Dr. Jones arrived for his appointment right on time dressed in his blue scrubs. He had come directly from his current associate position with Mega Clinic. I had met Dr. Jones at a dental school lecture a few years prior where the topic of our lecture had been “Career Choices Upon Graduation.”
In our lecture we discussed the three main pathways in private practice which are becoming an associate, starting up a dental practice or buying an existing dental practice. Like most young graduates he had chosen to become an associate and had practiced in the clinic for a couple of years. While he was making decent money, he had to work very hard for it and had very little control over the way he practiced dentistry. In addition, he could see that working for someone else was costing him money in the form of lost opportunity. Each year as an associate just delayed ownership, increased income, and equity gained.
He realized it was time to move on and he wanted to discuss whether to buy a practice or start one from scratch. The dental supply reps had been pushing him to start a practice and he had a few friends who had been successful at this. He also had friends who did not do so well and were struggling to make ends meet. This concerned him.
Dental supply companies strongly encourage dentists to start up a practice because they will make a larger profit on selling you new equipment. However, starting a dental practice can be extremely risky and requires management, financial, and marketing skills that few young doctors possess.
We explained that starting a practice was certainly a viable option. We help dentists find locations for a start up and could certainly work with him in that regard. We told him that there are good reasons for starting a dental practice. Starting up a practice gives the doctor complete control over the build-out, equipment, and location of the office. If there is no compromise on the location or if you are not willing to work using older equipment for an interim period before upgrading, then a start-up may be a an option to consider.
Otherwise, buying an existing dental practice is a far better option. We explained that there are a number of advantages to purchasing a dental practice. One is the value of a trained, experienced staff that will help you operate the practice. This means you do not have to know everything about insurance, management, finances, and the like. You have the benefit of a knowledgeable staff that is already accustomed to doing these things.
One advantage is the value of the new patient flow and referrals to the practice. From the first day in the practice you will have an established flow of new work.
Another advantage of buying an existing practice is the hygiene program. Established practices, especially older ones, tend to get much of their continuing work from recall patients. This part of the practice also contributes to the referral pyramid. When you are seeing a number of patients both in recall and personally, and you make them happy, they will go out and refer their friends and relatives to you. While this same thing happens when you start a practice, you are seeing far less patients on a day-to-day basis. Your resulting referral pyramid is much smaller.
The value of the seller as a mentor is another advantage. This mentoring could be long or short term depending on the transaction and it could involve financial, clinical, management, and lifestyle issues. In any case, it is valuable to draw upon the experience of someone who has been there. Why reinvent the wheel?
Other advantages include the value of the established phone numbers that keep on ringing, the depth of the patient base that will bring in old patients and emergencies, the lower cost of the lease (usually), and the proven location that is known to many established patients.
All these advantages really add up to the main advantage; cash flow! When you purchase a dental practice you should do so with the expectation that you will have a reasonable cash flow after debt service. You should be able to make money almost immediately and not have to deal with the uncertainties inherent in a start up practice. Because you are cash flowing from the beginning, you will generally make more money over your career with a practice purchase versus a start up.
At this writing, dental practice sale financing is unusually strong with many lenders aggressively competing in the market. One banking executive told me that these loans are among the safest they can make and they want as many as they can get. That comment alone should attest to the value of a practice purchase.
McLerran & Associates
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