collections. That also gets you more exams and more treatment opportunities. Remember, hygiene should account for 30% of collections. So when you increase hygiene by bringing in more of your patients, your restorative collections will increase also. That's win/win.
If you are evaluating a practice to purchase or to associate in, do an analysis of their hygiene capacity to determine if there is an opportunity for growth.
Questions encouraged. More to follow.

 

[OhioDMD]

Okay. We've got some apples and oranges mixing going on here. My post from 2/22/13 was edited in red. Some of the red was completely off track with respect to an associate buying a practice. Here's the problem area:
Cold Front discussed owner equity. That does not matter for the purchaser at all. It does matter for the owner/seller. He net from the sale will be the selling price, less closing costs, less any debt payoffs on the practice. The bank, when loaning to the buyer, will insist on paying off the seller's notes to clear liens on the practice. All that matters to the bank and the buyer are cash flow (income less expenses) less the buyer's practice note payment, less personal and school note payments, less living expenses.

Let's talk hygiene capacity and how it effects the practice.
70% of active patients (remember: that's anyone who's been in during the last 24 months) should be in hygiene recare with two appointments per year.
New patients during the year will need 1.5 hygiene appointments, two if they start in the first half, 1 if in the second half.
Let's look at an example:
Active Patients 1500
70% of 1500 is 1050
1050 APs in recall times 2 appointments each is 2100 hygiene appointments needed for APs
New Patients last year: 210
210 new times 1.5 appointments each is 315
Total appointments needed (at least) will be 2100 + 315 = 2415
Most practices have 8 appointments in a hygiene day sot 2415/8 = 300 hygiene days needed in the year
300 hygiene days divided by 50 weeks = 6 hygiene days per week needed right now for 70% of your APs and all of your new patients. So two hygienists each working 3 days would get you the 6 hygiene days.
Most practitioners believe they have a strong hygiene program if it's full. They don't bother to figure out if it's the right capacity. If the schedule is full, no one in the office is motivated to call APs to get them in for recare. So the owner is spending $ on marketing to bring in new patients and each new patient pushes an AP out the back door. When a patient has not been in for 18 months, they no longer consider you their dentist. They are susceptible to specials by your competitors. When you upsize your hygiene schedule to meet practice needs, then you get more hygiene collections. That also gets you more exams and more treatment opportunities. Remember, hygiene should account for 30% of collections. So when you increase hygiene by bringing in more of your patients, your restorative collections will increase also. That's win/win.
If you are evaluating a practice to purchase or to associate in, do an analysis of their hygiene capacity to determine if there is an opportunity for growth.
Questions encouraged. More to follow.

Here's a question and a problem.
At what point do you say enough is enough.
Case in point. Active pt count 3400 no Medicaid no DMO
240 new pts per year.... Word of mouth name & phone # in yellow pages only
2 full time hygienists avg 9 -10 pts each per full day
Could use a third however keeping up with all the hygiene checks will leave very little time for dentistry.

Problem.... Trying to find an associate (preferably US trained) who wants to work in a small city in Ohio (35000) about 50 miles from a major city any suggestions?

 

[Cold Front]

We are saying the same thing. I worked with many banks (BoA's practice solutions, Wells Fargo's Matsco, and many others) and they are all more or less follow the points we discussed above. This is not exact science, but an art - it's all about the numbers and painting a picture the banks wants to see to get their business. Truth is, banks love dentists. They love them so much, they will have hard time denying a practice product to a dentist. I secured 100% financing right out of school, I learned how the banks work while I was in school with zero equity and you don't have to be genius to do it, but it does require you to have financial knowledge to make the lenders do business with you.

Okay. We've got some apples and oranges mixing going on here. My post from 2/22/13 was edited in red. Some of the red was completely off track with respect to an associate buying a practice. Here's the problem area:
Cold Front discussed owner equity. That does not matter for the purchaser at all. It does matter for the owner/seller. He net from the sale will be the selling price, less closing costs, less any debt payoffs on the practice. The bank, when loaning to the buyer, will insist on paying off the seller's notes to clear liens on the practice. All that matters to the bank and the buyer are cash flow (income less expenses) less the buyer's practice note payment, less personal and school note payments, less living expenses.

Let's talk hygiene capacity and how it effects the practice.
70% of active patients (remember: that's anyone who's been in during the last 24 months) should be in hygiene recare with two appointments per year.
New patients during the year will need 1.5 hygiene appointments, two if they start in the first half, 1 if in the second half.
Let's look at an example:
Active Patients 1500
70% of 1500 is 1050
1050 APs in recall times 2 appointments each is 2100 hygiene appointments needed for APs
New Patients last year: 210
210 new times 1.5 appointments each is 315
Total appointments needed (at least) will be 2100 + 315 = 2415
Most practices have 8 appointments in a hygiene day sot 2415/8 = 300 hygiene days needed in the year
300 hygiene days divided by 50 weeks = 6 hygiene days per week needed right now for 70% of your APs and all of your new patients. So two hygienists each working 3 days would get you the 6 hygiene days.
Most practitioners believe they have a strong hygiene program if it's full. They don't bother to figure out if it's the right capacity. If the schedule is full, no one in the office is motivated to call APs to get them in for recare. So the owner is spending $ on marketing to bring in new patients and each new patient pushes an AP out the back door. When a patient has not been in for 18 months, they no longer consider you their dentist. They are susceptible to specials by your competitors. When you upsize your hygiene schedule to meet practice needs, then you get more hygiene collections. That also gets you more exams and more treatment opportunities. Remember, hygiene should account for 30% of collections. So when you increase hygiene by bringing in more of your patients, your restorative collections will increase also. That's win/win.
If you are evaluating a practice to purchase or to associate in, do an analysis of their hygiene capacity to determine if there is an opportunity for growth.
Questions encouraged. More to follow.

 

[Cold Front]

I'm approaching the 3,000 pts mark next month after 21 months from opening, and would be interested to know the solution to your questions too.

Here's a question and a problem.
At what point do you say enough is enough.
Case in point. Active pt count 3400 no Medicaid no DMO
240 new pts per year.... Word of mouth name & phone # in yellow pages only
2 full time hygienists avg 9 -10 pts each per full day
Could use a third however keeping up with all the hygiene checks will leave very little time for dentistry.

Problem.... Trying to find an associate (preferably US trained) who wants to work in a small city in Ohio (35000) about 50 miles from a major city any suggestions?

 

[Talondriver]

Believe it or not, there are solutions to having too many patients. First, a moment of silence for those less fortunate who are sitting in their practice office playing solitaire, waiting for a patient to appear.
A great deal depends on your personal financial goals, competencies, and desire to press ahead. First of all, much of the overhead in your practice is the same if you work 4 days or 7 days a week. Of course YOU don't want to work 6 or 7 days, but your office could be seeing patients that many days.
One of the items you did not mention is how many chairs you have. If I assume you have 4 chairs like most offices, then two for hygiene and two for restorative is reasonable. That still doesn't get you the doctor days you need, but it can get you up to 12 hygiene days x 50 weeks x 9/day = 5400 hygiene appts. 70% of 3400 APs =2400 in recare x 2 each = 4800 plus 1.5 ea x 240 = 360 for a total hygiene need of 4800+360=5160. So with 2 hygiene chairs, 9 appts per day, 6 days/we, 50 weeks you can do it, for now.
I promote adding an associate, who may or may not become a partner, to work added days each week. You can start at 1 day/wk and work up to three. You will probably need to add staff. First let's look at costs, then we'll look at schedule.
Your added costs for opening longer hours/days are as follows:
Variable expenses (lab, dental supplies, office supplies) 13%
Added staff 21%
Associate 30% of his/her 70% restorative or 21% of total collections on those patients.
Total of 54%. So if you were to open another 3 days a week and you didn't show up at all to do any work on those days (as the owner) you would make about 46% profit. Let's say I'm off by 21%, a big error, you still make 25% profit sitting in the "barkalounger" (that's the recliner you have to kick the dog out of to sit down).
Schedule: The one that I like is for you to work 3 long days Mon, Tues, Wed, then your associate works Thurs, Fri, Sat, Mon, Tues, Wed, and you come back in on Thursday for your 6 of seven days. With that schedule, you are available to each of your patients every day of the week except Sunday, and you only work 3 days per week, and you have two weeks off every month. You may want to pay out some of that added profit for a top notch office manager to keep the train on the tracks. You could ramp up to the schedule as needed.
It might not be that difficult to entice an associate to come 50 miles out to work 3 days per week and have two weeks off per month and be busy all the time. 3000 active patients (APs) would indicate 10 doctor days, so I'm sure you could keep very busy in 6. If you have more chairs, obviously you are better off and can have as much overlap and as many associates as your facility can handle on a 6 day week. Beyond that, it's time to find a larger office. Maybe by purchasing a nearby practice with a better facility. More on mergers later.
If you are eager to do even more, you could use the associate position as a training ground for new 50/50 partners that you can go out and buy another practice with. That's entrepreneurial dentistry. There are clearly easy and hard ways to do that and that's for another lesson. I hope I gave you something to ponder.
Questions encouraged. More to follow.

 

[Cold Front]

If you are eager to do even more, you could use the associate position as a training ground for new 50/50 partners that you can go out and buy another practice with. That's entrepreneurial dentistry. There are clearly easy and hard ways to do that and that's for another lesson. I hope I gave you something to ponder.
Questions encouraged. More to follow.

What do you look for in an associate before you turn them to a partner? I don't like the 50/50 idea, because it's very risky and difficult to give up 50% of something you created as owner from scratch, even for the right price at times.

 

[Ferneezy]

What do you look for in an associate before you turn them to a partner? I don't like the 50/50 idea, because it's very risky and difficult to give up 50% of something you created as owner from scratch, even for the right price at times.

curious about this too.

but maybe he meant you, as owner/operator, would hire an associate and if they were up to snuff, the two of you would then acquire a different practice 50/50?

 

[Talondriver]

Yes- you acquire a different practice 50/50 in the entrepreneurial model. With respect to any practice, would you want to be a partner with anyone dumb enough to own only 49% of the practice? If you are not willing to have a 50% partner, you are not ready for a partner. 49% means half the responsibility and risk and none of the control. You wouldn't invest in that, why would you expect anyone else to want to?
When you hire an associate that you want to eventually become a partner, you will be looking for different skills an traits than if it's just as an associate. Those traits will be different for each of us. Be sure to meet the family. When you partner with a dentist, you are getting the spouse also. Be sure to know how and how much the spouse intends to be involved.
When you bring on a partner, assuming you've gotten past the whole 49% vs 50% dilemma, there are some very bad ways to do the agreement and transition. Your accountant and attorney will only know the ways that will cost you and your partner years of higher taxes. Ask your analyst if he/she knows about an Equity Conversion Program. If they do, you've got the right person to help, if not, keep looking. It can mean literally hundreds of thousands savings on taxes if you take on a partner the right way.
Questions encouraged. More to follow.

 

[Talondriver]

Let's get into a way to protect yourself from disability. Dentistry is a high disability profession due to back, neck, and wrist problems. Insurance is high (get it anyway) and will only get you about $10-11k/month income. I believe there is a better way to protect your income.
Get a full sheet of paper and a pencil. I'll wait. ...................................
Draw a 2" circle in the center and label it "Hub practice". It has 6-9 chairs, doing $1.7-2.4M collections. Inside the circle write an A and a B. You are Dr A and this is where you do all of your dentistry. You go to CE, you hire a consultant, you do what you need to so that this Hub is operating just the way you want it to operate. (We'll talk about how to get this hub later) Dr B is your associate and you you hired him/her specifically because you believed she/he would make a great future partner. Once you believe Dr B fully understands the operation and is prepared to do $500k restorative/yr alone, you and Dr B form AB Corp and you buy a practice together with 4 chairs doing about $400-600k collections. Draw a 2" circle in the upper left and label it AB Corp. The Corp pays the bank note for the purchase. Dr B does all the dentistry and gets paid 30% of his/her restorative collections. Your management team from the Hub gets the practice operating just like the Hub and for that you get 6% management fee off the top of total collections. Then you and B split the remaining profit 50/50. So you will get 6% + about 10% as half the profit for a total of about 16% of the $500k collections or about $80k/yr at the beginning. As the practice grows your income will grow from AB Corp. When Dr B left the Hub, you hired Dr C and trained her/him the same as B. When C is ready you form AC Corp and buy a practice with C just as you did with B, so draw another circle labeled AC Corp. Then DEFG... When you do this, you are getting $100k income or so from each practice each year in addition to about $500k from you Hub. Also, remember as each practice grows, you are growing your equity in that practice from both paying down the debt and growing collections. At an average value of 75%, each $100k increase in collections increases value by at least $75k and half of that growth is yours.
Each of these relationships must be set up with an exit strategy. I suggest you allow your Bs Cs etc. to buy you out whenever they can go out and borrow the money to cash you out. THe minimum would be two tax returns, so let's say it happens in 3 years. You made $100k X 3 years plus maybe another $200k in equity growth for a total of $500k in those 3 years. Not bad since you didn't sit by any of those 4 chairs.other than an occasional over the shoulder.
Now if you were to become disabled when you have 3 or more of those practices going, all you would lose is what you are doing with your hands at the Hub. You can hire an associate to do that work. Now that's DISABILITY INSURANCE. I call this Entrepreneurial Dentistry, the other ED.
It's also a faster road to financial security, the day when the practice of dentistry becomes optional.
So are you a dentist drawn kicking and screaming into business, or are you a business person who happens to be a dentist?
Questions encouraged. More to follow.

 

[Talondriver]

I promised to tell you how to get the Hub in the last post. One way is to buy the Hub from a dentist who wants to continue to so some dentistry, just doesn't want to own anymore. This is very common. You can compensate him extra for a time if you like to help you get a handle on managing a large practice, but remember you committed to CE and outside management to get it operating in top condition. When your seller rides into the sunset, you bring on Dr B.
Another way in is to buy the 4 chair practice first. Do the CE and outside management thing to get it operating and growing, and then keep someone looking for the Hub for you. While there is a search for the Hub, you need to be searching for a B with a little more experience than your normal green B. When you find the Hub, you form AB Corp and sell your first practice to AB Corp (remember you are Dr A). You cash out of it, take your equity out and then you are ready to bring Dr C into the Hub whenever the situation suits you (now or after the seller leaves).
Either way you are on your way to higher than average dental income and a faster track to financial security for you and your family.
Questions encouraged. More to follow.

 

[Ferneezy]

talon, while your input and knowledge are valued here (at least by me), i think your posts would be more palatable if you broke them up a bit, maybe mix in hitting the enter key

twice. just

like

this.

 

[Talondriver]

I'm

trainable

 

[little Buddy]

Why does there even needs to be a doctor B, C...? Why not just use the consulting company as the other partner instead of dental partners? Does anyone use contract associations with maybe a loan repayment incentive for a new associate? I like the idea of the buy in percentages talon was using but they seem too high, even if it is just an example. I am under the firm belief that flipping is not an easy, passive way to build wealth as a business person who happens to be a dentist. Rather, I think the goal is to retain your assets, not getting bought out, for passive residual income.

 

[Talondriver]

Good questions:
Question: Why a Dr B, C etc.
Answer: If you plan to own multiple practices, having an owner on site (Dr B, C etc.) is significantly easier than associate only practices where the doctor is not motivated by profit.

Your question: Does anyone use contract associations with maybe a loan repayment incentive for a new associate?
Answer: Are you talking about associate signs a contract to stay and host pays off some/all of associate's student loans? I suggest you take care of your loans on your own and not be held hostage by a host you may not like or who may not give you enough work to keep you busy. Handling the expense of your loan payments is not a problem if you are making adequate income. The key is to find the opportunity where you can make the income. That goes back to evaluating the opportunity before you start.

Your question:I am under the firm belief that flipping is not an easy, passive way to build wealth as a business person who happens to be a dentist. Rather, I think the goal is to retain your assets, not getting bought out, for passive residual income.
Answer: The method above is not flipping. It is buying a practice with a partner (B,C etc) and allowing the partner(B, C) to buy you out. If you are Dr B, what's your motivation to buy a practice 50/50 with Dr A, give Dr A a management fee, and give Dr A half the profits? The motivation is two-fold and I should have explained: 1) Dr B is too new to buy the practice solo, no bank financing, and 2) Dr B knows he/she can buy out Dr A when he/she wants and is able to borrow the money solo. So it's not a flip. The agreement should also state a point in the future when Dr A, the senior partner, is able to force AB Corporation to buy A out. It's a partnership (corporate) with an exit strategy.

Please let me know if I misunderstood your questions.

 

[Ferneezy]

Talon, I get the idea behind the hub practice model and it sounds attractive for building multiple income streams.


Do you post on dentaltown and do you have any examples of practitioners that have successfully executed this model?

 

[little Buddy]

Talon, my questions were from the majority owner POV. I was just wondering why does there even need to be a partner, unless it is because your capital is too low?

Lets say you purchase an existing practice as your hub, solo, and want to branch out with surrounding satellite clinics. Is it even necessary to bring on a managing partner to oversee that satellite clinic like in your examples above? What if you wanted to take a more rural approach and bring on a DT since an associate might not be cost effective? Do you make them partner?

I can't imagine that every time a new office is opened that you have to give up some ownership percentage. I understand that if the managing associate would then have a vested interest in the company at that point, but look at the major dental chains other there that invest in a "interchangeable parts" system so they can have turnover in their associates, lets say ever 4-5 years, instead of relying on the passion and work ethic of their employees.

I guess my question is why not invest in some type of bonus structure based on production or expense management which could be financial, insurance more vacation time as the currency since everyone is motivated by different incentives. I have the mind set that I would only want one partner and that would be on the business side of the company - the consulting company. I would be more willing to give them a large percentage of ownership since they would have significantly more experience and a vesting interesting in the company.

Because there needs to be a someone with a vesting interest in the company that has legit, marketing, accounting and management experience.