Earl M. Douglas, DDS is the author of many articles on dental transitions.  He has also authored software for the financial analysis of dental practices.  His company, ADS South, LLC, is engaged in the valuation and sale of dental practices in the Southeast.   He can be reached at 770-664-1982 or earl@adssouth.com

So, What’s My Best Option?

It won’t be long now. Graduation is fast approaching, and you’ll soon be leaving the preparation phase of your career. But it can seem strangely confusing at this late time trying to determine the next step.

Many years ago, dentists’ decisions and options were quite standard.  Graduates opened their own practice or purchased a practice. Many of today’s options did not even exist in those times.  Today’s graduates face an array of opportunities and they may have limited or even incorrect knowledge about each of them.  Let’s take a look at a few of them.

In considering options, keep in mind that one size does not fit all.  Each graduate will have their own set of abilities, resources, skills and emotional and rational wiring.  Don’t worry if your best friend decides on one career option and your choice is entirely different.  You can both be right in your own differing decisions.

Buying a practice is one option.  Surveying senior classes where I lecture, I find that only a handful of students indicate that they plan to own a practice soon after graduation.  I don’t know what has changed graduates’ motivation over the past 40 years, but there has definitely been a pronounced shift.

Graduates probably feel many doubts about going into their own practice, including concerns such as not being able to afford a practice, not being able to get financing, not knowing how to run a business and not being ready to make such a large commitment.  I recently helped a buyer prospect discover that he was not all-in committed to owning a practice, and he therefore withdrew from the purchase.  This critical decision on his part no doubt saved him from a very unpleasant experience.

Not everyone is a candidate for practice ownership.  It requires an absolute total commitment.  Owners cannot just walk away if they don’t like how things are going at any given time. Owners require a strong positive outlook and the attitude that they can overcome any and all problems.

Owners need excellent people skills in order to motivate staff and patients alike.  They should have a sense of financial matters.  Owners need to be able to delegate.  When a client buys a practice, I remind them that part of their job will be fixing teeth, because their actual job will be running a business.

It is not easy for a new graduate to buy a practice, but it is generally possible for the determined person.  Financing can be obtained relatively easily for dentists who have been licensed for two years, but I have gotten financing for newly licensed dentists as well, typically through the SBA.

Today we are especially fortunate to have expert management consulting services available that can help new dentists  manage a practice better than if they had spent 20 years perfecting their mistakes as do many dentists.

A huge benefit of purchasing a practice is the acquired staff.  The staff conducts 90 percent of the daily business of a practice, so the new owner need only let the staff continue doing their job.  Another huge potential resource is the seller.   Sellers can counsel purchasers on every phase of practice life–the staff, the building, the equipment, patients, materials, laboratories, techniques, study clubs, dental societies and just about anything else.

The lenders that finance most practice purchases today specialize in dental acquisitions.  They have resources to help purchasers who may get into a spot of trouble and will work hard to help avoid a failure.  Today’s purchaser has multiple safety nets and layers of support to enable them to go straight into practice and succeed.  This is borne out by lender statistics of a default rate of only 0.5 percent so their borrowers have a 99.5-percent chance of success.

Purchasers question how they will ever pay for the practice.  Take for example an actual practice we are currently marketing in North Carolina.  It has a gross income of $530,000.  The hygienist performs $165,000 of that gross and the purchaser would produce $367,000, a very manageable amount for a new graduate.  The annual payments for the practice loan are $53,000.  Now consider that the profit from the hygiene department, after paying the hygienist’s salary, is $93,000.  In this practice, the hygienist is providing the payments to buy the practice for the purchaser twice each month!

I have even had recent graduates purchase a practice and the building as they enter their career.  How can a purchaser afford both a practice and a building?  In this practice, there is still a $40,000 hygiene profit after paying the practice loan that can be applied to a mortgage payment for a building.  If that were not enough to pay the entire mortgage, the savings in not having rent payments would certainly provide any needed cash flow.  In most practices I see, mortgage payments to purchase the building are about the same or less than rent would have been.

Owners have another very significant advantage that compensates for the hassles and commitment factors of ownership, and that is profit.  Profit is not the money owners earn for the work they do, but rather it’s the money that results from ownership.  Imagine owning stock in Google that pays dividends.  You don’t have to work for Google to get dividends, but simply own some stock in the company.

In this practice, paying the purchaser 30 percent of their $367,000 production provides a salary of $110,000.  After paying the purchaser salary plus all the practice overhead, there is a practice profit of $179,000.  This profit is purely a benefit of ownership, in addition to and over and above the purchaser’s $110,000 salary for working.  This $179,000 Profit represents a return on investment of 45 percent, and it continues every year!  Now you can see why entrepreneurs and corporations are scrambling to buy practices and hire dentists to work for them.

And if that were not enough, purchasers invariably deduct and depreciate the entire practice price.  The tax savings amount to ~40 percent of the practice price, a great gift from Uncle Sam.

Warning: While this is an actual practice and these are actual figures, not all practices are as profitable as this one.  Purchasers are advised to seek competent help in understanding the specific cash flow of any given practice.

Another ownership benefit is being “the boss”.  You decide who to hire, what materials to buy, what laboratory to use, what marketing to employ, what benefit plans to provide, what image your practice projects, what advisory professionals to use and all other aspects of your practice.

Now let’s examine another quite popular career option, working for another dentist or a DMO corporation.  The benefits of this option include having no debt and no risk. You don’t need to borrow money, and if you don’t like it, you can leave, subject to termination provisions of your contract.

Associateships are excellent for individuals who don’t have a total commitment to their career quite yet, or who are not as endowed in people skills and financial savvy as they feel they should.  Associateships provide an opportunity to build speed and skills and to see how other owners manage a practice, discovering both good and the bad tactics.

This option is also an excellent holding pattern where you can earn income and build skills while waiting for a practice to become available where you want to practice.

Associateships can be a safe and gentle transition to hard core ownership, and can help graduates discover how they are wired up and what direction they want their future to take.

Associateships do have their downsides though.  You definitely are not the boss, so you shouldn’t expect the boss benefits of ownership we just discussed.  Another difference is that associates do not receive Profit.  Profit belongs to owners and not associates. Further, associates do not receive the tax benefits that purchasers receive from depreciation and write-offs.  These last two items can result in associates earning significantly less than their owner counterparts for the same amount of work.  That may mean working for a longer period of time before retiring on the same income as an owner would have.

So in examining your options, it’s critical to understand yourself very well.  Are you ready to make a huge commitment and keep it?   Are you willing to take on debt in exchange for receiving Profit?  Do you want to be in control of your career or are you willing to let someone else control it for you?

Everyone has the right answers inside them, and many times having a competent advisor can be helpful in identifying, but never making, those key decisions.  Good luck.