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During my career helping dentists acquire practices, financing has always been a challenge for them. I point out to lenders that while new dentist borrowers might have little financial net worth, they do have an incredibly valuable asset-a dental degree. It's not unusual to see dentists invest $400,000 or more in order to obtain their degrees. But a lender cannot collateralize that asset.
When people commit to dental school, they're making a huge investment in themselves that should have a significant return. By return, I mean a profit that is over and above the cost of their investment and a salary for their work.
New graduates might be averse to risk and debt, so they might not recognize the best possible way to make a living, pay for their education, and most importantly, receive return for that risk. The only source of that profit is to become an owner. Dentists who choose to work for someone else to play it safe are not even aware of the profit dividend that they forfeit. Ownership has many rewards: control, security, choices, and profit. Dentists who work for someone else do not receive these benefits.
Consider one practice that grosses $700,000. The net income after all expenses is $393,000. The salary component of that income, based on 30% of the owner's personal production, is $165,000. In addition to this salary, the owner receives an annual profit of $252,000, a 59% rate of return on his or her investment.
The alternative of working for someone else results in a lower income and a much lower investment potential, and no return or profit. Meanwhile, the owner of this practice is making a 59% profit every year. We all agree that owning a practice would be wonderful, but many might think that it's not practical, affordable, or possible.
It is practical. My answer is to ask, how can you not afford to make a 30% commission for the work you do and receive an additional $252,000 in pure profit?
It is affordable. The annual payments for this $430,000 practice-plus an additional $35,000 in working capital and $164,000 for purchasing the building-amount to $93,000! How could anyone ever pay that, you ask? The answer is simple-just use part of the $252,000 profit to pay the $93,000 debt service, which still leaves $159,000 of the profit to invest or live on.
Some buyers believe they can't afford to pay $164,000 for a building while paying $430,000 for the practice. But if the purchaser does not buy the building for a $1,300 per month mortgage payment, he or she will pay $2,000 in monthly rent, which will increase annually. The choice is to pay $1,300 per month for 180 months and own the building, or pay $2,000 per month forever and own nothing.
Some purchasers believe it will be too hard to afford the loan payments for the practice and building, which total $7,800 per month. In this case, let the hygienists pay for the practice and building. The hygiene profit for this practice, after paying hygiene salaries, is $9,200 per month. So the hygienists are actually paying for the practice and building.
Need more assurance? Uncle Sam has agreed to pay one third of the practice price for purchasers. In virtually every practice sold, the entire price of the practice is tax deductible. The dentist who plays it "safe" and works as an associate rather than purchasing a practice will pay $155,000 more in taxes rather than buying this practice. Conversely, the purchaser of this practice will pay $155,000 less in taxes.
It is possible. Many purchasers mistakenly assume they cannot acquire financing to purchase a practice. Fortunately, there are many practice lenders that will finance practice acquisitions, especially since they know that over 99.5% of all dental loans are paid in full. For newer graduates, the Small Business Administration may be a solution. But for a committed purchaser, my company can nearly always arrange financing.
Dental acquisition lenders are skilled at assessing opportunities. So if a lender approves a buyer, they're expecting a very high probability of success.
Are you worried you don't know how to run a practice? Again, purchasers are in luck. Most sellers are happy to coach their buyers about managing their practices. For buyers who want more advice, practice management consultants help dentists produce more income with less stress. Good consultants pay for themselves and more. Finally, for owners who want nothing to do with management, there are organizations that take over the management reins.
Practice owners are the happiest, most successful, highest-paid dentists in the profession. They have security and control of their practices. They choose their employees, labs, supplies, vendors, retirement plans, and insurance benefits. Owners also hire other dentists to increase their practice revenues, adding more profit to their bottom line. I recently witnessed one owner retire with $14 million more than a dentist who practiced as an associate during the same time.
It should be noted there's a noble reason for dentists to own their own practices, and that is so they can own their profession. We have witnessed other professions failing to maintain ownership of their practices. That's when investors become the owners and managers and the profession ceases to exist. It's replaced with a business, which is only obligated to its investors.
I urge everyone entering the dental profession to become the owner of your career and personally collect the return on your investment for the risk, cost, and hard work you paid to become the professional you are today.
Earl M. Douglas, DDS, MBA, BVAL, is the author of many articles on dental transitions. 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 [email protected].
