James R. Pride, DDS
Every year, hundreds of dentists buy dental practices. Are their decisions sound? Did they purchase at the right price? For the right reasons? At the right time?
To buy or not to buy? That is the question that will profoundly affect a dentist`s career. In surveying more than 150 dentists who have purchased practices in the last two years, Pride Institute has identified five basic times in the dentist`s career when he or she makes this investment:
(1) Buying a First Practice. Thirty-five percent of the purchasing dentists were either starting to practice for the first time or had been practing as an associate and were buying a first dental practice.
(2) Moving. Twenty-five percent of the dentists bought a new practice because they wanted to relocate to another community.
(3) Making a Slow Practice Busier. Twenty-two percent of the buyers were not busy enough, so they bought the practice of another dentist in the community to quickly increase their patient base and boost practice productivity.
(4) Upgrading or Changing the Type of Practice. Twelve percent of the dentists bought a practice to improve their existing practice. In buying the new practice, the purchaser may have been looking for more quality patients or a better facility. Others may have change their practice focus from, for example, a pediatric practice to an adult practice or from a general practice to an esthetic practice.
(5) Preventing Competition. Six percent of dentists purchased a practice to prevent another dentist from coming into the area - to curb competition, for example.
Let`s analyze these five common reasons why dentists buy practices and evaluate the results.
Buying a first practice
Many dentists enter the profession in part because they want to be self-employed. Therefore, they will want to own a practice at some point. They can either:
1) start a new practice from scratch without any patients, or
2) buy an existing facility and practice.
Which way is better financially?
Banks are reporting loan requests for scratch practices of $270,000 to $350,000. (This price includes an average of $45,000 to pay student loans and $110,000 for living expenses over a two-year period to help the dentist get started!) For example, a $300,000 loan at 10 percent interest for seven years requires payments of $4,980 per month to repay the debt. To service such a debt - in addition to paying other expenses - monthly production would need to be at least $32,000.
Judging from experience, it will take approximately two years for a start-from-scratch practice to reach such a production level.
Instead of starting a practice from scratch, a dentist may buy an existing practice that is already producing our example amount of $32,000 a month or $384,000 annualized. Selling prices for a general practice are running approximately 60 percent of the "adjusted" gross annual production (the amount that can be collected).
For simplicity, let`s assume that collections are 100 percent, so 60 percent of $384,000 is $230,400. Add to this selling price an estimated $50,000 in operating capital. This may be taken as a loan or a line of credit to provide the cash flow necessary to get started before the buyer`s receivables begin to build up. (In most cases, the purchasing dentist does not buy the seller`s accounts receivable.) This gives us a total cost of $280,000. A loan on $280,000 at 10 percent interest for seven years results in a monthly debt payment of $4,648, or $332 less debt per month than the start-from-scratch practice.
The loan payments on the above two models are almost the same. However, the start-from-scratch dentist must wait two years to build production to the level at which it can service the debt. The dentist who buys an existing practice has an immediate source of production to cover loan payments. In addition, the start-from-scratch doctor will spend a lot more time "growing the practice" and will need greater organizational skills than the dentist who purchases an existing practice.
Building a practice from nothing takes far more effort in terms of hiring staff and establishing all of the business and clinical systems and procedures. This doctor must also develop a marketing program for his or her practice, such as creating brochures, networking after hours at community gatherings, etc. A start-from-scratch practice also brings with it greater stress and uncertainty.
The dentist who buys an existing practice, of course, will need to use the same organizational and marketing skills, but not nearly to the same degree and effort as the dentist who must build something from nothing. So, when leaving an associateship or attempting to practice on one`s own, the most straightforward approach is to buy an existing dental practice.
Moving
When relocating to a different community, should a dentist start a practice from scratch or buy an existing one? The answer usually is the same as in the case of buying a first practice in the same community - namely, to buy an existing practice. There also is a psychological reason for buying an existing practice when relocating. Experienced dentists accustomed to working at a fast pace and doing a lot of dentistry each day will be downshifting tremendously when they find themselves suddenly waiting for patients to arrive (first one a day, then two a day, etc.) and worrying about their newly generated debt. When relocating, the experienced dentist should consider buying an existing practice.
Making a slow practice busier
The third reason why dentists buy a practice is that their own practice is slow and they are attempting to purchase an additional patient base to improve their production. Is this wise? Typically, we advise dentists wanting to increase productivity not to buy an additional practice. Let`s analyze the situation.
Why is a dentist not busy enough in his or her practice in the first place? Common answers are:
- The practice is in the wrong location (which, indeed, may be a valid reason to buy another practice in a better area).
- The practice lacks an effective marketing program.
- The staff is not providing the excellent customer service that brings word-of-mouth referrals from satisfied patients.
If failures in marketing and patient service are impeding the growth of the practice, it is unwise to buy another practice to make up these deficits. Sure, buying the additional practice will give the original one a temporary shot in the arm with an influx of new patients, but it will only provide a temporary harvest of treatment that will eventually become depleted. A practice needs to cultivate its own fields so that lasting patient relationships, loyalty, and referrals sprout abundantly.
Buying another practice is a short-term and expensive way to improve business. How many dentists who take this road actually compute the amount of production required to recoup the investment they have made in buying the additional facility? In reality, production per hour on the new patients decreases due to the cost of buying them. For every dollar in production from the secondary source of patients, a full 25 to 50 percent often goes to servicing the debt -and cutting the dentist`s salary!
We have known dentists who have purchased as many as four new practices within 10 years to revitalize a sagging practice. They have imposed an unnecessary financial burden on their practices that cannot solve the original problem.
The way to grow an existing practice is not to buy patients, but rather to market energetically, to improve customer service, to train the staff to ask for referrals, and to work on the specifics of proper case-presentation skills to increase overall production and production per hour.
However, there is one situation in which it can make economic sense to buy patients from another practice. This is the case in which the patients can be purchased very economically without also buying the facility. Regrettably, we sometimes see a retiring dentist with an old facility, worn furnishings, and outdated equipment that no one will buy. In this case, a nearby dentist may do well to buy the patient base of the retiring dentist at a tremendously reduced rate.
If the equipment and facility cannot be sold, then the patients should be purchased for not more than 10 to 15 percent of adjusted annual production from the previous practice. This could result in a two- to three-year boost in productivity for the purchasing dentist at a minimal cost. Remember, the purchase is made to bolster a slow practice by buying a body of patients that can be acquired without having to also buy the hard assets of the practice.
This purchase of a patient base can provide a wonderful service to the community, since the retiring dentist`s patients will need someone to provide for their care. In this situation, the purchasing dentist can increase productivity with only a small debt service or cash outlay.
Upgrading or changing
A good time to consider buying a dental practice is when the dentist is thinking about upgrading a facility or building a new one. We see many instances in which a dentist purchases an attractive dental office with used, but serviceable, equipment in a nicer part of town. The purchase is made from a retiring dentist or from the family of a deceased dentist.
In such cases, the buyer typically has to purchase the patients along with the practice, causing the buyer to spend more than he or she would have preferred to in buying just the hard assets alone. However, if a dentist can absorb the additional patients, buying a good, serviceable office can be an excellent way to get an instant new facility.
Some dentists buy a new practice to upgrade the quality of patients and therefore change the type of dentistry they do - from a general practice, for example, to one focused on esthetics. Pride Institute considers this a practice-management issue, not a practice-purchase issue. If dentists want to change the kind of dentistry they perform, they should first seek new training rather than buying another practice. They should consider training in new clinical tehniques, treatment-planning, case presentation, case acceptance, etc. By doing this, dentists can convert an existing practice into an esthetic-based practice. The new clinical and communication skills - rather than the ready-made patients - are the critical factors.
In one situation we know about, a dentist left government service to buy a very sophisticated, well-run practice, based on esthetics and heavy restorative cases. However, the dentist had no experience in managing and delivering this level of care. He did not think it was necessary to get training on the advanced techniques he needed to be successful. He ended up in serious financial trouble as a result of purchasing a practice that did not match his skills.
Preventing competition
Some dentists establish or buy a practice to curb competition. This can make sense for a specialist who, for example, has a patient base in a satellite area that is underserved and where the patients have to travel for treatment. If the satellite area is growing, the specialist may worry about a competitor establishing a practice within the satellite community. In this case, the specialist might open a second office in the satellite area to keep from losing this block of patients.
Specialists tend to have less practice overhead than general dentists. As a result, they may be able to carry two offices. General dentists often take a huge financial hit with the combined overheads of two offices. That`s why it pays for a general dentist to forget the competition and simply be the best that he or she can be. Astute practice management will attract a healthy roster of patients far more economically than buying a second office with its accompanying overhead costs.
This brings up the broader question: Should a dentist buy a practice in order to have a second office in a separate location? We are asked this question constantly. Some dentists believe that, if they are netting a 20 percent pretax profit with one practice, they will net a 40 percent pre-tax profit with two practices. Unfortunately, this reasoning just does not work. While some dentists reading this article may disagree, in Pride Institute`s 25 years of experience with thousands of dental practices, we have proven, without a doubt, that the most efficient and effective way to practice is with one location and one office team, focused on marketing in one area.
I have worked with over 100 dentists with mediocre incomes who divide their time between two locations. In every case, without fail, I advised them to sell one practice, which they vehemently resist at first. When I finally convince them to toss off the albatross of a second practice, the practice they kept mushrooms, production per hour increases, the staff is happier, the dentist is more focused, and the financial return skyrockets.
Can a dentist successfully maintain a second practice if he or she hires an associate to run it? This usually is disastrous. It is difficult enough to run a practice with the dentist present. With an associate running a practice miles away and unsupervised, systems tend to break down, embezzlement and other problems occur. In some cases, the associate even takes the patients and starts his or her own competing practice. This occurs because the owner/dentist is not present often enough to monitor things and to build relationships with the people in town. With an absent owner, the patients come to think of the practice as the associate`s.
Another question that arises when buying a dental practice is: Should the selling doctor work in the practice as an associate? The answer is yes for a one- to six-month period to aid in the transition. For any lengthier period, the answer is no. It is very difficult to be the leader of a practice for a long time, then step down and be an employee. This situation has caused tremendous friction between the new owner and the former one, which in many cases has resulted in bitter court fights.
Retiring dentists need to fund their pensions fully so that they can close shop when they sell. Purchasing dentists need to establish noncompete agreements with the seller. The time not to buy a dental practice is when the seller wants to continue practicing in the original location.
To buy or not to buy? That is the question. The answer is complex. It depends on a myriad of different contexts and purposes. To avoid costly ramifications, purchasers should proceed with their eyes wide open and seek advice from those who are experienced in this area.
