An Ownership New Year’s Resolution
By Michael Dinsio, Next Level Consultants
As a buyers’ representative and business coach, I talk to hundreds of doctors a year. Many themes emerge from these conversations, but the one that pains me the most is hearing how dentists delay considering practice ownership early in their career. Many desire ownership and watch as friends become owners with a thought of maybe someday. But, for themselves, they hope and wait till the “perfect” situation presents itself, if it ever does. As we roll into the new year, my hope is that more doctors get off the bench and into the game. The time for ownership is right now. Here is why.
#1 MONEY is Cheap
As once a dental specific banker, I can tell you interest rates have never been lower. With rates as low as sub 4% on 15 year practice loans, the cost of money is cheap for buyers. What does this mean? Lower payments equal more cash flow. Even with practices being priced higher than historical averages, lower payments offset the cost to make the purchase affordable. The lower payments also allow buyers to invest in new equipment, stronger marketing, and consulting services to set them up for success. These types of investments help buyers confidently take the leap into ownership!
#2 The Market is Primed
For over a decade, industry experts have predicted a slowdown of practice sales. Fortunately for the 25,000+ graduating dentists every year, this has not been the case. I predict that in 2020 more dentists will put their practices up for sale than ever before. Here’s why.
First, in 2020 the average age of the baby boomer generation will hit 65 and they become eligible for Normal Retirement Age (NRA) benefits. As their retirement benefits start to roll in, many will consider selling their successful practices.
Secondly, the stock market is at an all-time high. Last month the market hit another peak, as investors focus on the progress of the U.S.-China trade talks. Overall the Federal Reserve is upbeat and continues to keep interest rates low. For those retiring baby boomers, this means they can comfortably retire with the nest egg they have, not feel pressured to keep working.
Lastly, Washington State continues to increase taxes. Although a capital gains tax has been voted down, it continues to be an annual discussion in Olympia. New and expanding taxes are always a threat. Kitsap Daily News reported that, “Washington is one of seven states with no state income tax, and one of nine without a capital gains tax, making it an outlier among West Coast states.” Governor Jay Inslee released a three-year plan that contained a proposed 9 percent tax on certain capital gains over $25,000. Sellers may have dodged a bullet this time, but many owners will consider selling sooner to avoid the looming threat of higher taxes.
#3 TIME is valuable
It’s not a secret that small investments over the long term will yield more than large investments over the short term. In short, time is on your side. Working as an associate definitely has some benefits. The corporates make sure of that. With that said, the ownership opportunity dentists have in front of them is difficult to quantify. Just like a mutual fund or a piece of property, dental offices have real value. When my clients choose ownership, they are not only benefiting paycheck to paycheck, but they are also building real value in an asset to sell in the future.
I recently had coffee with a dentist and an old friend. In 2012, when I first met her, she was considering buying an office. I remember the first practice she looked at: it was in a desirable location, the equipment was in good shape and the financials were average. Despite my recommendation to buy, she ultimately passed on the opportunity.
When we sat down, she was so excited to tell me that she just received news of an accepted letter of intent to purchase her first practice. While I’m excited for her, the delay of 8 years got me thinking. If she had purchased in 2012, by now her initial loan would have likely been paid off and her business would most likely have surpassed a million in revenue. Eight years of lost income and equity over trying to find “the perfect practice.”
As a New Year’s Resolution, resolve to take your career into your own hands. The average associate struggles to make ends meet juggling two to three associate positions. For all that hard work, their income ranges anywhere from $120,000 to $150,000 per year and they have less than $25,000 dollars in savings. Yes, becoming an owner is daunting, but the statistics speak for themselves. Default rates remain lower than ever in this industry. The money is right, the market is primed, and time is ticking.
Make the decision in 2020 and invest in yourself!
Be an Educated Dental Practice Buyer
I meet over 150 dentists each year who are looking to buy an existing dental practice. Of those, I would estimate that 30% haven’t done any research on what is involved in buying a practice. Of that 30 %, none of them know the beginning-to-end process of buying a dental practice. While I can’t cover all the steps in this article, I can give you some guidance on where to start and what steps to take before buying a practice.
The very first recommendation I have is that you should be at least 2 years out of school. I have seen dentists buy a practice right out of school, but I’ve seen the majority of them struggle for two years until they finally figured things out.
Now that I’ve got that out of the way, here are your steps:
- Contact a bank that finances dental practice acquisitions and make sure you can qualify for a good loan. The days of just having a D.D.S., or D.M.D. and being qualified are gone. Banks now require decent credit scores, cash in the bank, and in some cases, a current associateship. Try to avoid SBA loans if you can as they can be expensive with early payment penalties.
- The next step is to understand a little bit about dental practice valuations. You don’t want to go into a sale not knowing if the practice is worth the price listed or not. A “rule of thumb” is that a practice is typically worth between 65% and 75% of its’ last 12 months production. Remember – that’s a rule of thumb. I’ve seen practices go for as high as 110% of production and as low as 50% of production. For a book on Dental Practice Valuations, contact me and I’ll send it to you.
- Think about where you want to practice. You’re probably going to be there a while, so you might as well like the area. Also, research demographics. There are excellent demographic sites that sell great dental demographic information for about $500. This will tell you where the best locations are to practice.
- Put together a good team. Get referrals for a good dental attorney, a good broker, and a good accountant. They’ll help you analyze the dental practice, do the legal work, and help you find a practice.
- Study up on practice management and dental financial ratios. You should know that lab fees should not be any higher than 10% of the practice production, or that staff expense should be 20% to 25% of production. Be an informed buyer.
- Be prepared for your due diligence. You need to know what to look for when you do get to the point of buying a dental practice. Is it an older dentist selling that hasn’t done much treatment in the last 5 years (buyer beware)? Or, is it a conveyor belt dentist that has done every speck of dentistry, and then some, on all the patients, so there’s none left for you? Know how to spot these things.
- Finally, spend some time with a dental broker before you go look at the practice. Understand what the practice you are looking at is all about. Does the broker honestly think it’s a good practice? Why? Once you’re comfortable with the numbers, then go look at the practice.
By being an informed buyer, you will avoid a lot of headaches and potential problems down the road. There are practices that are gold mines and practices that you should not touch. Being educated and knowing the difference is critical in your dental practice acquisition success.
Read MoreEconomy Helping to Ramp Up Practice Sales
The strong numbers have played a part in the increase in practice sales. Practice owners who are over 55, are seeing the strong numbers and returns in their portfolios and deciding now is the time to retire. Buyers are also watching the economy and realizing it’s a good time to buy a practice. Interest rates are still good at between 5.25% and 5.5%. Consumer’s discretionary income is up freeing funds for consumers to do elective and cosmetic dentistry. (I know you shouldn’t base your dentistry on discretionary income, but many do).
The result of all of this is that practice listings and sales are up. We typically carry an inventory of 10 to 15 practices and we’re now up to approximately 25 practices. We have spoken to other brokers and most are experiencing a similar increase in business. The interesting thing is that valuations are still staying true to normal formulas and historical numbers.
What this means to you is you can either be a participant in this booming market, or you can be a bystander and watch opportunity pass you by. If you would like to get any information on any of our practices, let us know. Consultations and phone calls are always free!
Patients
When you are evaluating a practice, you may be told that there are a certain number of “active” patients in the practice. That term “active” is one of my least favorite terms when trying to evaluate or sell a practice. One person may define “active” as having been in the office once within the past 24 months. Another person may define it as the patient having been in the practice once in the last 12 months. And yet a third may say the patient is “active” because they came into the office at one point or another while the doctor was practicing. It doesn’t even matter to them how long ago it was, or if the patient is even alive. If I were in your shoes, I would throw out what anyone says and count the charts myself. If the practice is digital, I would look at the number of hygiene appointments seen in the past 12 months and divide by two to get the number of active patients seen that year. You can gross it up by 50% to account for walk-ins and other types of procedures, but that should give you a ballpark of the number of active patients. Another quick rule of thumb is to divide the annual collections by $1,000. A practice producing $500,000 per year, should have in the neighborhood of 500 patients ($500,000 divided by $1,000 per patient)Patient demographics is another thing to be aware of. Buyers often blow off a practice that has an aged patient demographic. Little do they know that a lot of elderly patients pay cash for their treatment and they still want their treatment. They also have more required work than patients that are in their 20’s, 30’s and 40’s. These patients are very profitable patients.
Hopefully looking at these two areas of patient demographics will help you make the right decision when evaluating a practice.
Why Buying and Merging Another Practice into an Existing Practice Makes Sense
Owning and growing a dental practice can be one of the most challenging things in dentistry. Advertising for new patients can be hit and miss and expensive. That’s why one of our favorite strategies is to purchase another practice and merge it into your existing practice.
The reason you would consider doing a merger is because you get all of the revenue and current patients from the new practice, but you don’t get all of the expenses. You don’t bring over the fixed expenses like rent, telephone, electricity, etc., You already have those in your practice and don’t need to incur them again when you bring over the practice you just acquired.
As an example, say you own a practice that collects $600,000 per year. You have overhead of $390,000 with 30% of the overhead in fixed expenses – rent, utilities, insurance, etc., Another practice comes on the market that collecting $500,000 with overhead of $325,000 with fixed expenses again at 30% or $150,000. You purchase the practice for $350,000 giving you a debt service payment of $3,500 per month. You work closely with the broker to ensure 100% of the patients transfer to your practice. Your practice now goes from $600,000 up to $1.1 million in revenue. You incur the variable expenses of the second practice, but you do not incur the 30% fixed expenses of $150,000 because you already have rent, utilities, insurance etc., at your current office. In essence, you just gave yourself a $150,000 raise, less $42,000 in debt service and dropped your overhead to the neighborhood of 55%. It would take you much longer to do this if you just did marketing and advertising. By consolidating practices, you get instant growth and income. If you have a practice for sale near you, you should consider merging it into your practice in order to achieve quick growth.