You've Got Your Diploma Now What?
Earl Douglas DDS, MBA, BVAL
Now that the end of your formal dental education is finally in sight, you're probably thinking about what's next. As you search the horizon for options, you will probably discover that your new career will consist of one of the following - an associateship, a partnership, starting a new practice, or buying an existing practice.
Each option comes with its own risks and rewards, and each option will contain the best and worst of opportunities. Your job is to discover which option is best for you and discover the best opportunity that is available therein.
First, let's look at associateships. This option requires the least commitment. It doesn't cost anything to get into one, and if one is careful, they can usually be terminated in 90 days or less. The best associateships with fee for service patients will generally involve a covenant not to compete and non-solicitation agreements as owners of such practices are not willing to allow an associate to leave with their patients. In managed care or Medicaid practices, owners are not as concerned about losing patients, as there is usually a very large supply. You should not expect to enter into restrictive agreements in those type practices.
Don't be surprised if associates are not given the best patients and the most rewarding treatment plans to work with. These will naturally be reserved for the owner. Also, if things slow down, the associate's schedule will be the first one to be cut, as they are hired to work on a practice's overflow. If the overflow disappears, so will the associateship.
Hopefully, you will find an associateship where you wish to practice that has an abundance of fee for service patients who have the need, demand, and ability to pay for top drawer services. In such a setting you can sharpen your skills, be productive and profitable.
The next option is the partnership. I am more cautious about partnerships than any other option, having observed the experiences of dentists who have been hurt in these situations. Partnerships are like marriages in many ways. You may well spend more waking hours with your dental partner than you will with your spouse, but few partnerships have the luxury of a long engagement period in which the parties really get to know each other. And like a marriage, partnerships can get involved fairly easily and quickly, but can take years of litigation and large financial losses in order to extract oneself from them.
Be sure you understand exactly what you are buying in a partnership – it is a 50 percent (or less) undivided interest in a practice, and it's critical to know exactly what that means. It's especially important to know what the rules are as to getting into it, working within it, and getting out of it before ever committing to a partnership.
Another option is starting a new practice. Advantages include being able to set up close to where you want to practice and being able to design your office to your specs and choose your desired equipment. A new practice is most likely to be most successful in areas where there is the highest demand for a dentist. However, these are usually "undesirable" areas where most dentists choose not to practice – hence the demand for dentists. Dentists planning to locate in upscale suburban areas should consider investing in a good demographic study before committing to such a venture. There are several excellent demographic study firms that can provide valuable input as to what to expect in a start up. As you might imagine, the most desirable areas for a dentist to locate in are areas that are already saturated and the patient/dentist ratio is very thin. A new practice with no patients faces a huge challenge in having to rapidly gain new patients when legacy practices in the area are losing active patients and revenues as a result of the economic decline.
New graduates will require expertise in setting up their new practice. Office leases and build-outs or new buildings need to be in place, employees need to be hired and trained, computer systems need to be purchased and put into place, effective marketing initiatives need to be implemented, insurance plans need to be evaluated and signed onto, and a number of other business details need to be accomplished, most of which the dentist has no training or knowledge in.
The economics of a new start are very daunting. An accurate understanding of practice economics is critical to anyone considering starting a new practice. They are simple but are unknown to most dentists.
Here is how it works: Every practice has a break-even point, typically in the range of $150,000 per year. With high rent and high bank payments it will be more and for a practice with low rent and no debt, it will be less. To compute it, the dentist – with the help of a dentally experienced consultant – should calculate what the expenses and debt service would be for the first $125,000 of income, and for each successive $25,000 income increment until the break-even point is discovered. This is the point at which the expenses equal the income.
The wrong assumption is to assume that practice overhead is around 60 percent and net income is around 40 percent of the gross revenues. This erroneous assumption could lead a dentist to believe that at a gross income of $150,000 there would be a practice net income of $60,000, when, in fact, there would be no net income at all.
At practice gross revenues below the break-even point, the dentist will need to inject money into the practice in order to meet the overhead expenses and debt service. The good news is that the dentist will net approximately 75 percent of the amount of collections above the break-even point, and this will be source of the practice net income.
The next step is to carefully develop a budget of living expenses to see how much income the dentist will need for living expenses, and don't forget to include an allowance for income taxes. If the total amount of living expenses is divided by .75, this will result in how much above the break-even point the practice would need to collect in gross revenues in order to support itself and the dentist's living expenses. There should be a very realistic plan as to how that practice gross revenue figure will be attained, or else the dentist will be borrowing money to live on.
The cost of starting a new practice needs to be considered – new technology, the build-out of office space, equipment, computerization, and so on – can add up to a figure of $300,000 to $450,000 for a new office. In addition, working capital will be required. That is the money needed to pay the overhead and live on until the practice hits the break-even point and reaches profitability for providing a net income. This option will involve sizable debt with potentially low income.
The fourth option is the purchase of an existing practice. Practice purchases are the most predictable choice since they have a long informational track record. We can see what they have done for the past three years as opposed to a new start or associateship, in which we have no idea of what to expect. There is a great deal of documentation for practices for sale such as gross revenues, overhead by each category, net income, fee schedules, employee analysis, insurance plans accepted, census of active patients, new patients, services performed and referred out, productivity rates, and much more.
An important advantage of purchasing a practice is that the projected net income of a practice is easily determined, and if it is not sufficient, the buyer can start looking for another practice that does have a successful net income. Another benefit of this predictability is that financing is typically easier to obtain for a practice purchase since the risk is lower than for the other options. Lenders can review actual practice statistics and make a much better informed estimate of future financial outcomes and have better security for the future of their loan.
Purchasers of practices are always pleased to see a book full of scheduled treatment to perform, a large number of active patients, experienced employees in place, equipment and systems in place and running – and a steady new patient growth from the first day forward. While a practice purchase is not likely to start out as one's perfect practice, in time it can be molded to that perfect practice while earning a good income along the way. Also, in most cases the seller is available to provide expert support to the buyer in time of need.
In review, the first step in your career process should be to look within yourself to determine which practice career option best suits you, then carefully assess each opportunity you uncover to discover the most successful alternative available. Good luck! ■
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 at douglas@adssouth.com. Visit the website at www.adssouth.com