As dental-education debts continue to rise, more graduates fear that practice ownership may not be in their plans. With the average dental school debt as of 2013 at public institutions averaging $209,000 and those at private institutions averaging $284,000, it is no small wonder why today’s graduates feel that way!
This is not the time to feel sorry for yourself, because the public does not view us as a profession who will not be successful financially. In fact, US News and World Report reported in its January 2015 edition that being a dentist is considered the best job in 2015. So we are ahead of the pack! Now understandably, your immediate concern about paying off these education debts is a major financial hurdle that many of you will have to face upon graduation. But the opportunities to create significant wealth are there for the taking, and that means that you do not have to consider finding a good-paying job for the next 10 to 20 years as your only path to financial freedom. In fact, the recent survey of the Class of 2013 taken by the American Dental Education Association shows that the majority of these graduates valued “control of time” as the top reason why they choose dentistry. “Service to others” ranked second and “self-employment” ranked a close third.
The survey also showed that 48 percent of this class were immediately pursuing private practice upon graduation. Sixty-five percent of this group planned to be employed as an associate, and 23 percent were planning to be employed in a corporate group practice. Granted, the option of employment both as an associate in either private practice or in a corporate group setting does not have to be a career-long event, but rather a stepping stone to eventually becoming a practice owner. Many graduates enter residency and/or specialty programs but practice ownership is still the long-term choice.
Every entrepreneur has heard the adage “you’ve got to spend money to make money.” The enormous benefits of acquiring a successful, profitable dental practice certainly can place you on track to retire your student debt comfortably as well as meet your financial obligations of purchasing a practice. Furthermore, if you have the clinical experience to produce in excess of $35,000 to $40,000 a month, start thinking about purchasing a $700,000 or $800,000 practice. In fact, you may be able to purchase a higher-grossing practice, especially if the Seller remains after the sale.
When you purchase a successful practice, you are purchasing a dentist’s historical earnings. As long as you continue to maintain the practice revenue and eventually grow the practice, your financial success can be easily achieved.
Before the Great Recession, many banks were funding start-ups at a very high rate. Recently, practice start-ups have declined, particularly in economically hard hit areas of the country. However, a start-up is still a viable career option in the right market. Yet, for many graduates, purchasing an existing income stream via a highly profitable practice is always a winning proposition!
The good news is that all of the major dental lenders understand your plight and are ready to loan money for a practice acquisition as soon as two years after your graduation. These lenders are in the business of providing funds for dental practice acquisitions because you are their market. The ability for recent grads to obtain sizable loans is a reality! Bank underwriters consider several factors; your credit, your amount of debt, your clinical production history and most importantly, the financial condition of the practice you are purchasing.
With interest rates still in single digits for the foreseeable future, it is a good time for taking advantage of these market conditions that allow purchasing a high-grossing practices a real possibility. Lower interest rates also translate into more purchasing power for you.
When comparing being a long-term employee versus purchasing an existing practice, you must consider the long term cumulative potential for wealth accumulation. To illustrate this point, assume that you purchase an $800,000 practice, which has a profit margin of 40 percent. That equals $320,000 of income per year (before debt service). Over a 20-year period, without even considering any growth in your annual income, the total income you can generate over that 20-year time-frame translates into $6.4 million! Let’s assume that you paid $600,000 for this practice (including working capital). The loan term is for 10 years at an interest rate of 6.0 percent. That translates into annual payments of $79,900 over the course of the loan. So is borrowing $600,000 for a practice that can produce potentially over $6.4 million in career earnings a worthwhile investment? The answer, of course, is yes.
So now, let’s compare ownership versus employment over the same 20 year period. If you work your way up the ladder in a large group practice, what kind of income stream can you expect to earn? For example, let us assume you work in a practice at a commission rate of 30 percent of collections and you earn $250,000 per year on average. Your annual collections needed to earn this income would be about $835,000. Ironically, this is more revenue than the $800,000 practice that we just discussed as a potential purchase. Granted, comparing the two scenarios over 20 years shows that in the employment example, you could earn $5.0 million in your career. But, the big question to ask is,will that employment opportunity be guaranteed for your entire career? The simple answer is NO! Ownership may change, the practice could be sold and your employment no longer required. Numerous scenarios that may impact your ability to generate that type of income over a long period of time as an employee. Another glaring omission from the employment model is the absence of any profit-sharing from business operations. Ownership certainly gives you that advantage!
Not pursuing an ownership model for several years after graduation is not a bad decision. Working in an environment where you can earn a good six-figure income and gain valuable clinical and management experience is not all bad. For several years you may be able to put a dent in your educational debt! But do not take your eye off the ball from becoming a practice owner.
Practice ownership is the long-term proven path, especially if you have any entrepreneurial spirit!