Your Career Options: Employment or Ownership?
Tom Snyder, DMD, MBA
Many of you are facing staggering dental education debts ranging from $250,000 to $400,000. Beginning your dental career with this amount of debt can certainly cloud your vision about owning a practice. For some of you, becoming a long term associate may be the only option you feel that you have, but this may not be the case!
In this article, we'll explore several options for you to consider, and how the economics of owning a dental practice may still be your best path to financial success.
BECOMING AN ASSOCIATE
Over the last ten years, we have seen a dramatic growth in Dental Service Organizations or Dental Management Companies. There are currently in excess of 170 companies, ranging in size from companies with 5 locations to an excess of 250. Many have acquired practices that require the seller to remain with the business anywhere from two to four years. Since these companies are "growth oriented," they'll need even more dentists to staff their locations. Furthermore, DSO's will also need replacements for those sellers who will be completing their post-sale commitment as they enter retirement. So the need to recruit a growing number of recent grads will only increase. Several of the national companies have been recruiting at many dental schools, offering very competitive starting salaries with good fringe benefit packages.. Additionally, based on the location of their practices, student loan repayment options may also be available.
Consequently, a growing number of you will consider this choice to be an attractive option after graduation. We also have seen a growing trend for new graduates to reject the career path of owning a solo practice. Today, approximately 64% of dentists today are considered solo independent practitioners. This ratio is down substantially from ten years ago! This trend will continue as more graduates prefer working with "another doctor" rather than practicing alone. For some of you, considering a long-term affiliation with a Dental Service Organization will be your career choice, desiring the security and benefits this model can provide. For many others, however, it will be a bridge to a career in owning your own dental practice or starting a practice.
PRIVATE PRACTICE
The majority of dentists still want to own their own businesses or become a co-owner in a group practice. So, you have three pathways to consider in private practice; starting a practice from scratch, purchasing a practice to become a sole owner, or becoming an associate leading to a co-ownership position.
START-UP
This path is still a viable in markets that have strong positive growth. Over the past several years, the Great Recession has taken its toll on dental start-ups, especially in markets that have been hit hard by the economy. Lenders have seen an increased number of business failures with start-ups so some lenders are quite stringent on loaning money for such a venture. Since many start-ups range from $300,000 to $450,000, you really have to be successful in the first few years of operation or the debt service may overwhelm you. So, considering a start-up in today's economy requires careful pre-planning accompanied by an exceptional marketing plan. Demographics of the area and population are key as well here, so investing in a professional demographic analysis is a must!
In the end it's the patients that will make you successful, so if you cannot attract a steady and growing patient base, the outcome is obvious.
PURCHASING A PRACTICE
I have a natural bias to either purchasing an existing practice or becoming a partner in an established practice. In both cases, you are dealing with an established patient base and doctor goodwill and most importantly, a historical cash flow!
If you consider purchasing a practice with a high gross revenue , do not back away from a larger practice If you are capable of doing the dentistry, you can be properly rewarded for assuming the risk of buying a larger practice.. To illustrate this point, assume that you purchase with a gross revenue of $700,000 practice that realizes annual profits of 40% or $280,000 a year,. Over a 20-year period, without ever considering any increases in practice growth and net income, the accumulated income could translate into $5.6 million in earnings! Let's assume that you paid $420,000 for this practice and loan payments were made over ten years at an interest rate of 7.5%. That would translate into annual payments of $59,454 over the course of your loan. Does borrowing $420,000 for a practice that can produce potentially over $5 million in lifetime earnings seem to be a worthwhile investment? The answer, of course, is "yes."
While it is true that assuming a large amount of practice acquisition debt seems imprudent when you may owe hundreds of thousands of dollars in outstanding student loans, you may want to rethink this assumption. The purchase of a dental practice with good profit margins is essentially ensuring a larger income stream for you now and in the future. Furthermore, banks are not afraid to loan you the funds to purchase the practice as long as you have good credit and proof that you can produce dentistry at a level to sustain the debt service. Banks that specialize in dental lending make their decisions not only on your credit worthiness, but also on the cash flow of the practice you are purchasing.
With interest rates still hovering in single digits, the time is right for taking advantage of these market conditions that enable you to invest in a high grossing practice. Lower interest rates translate into more purchasing power for you, thus enabling you to afford a practice with a higher gross revenue.
CO-OWNERSHIP
If you prefer not to work alone, joining a practice as an associate with the opportunity for a buy-in is a worthwhile alternative. For the same reasons as buying a cash flow when purchasing a dental practice, becoming a partner in a profitable practice with good cash flow and growth potential can also be a successful career choice. Obviously, being able to share responsibility and have compatible personalities are key ingredients to any co-ownership arrangement, whether it's one dental partner or multiple dental partners.
In the end, your options are wide open even though at this stage you feel that it will be a daunting task. Careful consideration of all options and understanding the pluses and minuses of each choice is key for you to become a successful practitioner. ■
Dr. Tom Snyder is Director of Practice Transitions for The Snyder Group/Henry Schein Professional Practice Transitions. A transition services consulting firm that specializes in practice valuation, practice sales as well as designing associate and partner relationships. He can be reached at (800) 988-5674 or email: tsnyder@snydergroup.net The firms' website is www.snydergroup.net