When to Start Looking for a Practice to Purchase

The main reason why the majority of you have entered the dental profession is to become a business (practice) owner. The road to your purchasing an existing practice has become a bit bumpier as the cost of your dental education keeps rising. As many of you will be in debt in excess of $200,000 after graduation, you may begin to wonder when the appropriate time will be to buy a practice. We have found, however, that the cost of delay can be significant, especially when purchasing an existing practice with a proven income stream. So, the sooner you are ready to purchase

a practice, the better financial outcome it may be for you.

capital, so he or she will need a loan of $530,000. Dr. A’s loan

The majority of dental graduates will enter a residency program for one to two years, with

terms are ten years at 7-percent interest, with annual principal and interest payments of $73,845. Let’s also assume the practice will grow 5 percent a year. In this example, the projected net income for Dr. A before

most grads electing to work as an associate for several more years before making a purchase/ decision. For those in specialty training, the timeline may even be longer.

Thomas Snyder, DMD, MBA

Making the decision to purchase a practice is not only based on your feeling of financial ability, but also your confidence in becoming a business owner and entrepreneur. Often times this deferral of ownership is driven by a need to earn money and get established financially before considering owning a practice. Careful introspection is also critical to ensure that you’re able to handle the clinical production of a potential Seller who has a successful thriving practice. Notwithstanding these considerations,

Thomas Snyder, DMD, MBA Getting Started

let’s look at the economics of two classmates who eventually bought a dental practice but did so at different points in time after graduating.

taxes in his/her first year of ownership will be approximately $206,000. In Year 2 of ownership, the projected income will be $220,000 before taxes.

Dr. A has decided to buy a dental practice three years after graduating from dental school. Let’s assume that the practice that Dr. A will purchase has revenue of $700,000 with a 60-percent overhead. Let’s assume the practice sells for $440,000 and Dr. A will also need $90,000 in working

Dr. A (Owner Year 1) Dr. B. (Owner Year 5)

Year 1 $ 166,000 $ 120,000 Associate Income

Year 2 $ 206,000 $ 130,000 "

Year 3 $ 220,000 $ 140,000 "

Year 4 $ 235,000 $ 150,000 "

Year 5 $ 250,000 $ 200,000 Ownership

Year 6 $ 266,000 $ 213,000 "

Year 7 $ 284,000 $ 228,000 "

Year 8 $ 301,000 $ 244,000 "

Year 9 $ 340,000 $ 260,000 "

Year 10 $ 360,000 $ 277,000 "

Total $2,628,000 $1,962,000

Dr. B, a classmate of Dr. A, is not sure whether or not he/she can comfortably make a practice acquisition as soon as Dr. A. So Dr. B decides to work four more

years from the time Dr. A purchased his/ her practice. Let’s assume Dr. B earns an income of $120,000 a year over that four-year period from the time Dr. A purchased the practice with small annual increments in associate compensation. We’ll also assume Dr. B then decides to

buy an identical $700,000 practice with the same overhead of 60 percent and sales price of $440,000 – now seven years after graduation! Let’s also assume that interest rates have increased to 9 percent. The annual debt service will now be $80,560. So, in his/her first year of ownership, Dr. B will earn about $200,000 before taxes and in year two will earn about $213,000 before taxes. In comparing the total income earned by Dr. A over a 10-year period from the time Dr. A purchased his/her practice, and comparing it to Dr. B’s earnings over the comparable period, the difference amounts to over $660,000. (See Chart on left)

entrepreneur.

In considering a purchase opportunity both from a timing and readiness perspective, make sure that you maxi-

Get more patients.

purchase a practice. These banks realize that you all have large educational debt, but as long as you keep your credit in good standing, meaning FICO scores between 650 and 680, and the practice you will eventually purchase is one with a good cash flow history, you will get funded for your practice acquisition.

Making the decision to purchase a practice

Imagine if Dr. B would have purchased a practice at the same time as Dr. A, that additional $660,000 dollars could have been used as pre-payment for dental school debt putting them in a much stronger financial position. The old adage “timing is everything” is quite applicable to purchasing a dental practice as well. ■

in becoming a business owner and

mize the opportunity you have in your residency program to learn as much clinical dentistry as possible, thus enhancing your clinical skills. Take Continuing Education courses along the way in practice management so that you can get a basic foundation in running a small business. Most importantly, remember that banks specializing in dental lending are eager to loan you money for practice acquisitions. In fact, most banks only require a two-year experience window from graduation to quality for a loan to

that specializes in practice valuation, practice sales as well as designing associate and partner relationships. He can be reached at (800) 9885674 or email: tsnyder@snydergroup.net The firms’ website is www.snydergroup.net

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