Let's Buy a Dental Practice

[Talondriver]

Little Buddy
I think we may be off kilter. When you have partners in the entrepreneurial model I discussed, they are not partnered in the hub, just in the practice they do dentistry in. So Dr B only owns half of AB Corp which is the practice A and B bought 50/50. A continues to fully own the hub. B's purpose is to have an owner dentist on site in the AB practice so A can basically ignore 90% of the operations issues that B handles and 9% is handled by his management staff and then A's involvement is minimal.

Here's the picture:
A fully owns the hub
A owns half of each AB,AC,AD,Aetc with B,C,D,and etc owning the other half.
B,C,D, and etc don't have anything in common with each other except they each share their practice with A. Each practice is a separate corp with a separate tax return. That's very important (you may need to use LLCs, ask your attorney). It's my understanding there has been a problem with single member LLCs not having liability protection, ask your attorney.

When you have an owner dentist in each practice, you don't need a bonus structure. Growing his/her practice for increased income and equity is the bonus. Buying out A at some point is the carrot.

I don't know what bringing on a DT is. You will need to clarify.

I don't post anywhere else.

We do have examples, but our clients are confidential. One of our EDs (entrepreneurial dentists) graduated in 2004, bought practice 1 in 2006, Has owned 16 practices, and still owns 11. He does dentistry one day per week and has hired an operations manager to help him with acquisitions and associate/partner selection. He markets and grows new practices aggressively and when Dr B buys him out he invests outside of dentistry and keeps fully leveraged in his practices with bank financing.

There are other ways to do ED. This one is simple and requires minimal oversight.

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[Ferneezy]

ok, i expected you to pull the privacy card. and that's more than understandable.

i was actually more concerned about how feasible a practice philosophy such as this is for a new grad that could be staring down the barrel of a quarter mil education debt.

what types of areas is this model suited for? (rural vs. urban, etc.)

 

[Talondriver]

This Entrepreneurial model works in urban areas where multiple practices can be owned that don't compete geographically. 3-5 miles apart seems to work well.

New grads should go to work for a practice where they can be busy to get their speed up and learn the ropes of an actual practice. Banks like 2 years experience. During those two years, a dentist should keep all records from the practice to show production to the lender when the time comes.

With respect to $200-400k school debt, the only thing that matters is cash flow. Larger practices cash flow better than small practices. Rural practices typically have lower fixed costs and thus cash flow very well. Since they are harder to sell, they are also priced lower and the seller is more apt to carry some of the financing if needed. If a dentist wants a quality family life with above average income from one practice, go to the upper midwest. Yes it's cold in the winter, but there are fewer dentists, the economy is good, and a dentist can produce without marketing.

 

[LeoK]

This Entrepreneurial model works in urban areas where multiple practices can be owned that don't compete geographically. 3-5 miles apart seems to work well.

New grads should go to work for a practice where they can be busy to get their speed up and learn the ropes of an actual practice. Banks like 2 years experience. During those two years, a dentist should keep all records from the practice to show production to the lender when the time comes.

With respect to $200-400k school debt, the only thing that matters is cash flow. Larger practices cash flow better than small practices. Rural practices typically have lower fixed costs and thus cash flow very well. Since they are harder to sell, they are also priced lower and the seller is more apt to carry some of the financing if needed. If a dentist wants a quality family life with above average income from one practice, go to the upper midwest. Yes it's cold in the winter, but there are fewer dentists, the economy is good, and a dentist can produce without marketing.

How much/long should I invest/spend for marketing? I guess it varies a lot in each case...but would like to know some general rule of thumb, if there is any.

 

[Talondriver]

Aggressive marketers invest up to 10% of collections on marketing, but you cannot do that indefinitely. It will get you a surge of new patients, but at a point, you need to do more than exams and treatment plans. Most settle in at 4-6% of collections over the long run.

Mature practices where the owner is slowing down will cut back to near zero, maybe just hanging on to yellow pages.

 

[mmmsteakdinners]

Aggressive marketers invest up to 10% of collections on marketing, but you cannot do that indefinitely. It will get you a surge of new patients, but at a point, you need to do more than exams and treatment plans. Most settle in at 4-6% of collections over the long run.

Mature practices where the owner is slowing down will cut back to near zero, maybe just hanging on to yellow pages.

Talondriver,

Very interested in your Hub model. I am starting school this august, but as a Business Management major, my mind is racing about how to set up my revenue streams.

My question to you is, why would Dr. B want to go 50/50 with you on a practice when he is going to do all the work? I thought it was relatively easy for dentists to get financing, why wouldnt he just finance the entire practice himself? Would your 50% of responsibility be running the practice? Let me know if I am missing anything.

 

[Talondriver]

MMMSteak

Good question. Generally the carrot for Dr B is threefold.

He is brought in as an owner earlier than the banks would normally loan him the funds for a practice selling for $500-800k. They do that because of the strength of Dr A. Also,

Dr B gets a great opportunity to be mentored.

The real gem is that the agreement is generally drawn up so that Dr B can buy out Dr A whenever he is strong enough to borrow the funds for the purchase. Normally, that means two tax returns so about 24-36 months.

During that time, Dr A is getting abut 5% for management of the practice by he/she and his staff, and about 10% as his split of the profits. Maybe $80-150k/year depending on practice size. When A sells to B, A is paid half of the equity in the practice which could be half of $300-500k at that point.

So A gets total income and equity of about $500k in 3 years, B gets a great education, a strong practice, and maybe $150-200k in equity. Not a bad deal for a B who might do this 6 months out of school.

 

[mmmsteakdinners]

MMMSteak

Good question. Generally the carrot for Dr B is threefold.

He is brought in as an owner earlier than the banks would normally loan him the funds for a practice selling for $500-800k. They do that because of the strength of Dr A. Also,

Dr B gets a great opportunity to be mentored.

The real gem is that the agreement is generally drawn up so that Dr B can buy out Dr A whenever he is strong enough to borrow the funds for the purchase. Normally, that means two tax returns so about 24-36 months.

During that time, Dr A is getting abut 5% for management of the practice by he/she and his staff, and about 10% as his split of the profits. Maybe $80-150k/year depending on practice size. When A sells to B, A is paid half of the equity in the practice which could be half of $300-500k at that point.

So A gets total income and equity of about $500k in 3 years, B gets a great education, a strong practice, and maybe $150-200k in equity. Not a bad deal for a B who might do this 6 months out of school.

Thanks for the reply. This model is very interesting.

Another question...is there any advantage to having a relationship with Dr. B after the cycle is complete? If you successfully run through this model 4-5 times you will eventually have 5 neighboring practices that you have been involved in. Does this model strengthen the HUB at all or is it purely a cash flow machine?

Thanks again

 

[little Buddy]

Thanks for the reply. This model is very interesting.

Another question...is there any advantage to having a relationship with Dr. B after the cycle is complete? If you successfully run through this model 4-5 times you will eventually have 5 neighboring practices that you have been involved in. Does this model strengthen the HUB at all or is it purely a cash flow machine?

Thanks again

That's what I thought and called it flipping since it doesn't seem you are retaining any of the practices but just profit after you turn it over to the partner who is now your direct competitor.

 

[Talondriver]

There is no requirement to flip anything. If you choose Dr Bs who are not interested in anything more than owning 50% into the future, there won't be any flipping. If you hire and partner with Dr Bs who are entrepreneurial like you, then you can expect them to want to buy you out at some point.

If you do this in a large metro area, there is plenty of dentistry to go around. If you are in Lincoln NE, you may want to approach multiple practice ownership a little differently.

I believe it's inevitable that dentistry will become more corporate and less "mom and pop", especially in metro areas. There are many ways to do it and I won't claim this is the best for you. It does work however.

 

[dentalsaving]

Nice thread!

 

[Shunwei]

I believe it's inevitable that dentistry will become more corporate and less "mom and pop", especially in metro areas. There are many ways to do it and I won't claim this is the best for you. It does work however.

I fully agree. Whether people like it or not, urban area dentistry will likely see a high conversion to corporate in time. They also have the resources to advertise/market as well as being able to support a growing practice by diverting funds from more prosperous offices to support ones not doing so well until they can get on their feet in situations where private offices may go under.

 

[cl263]

I fully agree. Whether people like it or not, urban area dentistry will likely see a high conversion to corporate in time. They also have the resources to advertise/market as well as being able to support a growing practice by diverting funds from more prosperous offices to support ones not doing so well until they can get on their feet in situations where private offices may go under.

I certainly hope not. I've spent some time working for corporate dentistry, a VERY large corporate chain with over 200 offices and a smaller one run by people I originally trusted with 7 offices. Keeping the Bottom line well in the black and not getting busted is what's most important to them. Make money and don't get sued. All their preaching and training is to those two ends . It sucks. It's great if all you care about is a paycheck and can let go of your conscience. I've seen sucky heroic dentistry in small mom and pop offices but the dentist cares about the patient like a brother. I've seen GOBS AND GOBS AND GOBS of excellent dentistry in franchises that didn't need to be done (but since they could justify it from the x-rays and in their notes, they can't get caught.

I almost went to work for another small franchise run by people I knew from church. I ended up not accepting the position because I saw it was exactly the same as the other two franchises. Even the owner's brother quit after a year because he couldn't stay ethical while working for his own family. It split them apart so bad he left the state.

Patient retention and associate retention in franchises and corporate dental offices is DISMAL. The large corporate office had set company goals to get pt retention above 20%. Their associates typically stayed on for less than 1 year (their corporate goal was to get more than 28% of associates to stay beyond 2 years). The majority of patients who stick with corporate chain offices do so because they're trapped by their sucky HMO insurance that's not accepted by any other offices or Medicaid (FOR GOOD REASON). And these HMO patients are RAKED over the coals to pay for uncovered benefits like unnecessary inlays and onlays done by a cerec, or all-porcelain crowns using very carefully scripted manipulations (so they can stay "honest" while coercing the patients). Or these HMO and Medicaid patients receive such stinky dentistry because the associate is racing through too many restorations in an appointment to meet the production goals the company sets for them (and holds them to).

Franchises are about MONEY first, patients second (if that high). Business efficiency is not always best for the patient. Emotional needs are extremely important.

I've been out of school for 2 years. I've interviewed with several large corporations and even smaller franchises looking for a practice to stay in that I feel safe in. I see the same thing going on in all of them. I've met with and set foot into at least 100 other offices looking for work and had lunch with at least 30-50 different private owner-dentists. Right now I'm associating between 3 offices for 2 different dentist-owners and it's going okay, but I'm itching to have my own place. Now that I've seen how so many others have done it, I've got lots of good ideas and have just found a local consultant I trust who seems willing to help me get through it and has helped 21 other offices open from scratch in the region, successfully, including a few guys I knew from school. Even after I open an office, I'll keep associating elsewhere until I'm busy enough in my own place to let go of them, but I like those associateships enough for now.

Corporate dentistry fills a void. There's a need for it. Not for me or most other people who went to dental school. It works for some people, but don't buy into their hype that it's so much easier to work for them than have your own office. If your office is stressful to run, you need help and hire a consultant or firm. (that's what the corporations are doing for the corporate offices anyway, but do it on YOUR terms with YOUR money, not their terms with your money). If the corporation touts that you can do it your way, DON"T BELIEVE THEM!! Else what's the point in having a unified brand and corporate status? To do it their way, with YOUR MONEY. Also, many franchises will require at some point that you "buy in" and become a "partner" by taking out a minimum 50k loan for them to use as capital for opening other offices. Will you ever see this money again or have any say on how it's going to be used? Maybe, in the form of the higher % of production you'll take home, but I would never consider it as some form of equity that you'll get back. It becomes a form of pyramid scheme or MLM and your money only exists as the chain grows. Once it stops growing, who's going to buy you out to take your spot and let you get your "investment" back out?

Good luck

 

[cl263]

Oh, and I've worked in all settings Rural to Metro.

The large corporation was in super-suburbs. The small franchise I turned down, also suburbs. The 7-office franchise I worked for was super rural New Mexico where the largest city in 3 hours was 40k people, I worked 20 min away in their office in a town of 10k people. Now I'm back in a large metro area. Before I found the current positions I'm in, I interviewed with a few more large corporations (they're still jobs after all, but they were lower on the totem pole for me) and small franchises in the area. Saw the same thing.

My current positions: A one office start-from-scratch (No charts or patient base, just used equipment) in the large metro area by a guy who graduated from school the same time as me and has had help from his business-minded family in the area helping it and he's doing great. (It was an office that had been foreclosed on after the previous dentist lost his license). He's doing great. The other offices are owned by one guy. His main office in metro-suburbs that runs like CLOCKWORK, and a small satellite office an hour away in super rural hicksville that he picked up for cheap from a pseudo-specialist just to see if it would work. It's actually fun to go out there once a week. I spend a day a week in each and both are going decent.

 

[cl263]

Meeting with other dentists and looking for associateship positions, one commonality everywhere:

The large corporations and franchise groups become the best patient referral sources for the local mom-and-pop offices. Patients try them out and don't come back. That's why they work best in transient suburban-metro areas with high population turn-over.

 

[Talondriver]

c1263
I agree with you completely. What's most important is that you review your financial goals and determine what annual income and equity growth you need to reach those goals. Once you know where you are headed, it's much easier to determine what you will need to do to get there.

In your first two years out of school, you should be preparing to own a practice. Either in whole or in part. Should you do a "start-up" or buy an existing practice and patient base? Here's a narrative that may generate some discussion:

Dr. B had graduated from dental school three years ago, and he had been working as an associate in a commercial dental office and making a decent living, but it was not enough money to support a lifestyle that he wanted for his family. Dr. B decided that practice ownership offered the most rewarding opportunities so he began searching for practices for sale. Dr. B soon located an opportunity to purchase a successful practice in a great area of town that was currently grossing approximately $1,250,000 and it was selling for $1,000,000. The seller was netting about $450,000 per year and Dr. B decided that this was the practice for him.

He shared his plans with family and friends, and some of them expressed concern about Dr. B going $1M in debt in order to get into a practice. As a result, he spoke to a dental supply rep who assured him that he could start-up a brand new practice in the same area for as little as $400,000, and as a result, Dr. B could save a whopping $600,000 for getting into practice.

Now Dr. B was in a quandary, spend $1M to buy an existing practice or pay only $400K to start up a new practice. That $600,000 difference was a strong influence on Dr. B since it appeared to represent a great savings, and Dr. B was not sure what he should do next.

On the surface it appeared that Dr. B would save $600,000, but once you analyze the numbers over a period of time, it does not appear to be as simple as it seems.

Let's say the start-up cost does come to $400,000 (a reasonable figure in today's marketplace), and let's say that Dr. B is a superstar dentist and he is able to net $100,000 his first year in practice (a high estimate in any marketplace). This is actually a great start for any new dentist in a new practice, and it would appear that Dr. B has made a good decision with starting up a new practice. However, instead of earning $450,000 that first year (if he had purchased the existing practice) Dr. B made only $100,000, and that $350,000 difference is lost income and it has to be added to those start-up cost of $400,000, so now the actual cost of the start-up is $750,000.

At the end of the second year, let's say Dr. B's net earnings increased to $150,000. Subtract that amount from the $450,000 that he would have earned if he had purchased the existing practice and now the start-up costs goes up to $1,050,000.

In the third year let's say Dr. B earns $200,000, and subtract that from the $450,000 of potential earnings and that adds $250,000 to the start-up costs for a total of $1,300,000 for the start-up practice. In the fourth year Dr. B earns $250,000, and subtract that amount from the $450,000 and that adds $200,000 to the cost of the start-up practice for a total of $1,500,000. Year number five Dr. B earns $300,000 which is subtracted from the $450,000 and that adds $150,000 to the cost of the start-up practice for a total of $1,650,000 . Dr. B earns $350,000 in the sixth year and that adds $100,000 to the cost of the start-up for a total of $1,750,000. Dr. B earns $400,000 in the seventh year and that adds $50,000 to the cost of the start-up for a total cost of $1,800,000 for the start-up practice.

You will notice that I did not show any increase or decline in the existing practice revenues (they should increase). The real issue is that Dr. B thought that it would only cost $400,000 for starting up a new practice... instead the real cost was $1,800,000! This means the new practice actually cost $800,000 more than the cost of purchasing the existing practice!

What are your thoughts about start-up vs buying an established practice?

 

[Shunwei]

Hey talon:

Since buying an existing practice you are really paying for the existing pt base who is presumably loyal to the previous owner, what's been your experience and observations on what percentage of this pt base is lost with the change of ownership. I guess in a way that can help,decide whether startup vs buyout is the way to go.

 

[suarez 7]

c1263
I agree with you completely. What's most important is that you review your financial goals and determine what annual income and equity growth you need to reach those goals. Once you know where you are headed, it's much easier to determine what you will need to do to get there.

In your first two years out of school, you should be preparing to own a practice. Either in whole or in part. Should you do a "start-up" or buy an existing practice and patient base? Here's a narrative that may generate some discussion:

Dr. B had graduated from dental school three years ago, and he had been working as an associate in a commercial dental office and making a decent living, but it was not enough money to support a lifestyle that he wanted for his family. Dr. B decided that practice ownership offered the most rewarding opportunities so he began searching for practices for sale. Dr. B soon located an opportunity to purchase a successful practice in a great area of town that was currently grossing approximately $1,250,000 and it was selling for $1,000,000. The seller was netting about $450,000 per year and Dr. B decided that this was the practice for him.

He shared his plans with family and friends, and some of them expressed concern about Dr. B going $1M in debt in order to get into a practice. As a result, he spoke to a dental supply rep who assured him that he could start-up a brand new practice in the same area for as little as $400,000, and as a result, Dr. B could save a whopping $600,000 for getting into practice.

Now Dr. B was in a quandary, spend $1M to buy an existing practice or pay only $400K to start up a new practice. That $600,000 difference was a strong influence on Dr. B since it appeared to represent a great savings, and Dr. B was not sure what he should do next.

On the surface it appeared that Dr. B would save $600,000, but once you analyze the numbers over a period of time, it does not appear to be as simple as it seems.

Let’s say the start-up cost does come to $400,000 (a reasonable figure in today’s marketplace), and let’s say that Dr. B is a superstar dentist and he is able to net $100,000 his first year in practice (a high estimate in any marketplace). This is actually a great start for any new dentist in a new practice, and it would appear that Dr. B has made a good decision with starting up a new practice. However, instead of earning $450,000 that first year (if he had purchased the existing practice) Dr. B made only $100,000, and that $350,000 difference is lost income and it has to be added to those start-up cost of $400,000, so now the actual cost of the start-up is $750,000.

At the end of the second year, let’s say Dr. B’s net earnings increased to $150,000. Subtract that amount from the $450,000 that he would have earned if he had purchased the existing practice and now the start-up costs goes up to $1,050,000.

In the third year let’s say Dr. B earns $200,000, and subtract that from the $450,000 of potential earnings and that adds $250,000 to the start-up costs for a total of $1,300,000 for the start-up practice. In the fourth year Dr. B earns $250,000, and subtract that amount from the $450,000 and that adds $200,000 to the cost of the start-up practice for a total of $1,500,000. Year number five Dr. B earns $300,000 which is subtracted from the $450,000 and that adds $150,000 to the cost of the start-up practice for a total of $1,650,000 . Dr. B earns $350,000 in the sixth year and that adds $100,000 to the cost of the start-up for a total of $1,750,000. Dr. B earns $400,000 in the seventh year and that adds $50,000 to the cost of the start-up for a total cost of $1,800,000 for the start-up practice.

You will notice that I did not show any increase or decline in the existing practice revenues (they should increase). The real issue is that Dr. B thought that it would only cost $400,000 for starting up a new practice... instead the real cost was $1,800,000! This means the new practice actually cost $800,000 more than the cost of purchasing the existing practice!

What are your thoughts about start-up vs buying an established practice?

The problem I believe is that dentists should consider is whether or not they are compatible with that particular practice that grosses $1m+ a year. As a new dentist (out of school for 2 years), can one produce the same as the dentist selling the practice? Probably not. What if the owner was regularly doing implant cases, while the new dentist has not done implants? Does the owner rarely refer cases? Is the practice insurance or FFS? If it is FFS, the patients are there because of the dentist personally more than anything. If the dentist changes, patients will start to jump ship. I would love to see the patient retention rate for a FFS practice after transitioning doctors.
Also as a new dentist I would be under large pressure to produce that amount per year. The reward is high, but so is the risk. There is a large overhead for a $1m practice and that might be a burden too big to handle.

 

[cl263]

The problem I believe is that dentists should consider is whether or not they are compatible with that particular practice that grosses $1m+ a year. As a new dentist (out of school for 2 years), can one produce the same as the dentist selling the practice? Probably not. What if the owner was regularly doing implant cases, while the new dentist has not done implants? Does the owner rarely refer cases? Is the practice insurance or FFS? If it is FFS, the patients are there because of the dentist personally more than anything. If the dentist changes, patients will start to jump ship. I would love to see the patient retention rate for a FFS practice after transitioning doctors.
Also as a new dentist I would be under large pressure to produce that amount per year. The reward is high, but so is the risk. There is a large overhead for a $1m practice and that might be a burden too big to handle.

Bingo. For two years I've been scrounging around for both associateships AND offices for sale. The only place I've ever seen an office for sale that was producing over $600k/yr was on a website with a "SOLD" label over it, as if the consultants/brokers were bragging on some practice they sold a while back. I'm being harsh, but sharing my experiences.

9 out of 10 offices for sale in the areas I've been living are really small or really run down by old guys who've been working 3 or less days/week and ready to retire (or get foreclosed on by the bank). If you have the freedom to chase an opportunity somewhere AND a bank is willing to drop 750k to 1 mil on a new graduate with no equity in anything and tons of debt behind is ears, GO FOR IT. You may have to fight off a hundred other dentists who are all scavenging for it and have 10-20 years experience behind their careers.

It can be done, for sure. I've got a class mate who spent his four years of dental school buttering up doctors in a nice part of Montana so when he was finished had his foot in the door for a 1.2 mil bread-n-butter practice (no implants or specialty work, A VERY RARE FIND!!). Even a lot of these little run-down places I find, the GPs have been doing a healthy bit of ortho or taking Medicaid. My class mate got a rare gem. Very lucky indeed. The staff and systems were all set up, he just walked right in and started taking home a few hundred thousand/year.

This is much harder to do and find than it sounds. Most practice transitions happen between friends, colleagues, people with prior relationships, not through brokers or classifieds. I talked with a dentist who moved out here, met a guy who offered him his practice in 2007 for 1.2 million. Medicaid Machine. In 2009 when Medicaid was cut to bare bones, he had to scramble to save the office which now produces ~$400k/year with a third of that being his ortho, and the BANKS and suppliers are all pounding down his door wanting to get paid. His pt base/charts weren't worth anything to a new dentist. It was basically buying used equipment and leasing the space. His last option? Sell out to a small franchise in the area who agreed to cover his debts if he kept working and running the place himself (and they get paid the profit of his office, so, now he's an associate in his own office, major stinky).

If there were any chances of picking up an office that produced even $500k/year I'd jump on it, but haven't seen any of those that would've been sold to me.

One last thing, opening an office from scratch shouldn't cost $400k. There'd be no patients to fill it. Start with 2-3 ops (with room to GROW, of course). At 20-30k/operatory, you can set up a nice office for MUCH less than $200k (OR LESS!!) and grow it from there with an awesome patient experience and some good marketing geared towards the locals (not as easy as it sounds either, billboards? Waste of money IMO).

For any students still reading this thread, its rough out here for MOST new graduates. Take some deep breaths, jump in, and start swimming upstream. It works, just don't panic and have a good time, and your patients will see it too. The banks catch onto REAL confidence and a safe investment. Keep your ears open, learn everything you can from any and every office you work for, and don't expect hard times to last.

One thing that convinced me dentistry would be a good career was a study by Gordon Christensen. 5 years out of school, 50% of dentists said they would do it again. Those that made it to 10 years? 90% said they'd definitely do it all again. Keep that in mind.

 

[Shunwei]

You haven't been able to find a desirable practice at all the past two years? No associateship buy-ins? Are you looking in an urban or rural area?

 

[Talondriver]

C1263
I don't believe your experience is the norm. I don't know where you are or how you are going about your search. Let's examine your current search and what you've found.

You are saying that 9 of 10 are small contracting practices. That means they should be priced low and an opportunity if looked at the right way. I'd suggest you find one with more space than currently needed, say 4-5 ops or space for 4-5. Then buy that practice and another close by that you can merge together. As soon as you merge that one in, buy another small practice. If you need to do a buildout on a new facility to make it work, then do that. The lenders are okay with that as long as they know what you are planning and that it cash flows well. If you can't put it together, work with someone who can.

Buying patient bases is the least "expensive" way to build a practice. Much less cost than growing from scratch.

I've been asked how successfully goodwill is passed on to a successor. The majority of what you are buying when you invest in an existing practice is goodwill. That's the relationship between doctor and patient, and staff and patient. In any purchase of a practice the agreement must direct the seller to make best effort to pass the goodwill. Patients will rely on their dentist's recommendation for their next dentist above anyone else. Upon sale, there should be two letters sent to the patients in one envelope. The top letter should be from their dentist announcing his/her retirement/relocation and making a clinical recommendation of the successor. I.E. "I care deeply about your dental health and I took great care in selecting Dr Buyer to become your dentist." He should go on to describe clinical qualifications. The second letter is from the buyer and shows how excited he/she is to be selected to be Dr Seller's successor and go on to talk about his/her family, hobbies, etc to give a personal perspective.

Do keep all of the staff. They are your link to your patients. The patients will try you out. If they don't have to wait 2 hours to see you and if you don't give them pain, they will stay. Why would they go to a strange place with a strange staff when they can stay with the location and staff they know. The only thing new is you and if you don't make them wait or give them pain, they will like you. Most likely, if your seller was old, they will welcome a dentist with fresher training. 95% of the patients will stay with their dentist's recommendation.

With respect to practices with collections over $600k, there are many of them. I don't know if you are using craigs list, or if you are limiting your location do to family or other constraints. Practices collecting over $600k without medicaid are commonly available.

Can I do the dentistry in a big practice? Great question. First, don't just look at total collections, look at the amount of restorative work. A practice collecting $1M is probably only $700k restorative, $63k/month which should be doable by a two year dentist.

What if they are doing procedures such as implants that I don't do? Then you are not a match for the practice unless the seller is staying on as your associate for a couple of years and available and committed to do 1-2 days per week and mentor you while you are getting your training for those procedures.

You must have a positive perspective to become a business owner. If you believe it cannot be done, you are right. But only right for you. If you believe you can be successful, you will be. Set your personal financial goals, so you always know why you are working hard and taking risk. Do your homework, get some experienced help to put it together and then work your butt off for success. when an obstacle presents itself, take another look at your goals and then find a way around or over the obstacle.

Good luck.

 

[cl263]

Talon, you're right. I do have to limit my search to a region due to family needs. Talon's also right in that if you can relocate to the practice being sold, there are lots of opportunities around the country. And it's not always the size of the office that is the indicator of how successful an office is or could be. Next month I'm going to temp for a guy who's getting called up on active duty for the army reserves for a month and he's collecting some temps to split up and temp-cover his practice while he's gone. He bought the office in October as the third dentist to own the place since it opened 50 years ago. It's got the tiniest waiting room I've ever seen, has two very crowded ops, and he produces 5-6k/day regularly. He's a few blocks from a major university and treats A LOT of young adults and college students. He doesn't do implants or ortho. All bread and butter. A lot of crowns (young adults in semi and affluent areas actually get lots of crowns done, from not taking care of their teeth as teenagers and kids, have to get burned a few times before you learn to do better, right?).

I didn't mean to sound discouraging to anyone else, but understand that if you want a great opportunity, you're going to have to work crazy hard and look carefully and long to find it and get it. I've been looking for an office to buy since I got here in October (too bad I didn't catch the one I'm going to temp for!). There are offices for sale, but if they've only been open 1-3 days per week for the past 5+ years and have only been netting 100k-200k/year, and the seller is asking 100k for it, and it's got poor visibility/poor location, I'll likely pass unless someone can teach me how to make it worth it (Talon???

I do make a lot of my decisions for emotional reasons, as ALL people do. I need to be close to my kids, I need people to trust me, and I need to feel happy at work. Those things can't be bought (well, they can, but they're usually not the most financially sound purchases).

My friends from school who recently just opened their practices have seen the same thing I've seen. One was one of the most productive students in his class and was unemployed for the first year out of school because he couldn't find a viable practice to purchase or find a stable associateship. He found a brand-newly built office 2 hours away from here and the dentist who built it changed his mind and sold it before it opened. He struggled for the first year but is doing very well now. The second friend is a brilliant guy. Valedictorian in his class, did a GPR at Med College of Georgia (one of the best IMO) getting tons of training in implants and IV sedations and he associated his first year out with one of the best known and most successful dentists in this area. Things went sour between them and he still isn't sure why, one day it was "You're doing great here" the next it was "We're going in different directions, you need to leave". So he opened his own place from scratch. Started with 3 ops, has room for 3-4 more. He couldn't find anything else to do. (he's associating 3 days a week in a medicaid office and it does well enough for him for now.

Obstacles can be overcome and each region has its own unique obstacles and everyone has their own challenges to deal with. The same financial decision doesn't work for everyone, but I sure wish it could. That'd make it easy! Timing is a huge factor and so is growth of the area or turnover of the population. If you're looking and looking and can't find anything, sometimes you just have to take a leap and make it happen, just don't be afraid to associate on the side while you grow whatever practice you get. I'd never open an office from scratch in a stable saturated area, but am less afraid to do so in a fast-growing area.

 

[Talondriver]

C1263 comment:
"I didn't mean to sound discouraging to anyone else, but understand that if you want a great opportunity, you're going to have to work crazy hard and look carefully and long to find it and get it. I've been looking for an office to buy since I got here in October (too bad I didn't catch the one I'm going to temp for!). There are offices for sale, but if they've only been open 1-3 days per week for the past 5+ years and have only been netting 100k-200k/year, and the seller is asking 100k for it, and it's got poor visibility/poor location, I'll likely pass unless someone can teach me how to make it worth it (Talon??? "

If that's what you are faced with, consolidation is the only viable answer. Have someone put together a purchase of 2 or 3 of those practices at the same time and locate them in a single location. If they are close (less than 2 miles) it can be done. Find one that has a large enough space and move the equipment to the largest one. Now of course the lease needs to be near it's end on the one you are leaving and the practices need to be fairly compatible clinically.

The bank will look at total collections and projected expenses with the newly combined practice. If it cash flows, they will lend you the money. I normally suggest you borrow extra funds for a year of outside consulting (about $40k) when you do something like this so you get some help logistically and emotionally with merged staffs and systems.

If you have limited yourself geographically, this may be your only solution. You do need to find someone to work with to help you make it happen.

Here's another thought. You do not have to be limited to practices For Sale. If you are working with the right person, that professional should be able to find you the right practice that is not yet For Sale. Once he/she has determined your financial goals, your clinical strengths and weaknesses, and your desires, he/she can approach practices where the dentist is at the right age to make some sort of change. That could come in many shapes from a walk-away, to the seller staying on as your associate for a specified number of days and years, to an earn in, to some sort of a merger or equity conversion.

Let's say there is a small practice doing $200k in an area you like, but of course it's not providing the income you want/need. We find a practice near it where the practitioner is busy, but not busy enough to bring on a partner or associate. You and that practitioner form a new entity that purchases both that practitioner's practice and the $200k practice and you become partners. If that's not enough patients for the two of you, buy his plus two practices. This consolidation can make under performing practices perform. Now you no longer have solo economic dependence. There are two owners and when you vacation (wouldn't that be nice) the office is still making money.

Too few chairs? How about this: You come in Wed at about 1 and work until 7. Then you work Thurs, Fri, Mon, Tues, and Wed from 7 to 1. Then you are off until the next Wed at 1 since your "partner" is working the next Wed to Wed schedule. Sat can be included if needed for production. Now you have your overhead spread over more days and more patients, lowering the percent of overhead cost. You are available to your patients every day of the week, just not every day this week. You get 26 weeks off each year, and your partner gets 26 weeks off also. This schedule works great for one owner and one associate too. What associate won't want to take 26 weeks off each year? The other weekdays can be long enough to get you your 28 hours of clinical work each week which is considered full time for a dentist.

If you can dream it, it can be done. Think outside the box and get some competent help with structure and acquisition.

 

[cl263]

Those are really good ideas. I almost went for an office like that, owner works mon-thurs for 10-hour days and then the next week Wed-Sat doing the same thing so he has a whole week off at a time. He was even looking for a buyer so he could transition out and we would each work a full week when the other was not working. A great idea. I worked for him for a week. Nice office and everything. His brothers did all the office work and his cousin was the assistant (and an awesome one too, she worked hard enough for 2 assistants). His brothers didn't have any formal training for running the office and learned it on the fly but had a number of practices that made me nervous about continuing there or taking over the office. Maybe it would've worked out fine and I was just too chicken or ignorant to tackle it, but I wasn't ready to try it.

All of the smaller offices I've found are fairly spread out, 10-15 miles apart from each other, I did consider merging a couple small ones together that did happen to be 2 miles apart (one offer fell through anyway and it was a huge mess between the bank and owner and land lord) Mentioned it to a banker and he didn't seem excited about it at all. Perhaps if I'd already had success somewhere else, the banks would be friendlier, but with no equity in anything yet and 400k in student loans (500k with interest accumulated now) they want reassurance I can make the money, not a hope that I could resurrect a dying practice or Frankenstein a couple offices together.

Talon, your ideas and recommendations are spot on with everything else I've read, heard, or learned about dental business. Problem is that people and their situations are complicated and messy and dealing with them takes a fortitude not even dental school prepares you for. I'm good at making excuses for sure. I'm dealing with life like everyone else and my first concerns are people first, money second (people problems are redicously more expensive and destructive than any other business decision)

Talon if you can secure me a reasonable loan, I'll make it happen. That's my biggest obstacle right now and I'm looking for an opportunity that makes a bank feel comfortable taking the risk on me. I'm doing my best to meet and network. I'm on the email lists for every consultant and transition specialist and have spent hours and hours visiting, talking, and meeting them. I've met with dozens and dozens of dentists in the region, I've placed classified ads on everything I can find and followed up on every opportunity I could find. Moving mountains is tough but sometimes that's what it takes to get started.

I hope my situation is unique and that most of you have it easier.

 

[Draxula]

this thread is pure gold

 

[flatcamelbak]

this thread is pure gold

completely agree....It's hard to gain any kind of business insight with a dentist regarding their business, even family members in my case.

 

[Talondriver]

Important safety tip: Don't do this yourself. Get some competent help. Don't be afraid to pay a fee to get some competent help. When you pay a fee, your professional has a fiduciary responsibility to provide you with the best information he/she can get and to craft a transition that is a win/win. Those are the only ones that actually close and goodwill passes successfully to the purchaser.

Things ARE "complicated and messy". That's why the seller should be educated and coached in every aspect of what the buyer needs to have a successful transition, and the buyer needs to be educated in what the seller needs to wear a smile throughout the whole process.

Your professional should be representing both parties. Then he/she and only he/she can determine what is fair and to cut off party requests that wouldn't be accepted if that party were on the other side of the deal. Dual representation only works for those dentists who are willing to be fair as long as they are treated fairly. If you feel you have to cut the other party off at the knees, hire a lawyer, not a professional broker. Just realize you will be paying the attorney by the hour through either success or failure. Your broker only gets paid if the transition closes successfully.

A famous guy who used to fly kites in bad weather said a conflict of interest exists when an advisor has a financial interest in conflict. With unilateral representation, where broker represents only seller (no fiduciary responsibility to you) and each party has an attorney, attorneys may find themselves creating an adversarial atmosphere that often (about 80%) leads to failure. At that point, the seller still needs to sell and the buyer still needs to buy. Each pays his/her attorney who says "it wasn't the right deal, the next one will be better". That is a financial interest in conflict.

The alternative is a system where the seller gets everything he/she wants, understanding that if it's unreasonable, it won't sell. If it is reasonable, then the broker should be finding the buyer that matches that opportunity as it is made available. Keep in mind that the seller has poured years into the practice. He/she is very proud of it, even if it's not a great practice. You need the goodwill transferred and there are too many ways for the seller to foul that up without you knowing what happened. To avoid that, give them everything they want.

Do you have to buy it? NO. If it's not what you want as it is presented, find another opportunity. Don't start carving the sellers square peg to fit it into your round hole.

Price sensitivity: Most buyers have bought cars, some have bought homes. When you buy a car or a home, you don't have a post sale relationship with that seller. Negotiate and cut them off at the knees if you like. When you buy a practice, you do have a post sale relationship, even if it's a walk away. If you change the price of the practice by $100,000, the monthly reduction in your payment is about $800. While that's certainly real money, what if that negotiation results in 1) you get the practice and the seller scares off your staff or patients (hard to prove he did) to get even, or 2) you don't get the practice.

If the practice has projected pre-tax cash flows (after all expenses and debt service) of $150k more per year than you are making as an associate, you just lost out on $12.5k per month until you find another practice that would cash flow like that. There is a cost of waiting or a cost of losing a good practice just for the satisfaction of trying to get a better price. Your practice note will cost you about what your lab and clinical supply bills will be annually. If you want to save, get a cheaper lab or supplier.

That's probably enough, but everyone you ask when you are seeking counsel will tell you to negotiate price because they don't understand the dynamics of the whole process. You have to be smarter than that.

 

[Talondriver]

DEBT: There are basically two kinds of debt: bad debt and good debt. What kind of debt could be good when we've always been told that debt is bad? Good debt is debt for an appreciating asset; bad debt is for a depreciating asset. Good debt provides income; bad debt provides expenses.

For example, education debt is a fact of life for many of us but we should view it as an investment in our future. We'd like to think it will provide us with an opportunity to increase our future income, so that makes it good debt. Debt for an unaffordable expensive car would be considered bad debt since it is an unnecessary expense that provides no income and depreciates in value. Debt for something that depreciates and provides no income would certainly be considered bad debt. An education is an investment that appreciates in value by increasing future income potential... the car is a depreciating expense that will provide no income and will rapidly depreciate in value (uses up income instead of providing income). The expensive car may be more fun to have, but the education will be the best investment.

Now, let's take a look at good and bad debt for the average dentist who is preparing to enter private practice. Many new, young dentists get caught up with opening brand new, shiny offices with all the latest and expensive gadgetry. This idea is promoted heavily by businesses that profit from the sale of such gadgetry. Tens of thousands of dollars can be invested by a new dentist for equipment, furniture and leasehold improvements before the first patient ever walks through the door. Interestingly enough, no one has ever heard of a patient who was ever drawn to a dental practice because of the equipment the doctor was using. No one has ever had a dentist say that a patient was passing by and looked in his window, saw his new equipment and decided to pay a visit. It just doesn't happen.

Now, if you think cars depreciate quickly, wait until you see the resale value of dental equipment. The resale value of a car may depreciate up to thirty percent the first year, but dental equipment will depreciate up to ninety percent of its original cost the first year! Since purchasing new, expensive dental equipment does not produce patients and is a rapidly depreciating asset to boot, it represents "bad debt". However, purchasing new equipment that allows the dentist to provide new or additional procedures can increase income and therefore is considered "good debt".

Now, what is good debt for a dentist? Where can a dentist find investment or income producing debt? Where can a dentist invest in an income producing asset that appreciates in value, not depreciate?

The answer... buy an existing dental practice. The doctor incurs debt, but the current income stream of the practice exceeds expenses and debt service (the money required to pay off the debt), thereby providing income (income producing debt). Good income producing dental practices do not depreciate in value, they appreciate. It is not an expense, it is an investment. You will almost assuredly be able to sell it someday for more than you paid for it.

 

[Talondriver]

"The practice costs too much, it's way too expensive"

I have a proposal for you. You must choose Option 1 or 2 and you may repeat that option as many times as you like. Here goes:

Option 1) You give me $3 and I'll give you $10. You may repeat as many times as you like.

Or

Option 2) You give me $5 and I'll give you $20. You may repeat as many times as you like.

What's your choice? Wait, you picked option 2? But it's 67% more expensive. It costs way too much. At least offer $4 instead of $5, you're crazy to pay $5, after all that's what he's asking.

Get it? So maybe it's your net not the cost, ya think?

 

[UltimateHombre]

Talon,

Thank you so much for your posts, they have been very helpful. I am a non-traditional student who has experience with sales, management, and expansion of a couple small businesses with a good degree of success. As such, i am very interested in ED.

I have a couple questions referring back to financing:

1. What do you recommend your student loans to be at before attempting to purchase the HUB practice, assuming no other bad debt?

2. I know "cash is king", but is it difficult to secure financing on practices 3,4,5, etc. when there is still high outstanding balances on your other practices?

3. When owning 5-10 practices at a given time, is that enough to leverage buying power from the supply companies and lower overhead significantly?

4. Do you use all one payroll company / HR for all the practices or is each responsible for their own? To what degree of management is the other partner doctor responsible for?

Thanks for all your time, effort, and help!!

 

[Talondriver]

Great questions! Here we go.

I have a couple questions referring back to financing:

1. What do you recommend your student loans to be at before attempting to purchase the HUB practice, assuming no other bad debt?

It's all about cash flow. Your student debt amount doesn't matter as long as what you are purchasing handles all the expenses, debt service, personal debt service, and there is plenty left over for normal living expenses. That doesn't mean borrow more than you need during school. It means it's not the balance, it's the monthly payments and how they fit into your cash flows.

2. I know "cash is king", but is it difficult to secure financing on practices 3,4,5, etc. when there is still high outstanding balances on your other practices?

Again, it's not about the total debt, it's about the cash flows. Any practice purchase should provide enough collections to handle all the practice fixed and variable expenses, the debt service, and any other personal related expenses. So if your practices 1 and 2 are covering all of your personal expenses and creating some savings, then practices 3,4,5 will be looked at individually. Now you shouldn't be going after 2,3,4,5 unless the practices you have are running and producing well. The bank will see your track record and expect you to get the new practices running well also. If you've grown each practice, and you should if you are buying the right practices, the bank will expect you to grow the new (to you) ones and the loans should not be a problem.

3. When owning 5-10 practices at a given time, is that enough to leverage buying power from the supply companies and lower overhead significantly?

You might, but supplies are only 5% of gross collections, so any savings you would get would be small. Since there is different ownership (at least in this model) of each practice, you are not buying centrally, although you will have some leverage.

4. Do you use all one payroll company / HR for all the practices or is each responsible for their own? To what degree of management is the other partner doctor responsible for?

Most practices in my experience do payroll in house. If you do go outside, remember ownership is different for each practice, so they may use the same vendors, but they are independent.

Thanks for the good questions.

 

[Talondriver]

One more thing: Banks are looking for smart dentists. Smart dentists have savings and don't carry revolving debt. So when you start working, start saving. Use your credit cards, but pay them off every month. Your savings target should be $50k by the end of year 2. That's when most dentists transition from associate to owner. If you have that cash and no credit balances, and no big car loans, you'll do better with the banks.

The key is to not "live like a doctor". There's a life lesson here. Most dentists at age 65 cannot retire at the standard of living they currently have. The reason is that their standard of living has exceeded their income for their professional life. Just don't let your family know you are a doctor, that will solve it.

There is a great temptation when you begin earning $10-15k/month after school to feel "rich". I believe it's impossible to not let it affect you, just keep it in control. Wait to buy a home. You don't need the mortgage when you are borrowing for the practice and you don't want a house to dictate where you buy that practice. Drive modest cars and get them paid off, and start putting $ away for the replacement cars with what you would have been paying in car payments. In other words, you will always have car payments, just make them to yourself in advance of a cash purchase. Then you get the benefit of the interest instead of the bank.

Last, use a credit union. Much better for your life than banks.

 

[datsharing]

Hello, this practice is just outside a large metropolitan city. The over head is kinda of high (70%) can some please let me know if it is worth buying?gross is 509k

http://imgur.com/GLxXXv8

 

[Talondriver]

Your link didn't work, but 70% is very high. If you buy the practice, your debt service will be about 10%, so that only leaves 20% as your compensation. I'm assuming this is a solo practice. You should find overhead as high as 60-65% in a practice that is underproducing for it's physical size and staff. If the practice is sized right for the patient base, then you can reasonably grow the practice so that overhead % drops into the desired range.

You should expect metro practices around 55% and rural around 45% overhead. Here are some norms:
Rent 4-6%
Staff 20-24%
Lab 6-8%
Dental supplies 4-6%
Office supplies 1%
All the other misc like utilities, bank, software etc 7-10%

Many times with older sellers, their staff has been there forever and salaries are out of line with reduced collections as the seller is winding down. If you buy that practice, leave the high cost staff in place and let them atrit out themselves. Don't change anything at first, do it gradually. You should find collections growing rapidly as your patients will be happy with a new fresh face and newer skills.

Don't
Make them wait
Give them pain
Say anything bad about the seller
Lay a big treatment plan on them right away

Do
Use an intraoral camera. Let them see what you see.
Get a professional letter of reference from the seller detailing your clinical skills and why he/she selected you as successor. Put your letter under it with an introduction of you and your family and how excited you are to provide them with quality dental care.

 

[Pelikanz]

Anyone know what happened to Hammer? Not saying I don't appreciate Talon, but Hammer just seemed to disappear?

 

[ROFL A PIGGY]

Anyone know what happened to Hammer? Not saying I don't appreciate Talon, but Hammer just seemed to disappear?

I don't know. His last post was in September of 2011, although he has been online in May 2013.

I guess he's just super busy? Really sad to not see him on anymore, he is one of my great inspirations.

You're doing a great job Talon! I love to see you pick this up.

 

[ktran17]

Hey Talon,

First off, thanks for contributing! I have a question concerning credit score . I currently have a score in the upper 700s. However, I've never made a big purchase like a car. Should I do this to establish more credit history ? The reason I ask is because, I think my car can last me another 10 years. I really don't want to buy another car until it dies..

Btw, I intend to matriculate to dental school is the fall of 2014. I know I'm a bit early, but I want to get my financials in order so that banks will be more likely to loan me out money

 

[Ferneezy]

Hey Talon,

First off, thanks for contributing! I have a question concerning credit score . I currently have a score in the upper 700s. However, I've never made a big purchase like a car. Should I do this to establish more credit history ? The reason I ask is because, I think my car can last me another 10 years. I really don't want to buy another car until it dies..

Btw, I intend to matriculate to dental school is the fall of 2014. I know I'm a bit early, but I want to get my financials in order so that banks will be more likely to loan me out money

do you have credit cards already? if yes, and you continue to show good behavior, banks should feel comfortable enough lending you cash with that score.

it just seems silly to purchase a car just to build credit history when you already have a functional vehicle. loan interest is not your friend.

 

[Cold Front]

Last, use a credit union. Much better for your life than banks.

I would like to hear you elaborate more on this please. Thanks

 

[ktran17]

Yes, I already have credit cards. It might sound silly, but some people advised me that I need to show history of being able to pay off a huge loan.

The only debt I have is from student loans.

 

[Ferneezy]

Yes, I already have credit cards. It might sound silly, but some people advised me that I need to show history of being able to pay off a huge loan.

The only debt I have is from student loans.

if you're insistent on creating a line item of responsible payment on an installment loan i guess you could just walk into your bank and take out a personal loan. simply make payments on time for a year or so (regardless of the repay term) then pay it all off. voila, instant year of good credit.

if i were you, i wouldn't do it at all. but if i did, i would wait until i was closer to actually securing financing for a practice...after dental school. there are some indications that your most recent credit activity weighs heavier on your scoring and profile.

however, that bolded part up there makes the idea moot. let's see if you can tell me why that is.

 

[ktran17]

I'm not arguing with you, I agree that buying a new vehicle would not be a smart thing for me. If anything, I'm more hesitant than insistent. Perhaps I didn't convey that properly in my earlier postings?

Also, when you say most recent credit history, I believe that applies to the last 10 years, which for most people would include some of their time in dental school. A lot of people underestimate the time required to establish a good credit history and I don't want to be one of them!

I'm just trying secure the best loan possible.

Anyways, I just wanted the perspective of someone in the industry. I actually don't even know what we're arguing about

 

[Ferneezy]

we're not arguing, we're discussing.

your credit rating is part of securing the best practice loan you can, but in all likelihood you won't be doing it until you've actually been practicing for some time. this means you're in repayment of your dschool loans. which is an item, in addition to your already long established credit card history, they can look at when assessing you.

tl;dr: don't finance a car unless you need to. your dental school loans will help show good history with paying back "something huge". don't close your credit cards. ever.

 

[Talondriver]

When the banks look at you for practice credit lending, your credit score is important, but not most important. Here's what is important at that point:
No revolving credit balance. Charge and pay off each month.
No or low auto loans. Don't buy or lease an expensive car after dental grad.
Cash in savings. Shoot for $50k in the bank when you want your practice loan.
No history of late payments to anyone (including utilities).

All of that history and cash on hand will determine your interest rate. Whether you get the loan will depend on whether the practice cash flow meets all of your needs including:
practice loan payment
practice expenses
personal expenses
student loan payments
other loan payments you may have

Side note: Always make car payments. If you own your car clear, make the payments to a "car account" you have in your credit union or bank so there will be cash for the next car. It will make a huge difference over your life.

 

[Talondriver]

One more thing.

Don't buy a home until after you buy your practice for 2 reasons:
1) You don't want the mortgage expense and balance on your credit application
2) It could significantly limit your interest in the right practice due to the commute.

Just rent until you buy your practice. Then you will probably be able to get a better home once you get your practice. I know renting is a tough call after you've spent so many years renting already. But it will help you get the right practice at the right rate.

 

[UltimateHombre]

Talon, Coldfront, and all the other experienced dentists,

Thanks again for all your posts and advice. This may be a dumb question, as i do not have a lot of business acumen, but opinions are appreciated.

I came across this article the other day from this consulting company and it doesn't make sense to me. Although i am sure they are right, as they are a very successful consulting company, i would just like some clarification or your opinions.

http://www.aftco.net/Dental-Transit...le.aspx?title=Five+or+Three+Days+But+No&id=93

It is hard to understand that when you work 4 days, you still accrue 5 days worth of overhead expenses. It seems like you would have one less day of: employees salaries, office supplies, dental product, etc. Of course, you wouldn't save money on things like rent, utilities, etc. But those are fixed overhead costs and would still apply to the 3 day model, so they are assumed not to be the overhead in discussion. However, the things mentioned above are variable overhead expenses.

How does a dental office accrue variable overhead when the office is not open?

Honestly, it doesn't make sense to me... especially considering that percentage is a function of input. Using simple math, lets say overhead is $100 a day so 3 days = 300, 4 days = 400, and 5 days = 500. Wouldn't the overhead be 60% of the amount of days worked?

 

[Talondriver]

First of all, it's great that you are reading those articles, they are filled with knowledge and experience.

Here is the piece you are missing. Assume you have a practice that is operating on 4 days with a full time staff. Four days is full time and you will be paying them for full time. That means your non-variable overhead is only operating at 2/3rds efficiency, assuming you don't want to go to Sundays which is sound. So how do you cut back to 3 days per the article and not end up worse off?

If your practice qualifies, you can buy another practice, merge the staff and patients into your facility and stay open 6 days. When you buy and merge in a practice, the seller needs to come along for 1 year minimum and practice as your associate. His staff initially comes along also. You change your schedule to do your four days of dentistry in 3 days at 10 hours per day, and the seller, hia staff, and patients go into the other 2-3 days. You alternate weeks on this schedule as follows.

Let's assume there are enough new patients for 3 days (about 1000 patients). You work Thurs, Fri, Sat, Mon, Tues, Wed, and then you are off until the next Thursday and then repeat. While you are off, the other dentist and staff are on for that same alternating schedule. So you work hard while you work and then you have two separate weeks off each month. You may find yourself going in some depending on your office manager, but you will have a great schedule. Over a transition period you can whittle down the staff to the best of both to give you a great staff to fill the six day week with a combination of full and part timers. That will cut down on your staff costs a bit. But that savings is not crucial.

Benefits:
Seller: He gets to continue to do as much dentistry as he/she wants without the burden or responsibility of ownership. He works for 40% of his restorative collections. He gets his asset value out of his practice and does not need to worry if he were to die "in the chair".
You as the buyer: Since his restorative is 70% of that patients total collections (70/30 restorative/hygiene), his cost to you is 70% x 40% = 28% of total collections on those patients. You will also have salaries to staff (23%), lab (8%), and dental supplies ( 5%) for a total overhead on his patients of 64% and that's after paying the dentist. So you make 36% of gross collections on those acquired patients less the cost of debt to buy the practice which is generally 10%. So without any added work with your hands, you make about 25% after all costs. So say his practice was doing $400k and you bought it for $300k, you are going to profit $100k per year and work fewer days after covering the debt service to borrow the $300k.

When your seller rides into the sunset, you can either hire an associate at 30% of his restorative or bring on a partner. Now you are out of the sole practitioner phase of your life, making more money and working a great schedule. It is not difficult to find an associate to work that schedule.

If you read my earlier posts on entrepreneurial dentistry, you'll find out how to use this as a beginning to multiple practice ownership.

Bottom line: Get some competent help to get you thinking like a business person and out of that sole practitioner 4 op box every dentist seems to want to start in. Nothing wrong with starting there, just don't stay there.

I'm sure this will generate more questions. I'm eager to try to answer them.

 

[Talondriver]

Coldfront asked a question that I don't believe I answered:

Originally Posted by Talondriver
"Last, use a credit union. Much better for your life than banks."

I would like to hear you elaborate more on this please. Thanks, Coldfront

For all of your personal banking, I believe you will find credit unions far superior to banks. They generally do not charge fees, they pay higher rates on savings, cds, etc, and they are better for car and consumer loans. They do not have stockholders to serve, they have members and when you open an account you become a member.

This is just my opinion, but if you Google the question Credit Union vs Bank you'll get plenty to form your own opinion.

 

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[Talondriver]

"Everything you need..."

Except those pesky patients. There are some undeserved areas in the US, but they are currently the exception. There have been many start ups that were successful. The attraction is shiny everything.

When you buy an existing practice, you are buying staff with a patient relationship and patients that are already coming to your practice. The practice should have positive cash flow after paying all the bills and paying your debt service, or you shouldn't buy it.

New vs existing. It's up to you. Get some help to make the decision.