Starting a Dental Practice
Thinking about starting a dental practice? McLerran & Associates has the experience and expertise to help you create a foundation for success as a practice owner and navigate the process of starting a dental practice from start to finish. We specialize in providing our start-up clients with dental demographics, office space location, and lease negotiation services while also assisting our doctors with building a strong team of trusted advisors (equipment rep., attorney, accountant, etc.) to help with all other aspects of starting a successful practice.
Starting a dental practice is one of the most important decisions you will make in your professional career and often unlocks the door to a considerable increase in compensation and personal freedom. Therefore, it’s crucial for you to begin preparing for practice ownership in advance and have a clear understanding of the practice start-up process.
Why Start a Dental Practice?
When it comes time to pursue practice ownership, dentists have two choices: start your own practice from scratch OR purchase an existing practice. Here are several reasons why many dentists chose to start their own practice:
- Establish Your Own Practice Vision – Starting your own practice provides you with the freedom to develop your own practice culture, create an ideal work environment, determine your target patient demographic, implement your own systems, hire/train your staff members, and provide the type of dental services you prefer to offer in the your own unique style.
- Choice of Location – Not all locations are created equal. Choosing your location allows you to choose the area (both geographic and demographic) and type of office space (retail versus professional building/condo) that best suits your practice vision.
- New Equipment/Technology/ Finishes – Selecting and purchasing new equipment/technology and finishes (countertops, flooring, paint, etc.) will provide you with the ability you to create a state-of-the-art facility that matches your practice vision. Since everything in your office will be new, you should also have minimal repairs/maintenance expenses during your first few years of ownership.
While starting your own practice can be very rewarding, there are two PRIMARY CHALLENGES that dentists face:
- Lack of Cash Flow – The biggest challenge in starting a practice is a lack of cash flow. While overhead expenses begin immediately, it could take 6-18 months for a new practice to generate an adequate level of patients and revenue to produce a profit. Therefore, we suggest that you borrow a sufficient amount of working capital to subsidize your overhead expenses and personal living expense needs for at least 3 months following opening your practice AND supplement your personal living expense needs by working 2-3 days per week as an associate doctor at another location (while operating your practice the other 2-3 days per week). As the busyness and cash flow of your practice increases, you can reduce your schedule at your associate position and increase the operating hours of your office.
- Systems & Training – Most dentists who start their own practice have very little experience in developing/implementing business systems (billing/insurance, patient communication, work flow, etc.) and training staff members. Therefore, we tell our doctors to reserve room in their budget to hire a dental consultant to assist them with implementing proven practice management systems and hiring/training staff members.
Step by Step Guide to Starting a Dental Practice
There are numerous decisions and steps involved with transforming your goal of starting a practice into a reality, including identifying your practice vision, building your team of advisors, finding an ideal location/office space, negotiating a lease, constructing and equipping your office, developing a brand and external marketing plan (logo, business cards, website, etc.), hiring and training staff, developing business systems and protocols, etc.
In order to provide you with some insight into my role as your commercial real estate agent and the journey that lies ahead, we would like to provide you with the following guide to utilize throughout the process:
- Develop Your Practice Vision – As with any business, the first step is to identify the service you will be providing and to whom you will be providing that service to. While identifying the service you will be providing is likely an easy task, defining your target clientele is equally important and can be a little more complicated. What is the demographic profile of your desired patient base? What is the age range of your desired patient base? Will your practice revenue be derived from primarily Fee-For-Service, PPO, or Medicaid patients (or a combination of these)? How many operatories/treatment rooms do you need? What hours would you like your practice to be open?
- Build Your Team of Advisors – As previously discussed, there are numerous steps to take and decisions to be made in order to successfully navigate the start-up process and ensure that your practice is positioned for success. Therefore, it’s critical for you to build a strong team of professionals who can assist you with making the right decisions and getting all of the pieces of the puzzle in place so you are ready to hit the ground running when you open for business. Your team will typically consist of a tenant rep., lender, equipment rep., contractor, attorney, practice management consultant, marketing firm, accountant, and insurance agent. During the course of our career’s in the dental industry, we have developed close working relationships with many experienced, local advisors who we respect and trust to take excellent care of our clients. Therefore, we typically take an active role in helping each of our clients in completing this step of the process.
- Financing Pre-Approval – Prior to beginning your property search, it is imperative for you to secure financing pre-approval so we know you will have the ability to obtain the necessary level of financing to turn your practice vision into a reality. Obtaining financing pre-approval prior to beginning your property search will also enable us to provide the landlord with evidence that you are a credit worthy tenant and help facilitate negotiations once we locate an ideal property. Your lender will typically require a copy of your CV or Resume, Personal Financial Statement, and last two years of tax returns in order to complete the pre-approval process. The landlord will also require this same information to evaluate your creditworthiness, so it’s helpful to gather this information at the start of the process.
- Property Search – Once you have determined the vision for your practice and obtained financing pre-approval, we will work together to identify a property that fits your needs. If you have already identified the market area where you would like to start your practice, we can begin our property search immediately. If you would like to obtain demographic information in order to identify a particular market area that fits with your practice vision, we can provide you with basic demographic information or we can obtain more specific dental-related demographic information by utilizing Dentagraphics. Once we have analyzed the demographic information, we can identify the market area where you would like to start your office and begin our property search.
- Letter of Intent – Upon finding an ideal location for your practice, we will contact the Landlord or Landlord’s Broker to make them aware of your interest in the office space and obtain the economic terms the Landlord is seeking for the space. We will then work with you in drafting a Letter of Intent to further demonstrate your interest in leasing the office space. The Letter of Intent is a non-binding document that simply serves as a tool for negotiation between the two parties. The Letter of Intent will provide the basic economic terms of the lease such as the Base Rental Rate and Tenant Improvement Allowance in addition to other important business terms such as Exclusivity Clauses and Assignment Provisions. The negotiation of the LOI is intended to be conducted in such a manner that each exchange between the parties is progressive and ultimately culminates in mutually agreeable terms that will serve as the foundation for your Lease. While the amount of time necessary to negotiate and finalize the LOI may vary, we typically anticipate this process to take 2 – 4 weeks.
- Lease – Upon arriving at mutually agreeable terms in the Letter of Intent, the Landlord will instruct their attorney to draft a Lease. The Texas Real Estate Commission does not allow Brokers/Agents to provide legal advice to their clients, so we highly recommended that you employ an attorney to assist you with reviewing the Lease. As with the Letter of Intent, there will likely be several exchanges between each party and their respective attorneys before the Lease is finalized. While the amount of time required to reach a consensus and finalize the lease can vary, this step typically takes about 4 weeks in most cases.
- (a). Office Space Design & Equipment – Once we have negotiated an LOI for a particular office space, we highly recommended that you obtain a CAD file (electronic drawing of the office space) so that you can begin designing the layout and choose the equipment for your office. We encourage you to begin the office design process as soon as possible and utilize a dental equipment company and contractor to complete this task.
(b). Obtaining Construction Bids / Creation of Construction Documents / Permitting – This step is critical to the process and needs to be completed in a timely manner. To begin this step, you will need to meet with your contractor(s) to review the office space design to ensure that it meets your municipality’s building codes and decide upon the finishes for your build-out (countertops, flooring, paint, etc.). Once these decisions have been made, your contractor(s) will provide you with a construction bid. Upon awarding the project to a particular contractor, the contractor will need to prepare Construction Documents for the appropriate municipality, which should take approximately 2 weeks to complete. Each municipality is different and the amount of time it takes to receive a construction permit can vary greatly. The permitting process is currently taking about 60 days in the City of Austin compared to approximately 30 days in the City of San Antonio.
- Construction – Once your contractor receives a building permit, they can begin construction of your practice. In general, you should anticipate construction to take about 90 days to complete. Having a contractor that is familiar with “medical” construction is critical due to the many nuances involved with building a dental practice compared to other types of businesses.
- Branding / Marketing / Hiring & Training Staff / Business Systems – In the months leading up to opening your doors, you will need to work with your marketing firm and practice management consultant to establish a brand for your practice, implement a marketing plan, construct a website, hire and train your staff, implement business systems, etc. so that you will have appointments on the books and be prepared to take excellent care of your patients immediately upon opening your practice.
- Certificate of Occupancy – This is the final step before opening your doors to patients. Once your contractor has completed the construction of your practice, they will call for the City to make a final inspection. Upon passing that inspection, the City will award you with a Certificate of Occupancy and you can open for business!
The amount of time required to accomplish each of the above steps can vary greatly from project to project depending on the doctor’s ability to perform (secure financing approval and satisfying the requirements of the landlord) and the following variables:
- Availability of the space
- Willingness of each party to reach a consensus during the Letter of Intent and Lease Negotiation Phases
- Ability of the doctor and their contractor to complete a final space plan, choose finishes, produce a set of Construction Documents for the appropriate municipality in pursuit of a construction permit, and complete construction.
While the total time it takes to navigate the start-up process can vary depending on the above variables, it typically takes 6 – 8 months from the time we locate an office space until you are open for business.
By following these steps and working with an experienced team of professionals, you will be on your way to accomplishing your dream of starting your own practice!
Preparing for Practice Ownership
The process of preparing for practice ownership should begin during your third year of dental school and continue until the day you start your own practice. The better your credit and personal financial condition, the faster your hand speed and more diverse your skill set, and the more developed your business acumen … the more prepared and more successful you will be when it comes time to pursue practice ownership.
Since most dentists rely on third party financing to start a practice, it is imperative that you understand the perspective of dental lenders and how to position yourself for success when applying for practice financing.
Specialized dental lenders have the knowledge and experience to recognize that dentists are a good credit risk and to properly analyze practice financing opportunities. Therefore, you can expect dental lenders to continue to aggressively pursue dental loans and offer competitive pricing. However, it is important to note that the recent financial crisis has caused dental lenders to tighten their credit standards and evaluate borrowers more closely in these key areas: Personal Credit History, Personal Financial Condition, and Professional Experience.
Personal Credit History
When you apply for a loan it is often the first time you have been introduced to a dental lender. Due to the fact that the lender does not typically have a long-term personal relationship with you, the industry standard is to rely on your personal credit history as the primary character reference. While it is ideal to maintain a credit score above 700, most lenders will fund transactions for borrowers with a credit rating of 650 or higher. If your credit score is below 700, be prepared to answer questions pertaining to delinquent accounts, high credit card balances, or any other factors that may have driven your score below this mark. In order to ensure that you maximize your credit rating and present yourself in the most favorable light, we encourage you to employ the following steps in managing your credit:
✔Check your credit regularly (every 6 months).
✔Correct any mistakes or instances of credit card fraud. If any mistakes or signs of credit card fraud appear on your credit report, immediately contact the credit grantor to dispute the charge or correct the discrepancy. You should also contact the credit reporting agency to notify them of the mistake and submit supporting documentation so that the correction can be made to your credit report.
✔Pay your obligations in a timely manner. A delinquency will appear on your credit report if a payment to a credit grantor posts over 30 days past the due date. Lenders look poorly upon current or past delinquencies because this shows an unwillingness or inability to repay your obligations as promised. If delinquencies do appear on your credit report, be prepared to provide the lender with an explanation of each delinquency.
✔Limit your use of revolving debt. Revolving debt includes all debt relating to credit cards, charge cards, or home equity lines of credit. This type of debt can substantially reduce your credit score and is looked at unfavorably by lenders. Once revolving accounts have been paid off or retired, do not close these accounts, as availability (not use) of revolving credit will boost your credit rating.
✔Avoid declaring bankruptcy at all costs. Most lenders will not consider anyone who has declared bankruptcy within the past 7-10 years as a financing candidate.
Personal Financial Condition
Unlike traditional banks, dental lenders understand that most dentists with only a few years of professional experience will likely have a substantial amount of student loan debt and may have a negative net worth. What these lenders are paying closer attention to is if a potential financing candidate is “living within his/her means”. Lenders want to verify that your lifestyle matches your personal income level at the time you apply for practice financing, as the lender can only assume that your current approach to managing your personal finances will continue into the future regardless of your income level. An interest only or adjustable rate mortgage and/or substantial levels of credit card debt are key indicators that a financing candidate is not maintaining a lifestyle consistent with his/her personal income level. This situation will often give lenders an uneasy feeling about a potential borrower’s spending habits. Therefore, you may want to consider postponing any major purchases – such as a home, car, luxury items, expensive vacations, etc. – until after you start a practice and can generate sufficient income to fund these purchases with cash or keep up with the monthly payments rather than utilizing revolving debt.
While dental lenders will often provide borrowers with 100% financing plus working capital (to help supplement overhead expenses and cover the dentist’s personal financial obligations until the practice begins generating sufficient cash flow), some dental lenders require that potential borrowers have liquid assets (cash, savings, investments) equal to 5%-10% of the loan amount on hand. Borrowers who are able to meet these liquidity requirements have shown the ability to live well within their means and will be in the position to fund any unexpected expenses that may arise shortly following opening the doors of their practice with their own savings (once their working capital has been exhausted).
It is also important to note that lenders will often evaluate recent graduates from a different perspective than when considering more seasoned dentists. While it is understandable that recent graduates will be carrying large student loan balances and a negative net worth, a lender will expect established dentists to be in a more favorable personal financial situation due to the ability to save money and reduce debt obligations during their career. Experienced dentists with weak financial statements should be prepared to provide an explanation for their current personal financial condition in order to mitigate any perceived risk from lenders.
Professional Experience & Business Acumen
The majority of dental lenders will require a potential financing candidate to have one to two years of experience following dental school prior to pursuing practice ownership. The exact level of experience required to qualify for a loan can vary depending on the loan amount, buyer’s production capabilities, buyer’s business acumen, and more.
As a young doctor who is considering starting a practice within a few years following graduation from dental school, it is wise to search for an associate position that will allow you to produce a substantial amount of dentistry, quickly increase your hand speed, and expand the array of services that you are capable of performing. Obtaining your production/collection reports from your associate position can also be a useful tool in showing lenders evidence of how much and what type of dentistry you are capable of producing.
As a result of the myriad of changes that dentistry has experienced over the past few years (i.e. increased competition, PPO involvement, regulatory compliance, etc.), the burden of management associated with being a practice owner has reached an all-time high. Therefore, in order to be prepared to effectively manage the business side of your practice, it is crucial for dentists to develop their business acumen alongside their clinical abilities. While working as an associate, you should pay close attention to the responsibilities involved with owning/operating a practice and learn from the mistakes and successes of your employer. It would also be a wise decision to invest your time in taking a business/management courses at a local community college and/or read several business-related books such as Good to Great, The Art of the Sale, The Obstacle is the Way, The Tipping Point, Freakonomics, How to Win Friends and Influence People, and The 7 Habits of Highly Successful People. Possessing the experience and knowledge to intelligently discuss and apply both the clinical and business aspects of practice ownership will also impress your lender and increase your chances of securing loan approval.
If you take the time and effort to ensure that these three aspects of your personal and professional life are in order, you can rest easy in knowing that practice financing is readily available and you are in a great position to further your career by pursuing practice ownership.