Uncertain Times Call for
Certain Measures
Earl M. Douglas, DDS
In writing this article, I am reminded of a practice that our company sold nine years ago. That sale had both contrasts and similarities to today’s economic issues. The similarity is that the practice sold on Aug. 30, 2001 - 12 days before 9/11 happened. The buyer of that practice had no idea what a difficult time he would face as a result of the impact on the economy caused by 9/11. As a result, he encountered a completely unexpected downturn in the economy and cash flow for his practice. Contrast his situation with that of today’s dentists entering the profession who already know that our economy has experienced a downturn and is still in the throes of recovery.
The advantage of knowing we are in difficult times gives us the ability to adapt and adjust our plans before we open our doors. At risk of being labeled a pessimist (which I don’t consider myself to be), I am still guarded about our recovery. I am told that there is a chance of a W-pattern recovery in which a dip is followed by an upturn, which is followed by another dip, before the final upturn occurs. With this said, my best advice is to hope for the best, but be prepared for the worst.
My article in last year’s issue of Dental Entrepreneur addressed practice cash flow, as this is the most important aspect in planning a career in today’s environment. If a practice opportunity cannot currently provide a sustainable successful personal income for you, then you will need to think very carefully about entering into it. Be aware that many practices may still experience further economic decline before a real and sustained recovery takes place.
Too many dentists consider price at the exclusion of cash flow. I have yet to see a dentist fail because they paid too much for a practice. Debt service only constitutes about 13 percent of the monthly revenues. A 30 percent reduction in price only saves four percent of the monthly revenues, and I have yet to see a four percent difference make or break a practice. In practices with poor cash flow, even an 80 percent price reduction couldn’t make the cash flow work. So, think cash flow.
I have seen a number of established practices here in the Southeast that have experienced loss of patients and revenues.
Fortunately, they had a sufficient patient base and revenues to keep them profitable, but in a marginal practice that barely surpasses the break-even point, if there is even a small decrease in revenues, the owner will be losing money. While no one knows the future, in these times it is critical to be as well-informed and prepared as possible to handle any adverse events.
These observations are not meant to discourage anyone from entering the profession during these times. What are your options anyway? I still see successful opportunities, but they are fewer and farther between, and dentists need to be extremely cautious and well-informed to distinguish between the safe and the risky propositions. Let’s examine some issues that need considering.
Scratch Starts can be difficult in good times. The cost of a scratch start can be as much as $400,000 or more, and there is no income to start with - only expenses. In times where established practices are losing patients to unemployment, scratch starts are even more challenging. If you are considering a scratch start, do it in an area that is not over-served with dentists or be prepared for a struggle.
Marginal Practices are those practices that gross under $350,000 per year. For the most part, it is difficult to find a marginal practice that can pay a suitable net income after expenses and debt service. The temptation is that the price of these practices is relatively low, which tempts one into thinking it is a low-risk option, when it is actually a higher-risk venture.
Medium Practices are practices that gross from $500,000 to $800,000 per year. These practices may present a successful net income after expenses and debt service, but a cash flow analysis is required to know exactly what can be expected. There is variability in the profitability of medium practices and they need to be studied individually for extrinsic factors that will affect future performance.
Large Practices gross from $1-$2 million per year and will generally boast exceptional cash flow., having the latitude for dips in revenue to still perform profitably. While the price of large practices may seem daunting, the risk is actually lower than for the least expensive practices, because failure is not a result of high price, but of insufficient cash flow.
Things to Consider
The Local Economy: It is more important than ever to do your homework and gain valuable local knowledge. Is the town you’re considering experiencing layoffs or business closures, or is the economic base relatively stable? A medium practice in a town that is undergoing high numbers of job losses can quickly become a marginal practice with a failing cash flow.
Upgrading Equipment: Are you buying a practice with older equipment and plan on updating it immediately? If so, consider the advice I got when I bought my sailboat. A wise person told me to wait six months before buying any new gear for it, and then I could buy anything I wanted. After six months, I discovered the boat was fine and didn’t need anything. The same goes for dental practices. Consider that the function of a dental chair is to hold the patient off of the floor, so if your current chair does that, spending thousands of dollars on a new chair will not add a penny to your functionality or bottom line.
When your practice grows to where new equipment is required for you to keep up with patient demands, then the new equipment will pay for itself. But until then, it is only another expense that you don’t need. The same goes for your scratch start. Buy only the minimum equipment needed and only add equipment as the practice requires it. Also, consider checking the internet for clean and serviceable used equipment that can be bought at very reasonable prices.
Practice Overhead. In buying a practice, examine the overhead of the seller. We see practices in which the seller has allowed expenses to get out of control, especially wages. Many times, employees continue to receive annual raises while the practice incomes are decreasing, resulting in expenses that cannot be supported by a buyer. Buyers will need to know which staff members to retain, and which ones they can’t if they are to succeed.
Office Leases: If you are going to lease the office premises, remember that landlords are under a great deal of pressure today to keep their properties occupied. It does not hurt to ask for rate or other concessions in exchange for signing a lease. Lowered rent, several months of free rent, free refurbishing and the like are not unreasonable requests, and more often than not they are agreeing to such reasonable requests.
Conclusion: In these critical times, make it your job to investigate all of the pertinent basic information and underlying facts to predict as accurately as possible the outcome of the practice opportunities you consider. Your success depends on it. ■
Earl Douglas, DDS, MBA, BVAL, is the founding president of ADS, a company with independent practice brokers, appraisers, and consultants nationwide. His company, ADS South serves the Southeast and South Central US. He can be reached at 770-664-1982 or atDouglas@adssouth.com. Visit the website at www.adssouth.com