Buying a Practice

Pitfalls to Avoid in Buying a Building

By Steve Kikikis, Vice President, Commercial Real Estate Broker

Money Pit or Cash Cow?

On occasion when a doctor purchases a practice there is also an option to purchase the real estate.  Historically, real estate has been a good investment over time, but owning a commercial building has its own nuances.

There are a lot of similarities between owning a commercial building and a residential house.  As the building owner or homeowner, you are responsible for paying the insurance, maintenance, and property taxes.  Be sure to understand what your out-of-pocket costs are before you take on the responsibility of purchasing a property.  Investing in a building or home inspection conducted by a reputable building inspector is always worth it.

Before you purchase a commercial building, know your demographics, and do your research.  If a building is a steal, make sure you do some research to find out why.  A commercial real estate broker that specializes in your industry can assist you in looking at the demographic information to fully understand the value of the real estate.

After you’ve purchased the practice, you are now the king of your castle and if you are business savvy, you can make a profit from owning your building.  Having some knowledge of what to expect and what the pitfalls are of owning a building can save a lot of headaches down the road.  For this article, we will consider that you are the owner and sole tenant of your building.

Maintenance – You’re now responsible for everything from the leaky roof, sweeping the parking lot, HVAC systems, lighting, ADA compliance, security systems, plumbing, and possibly the water and sewer mains underneath the property.   The best advice is to adhere to a schedule with regular and preventive maintenance.  Don’t skimp on issues that may seem small but that can turn into a bigger safety issue (both expensive and potential lawsuit if hazardous) in the long run.

A lot of potential challenges are dependent on the age of the building and how the previous owner took care of the property.  You can hire a property manager to be the point of contact so you’re not distracted and can concentrate on your work.  Some owners like to be involved in every decision, while others don’t want the hassle of being contacted for leaky pipes, clogged toilets, etc.

Insurance – a commercial building policy will differ from a residential homeowner’s policy on your home.  A commercial policy will also have coverage for the business operations, its products, and operations liability.  Much like homeowner’s insurance, the age and construction type of the commercial property will determine the premiums.  Commercial insurance is also based on the neighborhood where the building is located.

Although chances are slim, some policies cover loss of income in the event of a fire or other loss of the building.  These are usually additional policies that can provide peace of mind.

City ordinances – Although you may own the building, ownership doesn’t necessarily mean you can do anything you want.   An example is a new building owner who wanted to utilize a specific size of a sign for his business, but the city ordinances stated a sign can be no bigger than 30 square feet.  Be sure to reach out to the city before you decide to change or update the signage on your building and also verify if there are any restrictions for the exterior of your building such as signage, color, material, etc.

Taxes – There are two points on the taxes. First, for the building taxes, make sure your ownership is properly transferred to you during the purchase, and make sure that you keep up-to-date on your taxes. Set up an account directly within the municipality you are located or make sure your loan program is paying it directly. For your business taxes, owning your own commercial real estate has many tax advantages. Connect with your CPA, make sure you’re paying your real estate entity as a business expense, and more.

Money Pit or Cash Cow? There will be costs to owning your own commercial real estate, but taking the proper steps and working with an experienced commercial real estate broker that specializes in medical/dental purchases will save you time and a lot of money. Just think, if you are leasing a space, after 10 years you will be signing up for paying the landlord another 5 years of income. If you own, after 10 years, you will be working towards paying that building off and have the equity in the building.

Where to Own a Dental Practice?

The question we often get from potential practice buyers is “Where is a good spot to own a dental practice?”  There are a lot of factors that contribute to answering that question. But first, let’s discuss the reasons why you want to own a dental practice.

If you are in it because you love dentistry and love helping patients and you are not necessarily in it to make the big bucks, you can really own a dental practice almost anywhere.  A lot of buyers seem to want the downtown metropolitan practice thinking it’s a great place to practice since there are so many potential patients and you can live the urban lifestyle.  I’ve helped doctors who absolutely wanted to be in a metropolitan area, even though the demographics made no sense whatsoever, who then started a practice and did quite well.  One doctor that I helped always dreamed of owning a practice in a particular city.  He went for it and is successful.  And I have seen others want a practice in a certain area, and although the numbers didn’t make sense, they did it anyway and were successful.

Some of you are buying a practice because you want to make a lot of money, in which case, further analysis and discussion are needed. The failure rate for dentists is infinitesimal – somewhere around .0125%.  If you’re buying an existing practice and you have identified that the practice already has good cash flow, you can purchase the practice and have success almost no matter where it is. If it’s a poor performing practice, you would need to examine if the poor performance is because of the location, the management, or something else.  If you want to buy an existing practice and are looking for an opportunity to grow and have lower overhead, I would suggest looking outside of the metropolitan areas.  Practices outside of metropolitan areas have less competition, wages and rents are lower, and it’s easier to grow those practices.  And if you are considering doing a startup practice, the same rules apply.  Look for a location with good demographics outside of metropolitan areas.  Of course, if you absolutely want to be in a metropolitan area, don’t be afraid to go for it.  Just look closely at the numbers and hire a good dental practice or real estate broker to help you out.

I do recommend that you do a bit of demographic analysis on the locale.  See how many dentists are currently practicing in the area.  A good ratio is 2,000 daytime population for each doctor.  There is a difference between the daytime population and the regular population.  The daytime population includes the workforce.  For example, if you look at the population of South Lake Union during the day vs. the nighttime population, you would see a big difference.  Another demographic to pay attention to is the age of the population.  For a general practice, a good mix of young and old is best.  If you want a high cosmetic practice, but the average age is 28, you might need to consider another area.  Homeownership is another good indicator of practice success.  You want to have more homeowners than apartment renters. You can obtain detailed demographics either through a company that will charge a fee and provides data such as the average annual dollar amount spent on dentistry per person within a zip code and other more granular items.  Or, Omni has information that we can provide.

One of the advantages of working with Omni is that we have both dental practice brokers and real estate brokers to help you traverse the ownership trail in any way we can.  Just give us a call at 877-866-6053 or email us at info@omni-pg.com and we’ll be happy to help get you started. Contact us today!

Do Not Wait to Buy a Practice

Do Not Wait to Buy a Practice

By Rod Johnston, MBA, CMA

Do you ever sit back and wait for something to happen thinking that if you wait, that
something could turn out perfect? But, then you end up waiting a little too long and you
end up missing your perfect opportunity? Whether that certain thing is a cake that you
think you need to wait a few more minutes to bake and then you end up burning it. Or,
the stock price of a company whose stock is going down and you want to wait a little
longer to let it drop some more and then you wait too long and the price shoots back up.
Or waiting for interest rates to drop and then all of a sudden the Federal Reserve
increases the rate.
For many dentists, acquiring a practice has been like that. You wait for the practice that
has the perfect location. You wait until you know how to do as many procedures as you
can. Or, you wait for the practice that has four operatories, collects $800,000 per year,
on a busy corner street with great visibility and 40,000 cars going by every day. We
know who you are. The problem is, waiting comes at a cost. You only have so many
years on this earth. For every year you wait to begin owning a practice, you may also
be adding another year on the end when you want to retire.
On average, a practice owner earns anywhere from a low of 20% to a high of 40% more
than an associate, depending on the source. All the while you’re owning a practice and
making an average of 30% more than your associate friends, you are building what’s
called equity in your practice. That means, the practice you purchased for $800,000, as
an example, with a 10-year loan is increasing in value to you as you pay the loan down.
So when you retire and sell the practice for $800,000 or more and you have the loan
paid off, you will have $800,000 in cash, less transitions fees, to put towards your
retirement. Your associate, if they never own a practice, will get to put $0 from the sale
of a practice towards their retirement.
To further explain the math, an average associate makes $185,000 per year. If you own
a practice, you would make 30% more on average per year which equates to $55,500
per year. Over a 20-year dental career, if you put that $55,500 into a bank account with
no interest, you would make $1,110,000 MORE than your friend who was an associate
their entire career. That’s on top of the equity of $800,000 from the sale of your
practice. That gives you a total of $1,910,000 over your friend the associate. This is all
assuming you are an average dentist and can learn a few things about practice
management during your tenure as a practice owner.
That all sounds great you say, but I have $500,000 in student loan debt. Even more
reason to get into practice ownership. By making more, you pay the student loan debt
off sooner. Banks are still eagerly lending to dentists on good practices. The failure
rate for dental practice owners is less than .03%! The only business to fail at a lesser
rate than dentists is…….Mortuaries! You literally just need to show up, do a little
dentistry and you will succeed.

But, you add, “I didn’t get into dentistry for the money.” Awesome, you probably got into
dentistry to provide the best standard of care you can. Working for a DSO and even
some solo practice owners may not have the same standard of care that you have.
When you own a practice, you get to determine what that level of care may be. You also
get to determine what procedures you get to offer and perform. In addition, you get to
hire and fire staff, pick which supplies and materials you want to use and even which
scent of soap you want in the patient bathroom. Mahogany wood scent is my choice if
you’re asking.
From generation to generation, dentists have owned practices. DSO’s and other dental
owned groups are increasing in number. The American Dentists’ dream should still be to
own their own practice if for nothing else, pride. Pride of ownership and pride of a good
quality of care. Make this year the year you take a step in the right direction and buy a
practice.
We’re always here to help in any way we can.

When Do You Know You’re Ready for Your First Dental Practice? 

The Importance of a Good Team When Purchasing a Dental Practice

​Buying a practice can be a daunting task.  That’s why it’s important to not only have the skills and education to analyze a practice, it’s also important to have a good team on your side.  On your team, you will want a Certified Public Accountant that has a big emphasis or specialization in your field.  They need to know the industry, numbers, etc., they should also be accredited in practice valuations.  The second person on your team will be a dental specific attorney.  There are too many idiosyncrasies to not have someone who doesn’t specialize in your field.  Non-compete provisions and other conditions are specific to dentistry.  A banker that specifically works on practice loans is another important member.  They will know the reasons why a practice may be what it is and explain to the underwriters what’s going on in the practice.  You will also want a broker who has done many transitions.  Having an experienced broker will help make the transition as smooth as possible.  Another person that may be necessary is a dental consultant.  The consultant can help analyze the practice and make sure it’s what you are looking for.  Omni Practice Group has a list of many of these team members.  If you would like our preferred list of vendors, please e-mail us at info@omni-pg.com.