Six Costly Mistakes
New Doctors Make and How to Avoid Them
Kevin Cumbus, MBA, Jeff Harrell, CFA, Brad Kucharo, CPA, CFP and Susan Harris, CPA
After years of dental school, labs and clinical hours logged in with patients, you are finally ready to begin work in “the real world.” The excitement of landing the perfect job, making money and embarking on a career in dentistry can overshadow the importance of decisions you will face early on in you career. Below are six (6) common mistakes that we have seen new doctors make in their first few years after graduation and how to avoid them.
1. Looking for the Wrong Characteristics in a Practice
While there are fewer job opportunities today, this fact hasn’t stopped new doctors from “nitpicking” opportunities that may not have the characteristics they are looking for. These characteristics include: age of the equipment, appearance of the reception room, proximity to the nearest metropolitan area, and other aesthetic-related concerns. However, the most noticeable characteristics of a practice are not necessarily the most important. The old adage, “never judge a book by its cover,” comes to mind. While the fancy practice with new equipment in a brand new building in the heart of downtown can break you financially, the practice in the suburbs with aged equipment and furnishings may help you become a millionaire.
The most important characteristics to look for in a practice are intangible. This includes items like practice growth potential and level of profitability. Other factors that can lead to an increase in intangible value include new patient flow and how far out the practice is currently booked. Although modern dental equipment and a 100% digital office might be desirable characteristics for you, don’t let the physical infrastructure drive all of your decision making when it comes to buying a practice. Remember, you can always buy new dental equipment, but it’s more difficult to improve the intangible side of a business.
2. Accepting an Associate position without an Employment Agreement (or worse yet, a poorly written one)
The two areas of an Employment Agreement that usually cause the most headaches are the Compensation and Non-Compete (or Restrictive Covenant) sections.
Your compensation arrangement should allow you both an open-ended earnings potential and a financial safety net. Let’s face it; you will have bills to pay once you begin working. In light of this, a draw against a commission (based on collections) will help satisfy your basic financial security needs, while providing an incentive for additional earnings.
For example, you could agree to be paid a commission of 30% with a draw of $5,000 per month. This means that you would be paid the greater of $5,000 per month or the 30% commission. Suppose in the first month that 30% of your collections is equal to $4,000. You would be paid the $4,000 earned plus an advance of $1,000. In the second month, suppose 30 % of your collections equals $4,500. You would be paid the $4,500 earned plus an advance of $500. In the third month, suppose you earned $6,500; you would be paid $5,000 and the owner (your employer) will recover the $1,500 in cumulative advances made.
A Non-Compete restricts your ability to practice dentistry within a certain geographic area over a finite amount of time following termination. In essence, this clause allows the owner doctor to protect his or her patient base from being encroached upon by a former associate. On the other hand, it must be reasonable and not prevent you from earning a living. The key here is to make sure that it is reasonable in both the scope and time.
Often times, new doctors negotiate and agree to various terms (including the two discussed above) before a draft agreement is presented to them, or they have had a chance to consult with an attorney or other advisor. Professional advice should be sought at the beginning of the process, before negotiations begin, and certainly before making any agreements (verbal or otherwise).
3. Relying on Hand-Shake Transition Agreements
All too often associates are promised ownership, but they are never given any details (in writing) about the timeline or costs included. In many cases, the promised opportunity, and the reality of the offer down the road, are often very different.
Many new doctors enter associateships and are told that it will lead to ownership only to find the offer drastically different from what had originally been discussed, or simply, different from what they perceived. This has happened more often recently, in these tough economic times, when the senior doctor is trying to “save” fees. This invariably leads to a loss –in terms of lost relationships, lost revenue, and lost opportunities. Fees well spent are an investment, not an expense. The mistake: entering into a verbal agreement without a definitive, long-term plan in place.
There are many things that must be planned before any transition is implemented. How long will you work as an associate before you are offered ownership? What should you expect to pay for an ownership interest? If you are going to be partners, how will each of you be paid? These are all questions that must be answered before a long term ownership deal can be structured - not after. Without such a plan, no one knows what to expect, leading doctors to create their own expectations. This is the path to disappointment. Don’t go into a situation blindly. Make certain there is a plan and it is in writing. It will be your roadmap to success and genuine satisfaction in the future.
4. Not Saving Early on in One’s Career
Most new graduate doctors are saddled with significant debt. Unfortunately, this often leads them to making bad decisions, such as delaying investing for retirement. This can be a perilous decision because new doctors can access the best retirement savings vehicles around, a ROTH IRA. New doctors must take advantage of this immediately because it is only available if their Adjusted Gross Income (AGI) is below a certain threshold (which adjusts annually). Since most new doctors may exceed this threshold quickly after graduation, new doctors should contribute to a ROTH IRA every year that their AGI falls below the threshold.
The reason contributing to a ROTH IRA is so important for new doctors is that while contributions are not deductible, withdrawals are 100% tax free (both contributions and earnings) when you retire. To illustrate how powerful this is, let’s assume a new doctor can contribute $5,000 per year for three years after graduating. Assuming they graduated at 26 and decide to retire at 65, this would result in nearly $200,000 of retirement savings assuming a 7% compound growth rate. Moreover, it is 100% tax free! While this is only a very small portion of the amount ultimately needed to retire, the nearly 40 years of compound growth and tax free earnings make this a once in a lifetime investment opportunity not to be missed.
5. Avoiding a Budget
Many new doctors graduate with a huge pent up demand to spend, and make big purchases without actually determining if they can afford them. By the time a doctor purchases a new house, furnishes their home, buys two new cars, and starts paying back student loans, they have very little left over to put food on the table. Doctors often overlook the fact that taxes will consume approximately 30% of their income, as explained below. Before the doctor makes a purchase, she should create a detailed budget with all of her personal monthly living expenses and see if she will be able to afford the potential purchase. Purchasing large items by taking out debt devours cash flow and negates assets causing a doctor’s net worth to go negative.
If the decision is made to make the large purchase, the doctor should have a clear plan for eliminating the related debt. Generally, doctors should focus on the debts with the highest interest rates first, and have a specific timeline for repaying all the debt. Dental specific certified tax and business planners will analyze their tax and financial situation to determine if they can afford to make various purchases. Doctors should have a financial game plan and always seek professional help before making big financial decisions. Otherwise, they could end up digging themselves a huge hole, with more debt and fewer assets.
6. Not Saving Enough for Taxes (Especially if Independent Contractor)
If you are working in more than one dental office, you may be treated as an independent contractor, rather than an employee. This means that the dentists for whom you work are not required to withhold taxes – federal income tax, state income tax, social security and Medicare – or pay the employer portion of social security and Medicare. In this situation, you are treated as self-employed and you are responsible for estimating all the above taxes and depositing them on a quarterly basis. How much are you going to need to set aside for taxes? Social security and Medicare combined are 7.65% of your earnings, but because you are both employee and employer (self-employed), you will need to reserve 15.3% for these taxes. This is in addition to your federal and state taxes!
But the news is not all doom and gloom. While you may have the administrative burden, you can deduct business expenses straight off the income you are producing. This reduces the taxes you pay. Keep track of the mileage driven and supplies purchased, including a computer if used at home for tasks like updating patient records. Other expenses to track include uniform cleaning, travel and fees for continuing education, dues for dental societies and meals/entertainment. Also, any medical insurance is deductible (at least currently - a variety of bills before Congress may limit this).
So the bottom line is to put aside a percentage of each pay check for taxes so you don’t have to scramble come April 15th. And save those receipts.
In short, mistakes early in your career must be avoided, as they will cost you both financially and with lost lifetime opportunities. Seek help from a professional who gives you a feeling of confidence and trust. This is how your patients make a decision to put their care in your hands. Most full service dental consulting groups have reasonably priced entry programs for new doctors just like you.
For over thirty years, The McGill & Hill Group has served as a one-stop financial services resource providing practice transition, tax and business planning, legal, accounting, investment advisory and retirement plan services exclusively for the dental profession. Since our inception, over 22,000 practicing dentists have depended on our unparalleled education, experience and expertise to achieve their personal and professional goals, with outstanding results. ■
*For more information on new doctor services offered through The McGill & Hill Group, contact them toll free at (888) 249-7537 or email info@bmhgroup.com.