Should I Buy the Building when Buying a Dental Practice?

One of the most common questions about buying a dental practice is whether to buy or lease the space. And, as with many things in life, the answer is: it depends. It depends on the real estate market where you are looking to practice, whether the practice space is owned by the selling doctor or not, your plans for growing the practice, whether you foresee moving the practice, whether you want to deal with the additional responsibilities of real estate management, what kinds of risk you are comfortable with, just to name of few considerations.

Most advisors will say you should always buy. Some will say you never should. The fact is, that there is no consistent rule. Some doctors have bought their property and lost their shirts when the property devalued. Some doctors have built lucrative practices in leased space. So, ultimately, the question is really what will be best for you and your practice. Below we discuss some of the factors you should think about.

Return on Investment

When you lease, you are paying for someone else’s investment. When you buy, you are paying for your own. When you lease, your monthly payments will increase over time. If you are buying with a fixed-rate mortgage, your monthly payments will stay the same (unless you refinance or there are other loan terms that impact the payments). If you lease, you will pay rent every month until you someone else buys your dental practice. If you buy, depending on where you are at in your career, you may pay off the building and own it outright.

Conversely, when you lease, your landlord is responsible for maintenance and upkeep. When you buy, these are your expenses. When you lease, you have more flexibility to relocate if you need to expand beyond the available space or there are other reasons to move. When you buy, it’s much harder to relocate and cannot be done as quickly. When you lease, you are insulated from the factors that cause property values to drop. When you own, you take the brunt of any economic downturn.

If you choose to acquire real estate as part of buying a dental practice, you have the option of thinking beyond the needs of your practice. If your practice requires 2,500 square feet but are looking to expand, you can buy a 10,000 square foot building, divide it in half, and rent the other 5,000 square feet to another tenant or two or three. This creates an income stream separate from your practice. But it does mean increased costs in terms of managing the space, dealing with tenants, complaints, and repairs.

Also, when you decide, “it’s time to sell my dental practice,” you can choose to sell or keep the real estate, either getting the equity out of the building or an ongoing income stream as part of your retirement plan.

In the end, however, a lot of this comes down to whether you want the risk and responsibility of real estatement ownership.

Control Over the Property

For an entrepreneurial doctor who is buying a dental practice, buying the building (or constructing a new building) can have some real advantages. First, it gives you much more control over your brand, which is a significant asset. You can make the property look how you want. You get to choose your signage. And you get to choose who you share the property with, if there is space for other tenants. These things can add significant value in unexpected ways.

If you lease space in a medical plaza, you might get your name on small sign along with all of the other tenants. You also might not get a sign at all. If you are in a retail space, you might get a sign over your entrance. Or you might not. And you have no control over who is in the spaces around you. If the property is not managed well, you could end up with questionable business as neighbors, or in a space that has high turnover and frequent vacancies. None of these are good for your brand.

By owning the building you can do something such as install a highly visible LED sign at the street. While this can be a significant outlay, you need to consider what you are buying. If you pay, for instance, $17,000 on a sign, assuming you get ten years out of it, that works out to $1,700 per year for 24-hour a day advertising visible to every person who walks or drives past. Some dentists have reported that these kinds of signs have, on their own, increased their business—simply by being there.

Additionally, if you have space to lease out, you get to choose which kinds of business you rent to. There are opportunities for cross-promotion and strategic partnerships. If, for instance, you have pediatric dental practice, you can look for business that also cater to families and children. If you present the opportunity for cross-promotion (having marketing materials in each other’s locations, splitting costs on advertising, etc.) and the exposure from foot traffic, you can end up with a tenant who feels more like a partner and may be willing to pay over market value for the benefits.

It May Pay to Lease when Buying a Dental Practice

If you are a young doctor at the beginning of your career, you may have ambitions beyond those that the selling doctor had realized. If you see room for growth in your new practice, it might make more sense to start out with a lease, with an eye toward buying or building your own space later on.

It wouldn’t make a lot of sense to buy a dental practice and immediately move its location. The move, along with the change in doctor, could have a negative impact on your patient retention (especially if the landlord ends up leasing to another dentist). Also, the perfect space that you envision might not yet be feasible for the practice. Under these circumstances, you may be better off leasing for the first few years as you establish yourself in the practice—and in the community—and put your effort into planning how to expand and and working toward that goal. Then, when you’re outgrowing your present space, you can begin looking at buying or building a new space.

Another reason to consider leasing is the real estate market in the area you are buying a dental practice. If you are in a dense urban area, property values may be so high that buying real estate is not feasible. Also, if you are in a market where real estate costs are peaking, that’s a bad time to buy, as the market will inevitably correct itself. And while real estate tends to appreciate over time, you don’t want to be the one who bought right before the crash.

Tax and Balance Sheet Implications of Leasing versus Buying

Whether you buy or lease space, either can have a positive impact on your tax liability, but in different ways. Lease payments are generally deductible as an ordinary business expense, however, deduction limits may apply. On a balance sheet, however, lease obligations will appear as liabilities (similar to equipment or other assets that you would finance with a traditional bank loan).

When you buy property, on the other had, Section 179 expensing (referring to the tax code section that allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense rather than requiring the cost of the property to be capitalized and depreciated) and first-year bonus depreciation can provide a significant tax savings for the first year the property is used by your dental practice. In fact, recent tax code changes have enhanced these tax breaks such that you may be better off buying things you would have previously leased (such as equipment).

Whether it will be better for your particular practice to buy or lease your practice space is a decision that needs to be made with the advice of a qualified tax professional.

ddsmatch Southwest Has Dental Practices for Sale in Texas and New Mexico

If you are looking to buy a dental practice in Texas or New Mexico, here at ddsmatch Southwest, we have several great options for you to consider. If you are considering selling a dental practice, we are dental transition specialists and can help you prepare and sell your practice on your terms, getting the most value out of your practice. Contact us today to find out what we can do for you.

What to Watch Out for When Buying a Dental Practice

Buying a dental practice will be one of the biggest—if not the biggest—decision of your career. It’s also the biggest risk, so it will pay, in both the short and long run, for you to be careful, get reliable professional advice, and do all of your due diligence. This is because, absent an ability to show fraud, once the practice keys are in your hands, there will be very little you can do about any overlooked details. And this landmark moment will cast a long shadow over your career.

Here at ddsmatch Southwest, while we represent the interests of our client, we view a successful transition as one where both the buyer and seller are happy with the terms and outcome of the deal. Most frequently we represent sellers (although we also have services for buyers and dental associates) but we think it’s important for those looking to buy a dental practice to know what they should look for, and what they should look out for, when considering a dental practice for sale.

What to Look for When Buying a Dental Practice

The Practice’s Financials

This might seem obvious, but it can also be complicated. It’s not just so simple as reviewing a profit and loss statement. You should expect to be provided with all recent financial statements and tax documents, along with the records of expenses for things like payroll, employee benefits, insurance premiums, continuing education, and reimbursements. You want to be able to know what percentage of collections is covering the practices overhead. That is, what does it really cost to run this practice?

The Practice’s Valuation

The seller will give you a number of what they think the practice is worth. You need to know how they reached that conclusion (the valuation method) and what are the bases of that valuation. Don’t be satisfied with the prior year’s cash flow, or a few recent years’ of cash flow. You should be prepared to review the entire history of the practice. That will tell you the whole story. For more on valuation methods, see our post “How Much is My Dental Practice for Sale Worth?

The Practice’s Brand and Goodwill

While the financial numbers are quantifiable, and easy to evaluate if properly recorded, the intangible assets—the practice’s reputation in the community and how closely it is tied to the selling dentist—are major factors in the practice’s overall value. This can be determined by looking at patient records which will show you patient retention, patient turnover, new patient referrals. These are indicators that the practice is viewed positively in the community.

Relatedly, when buying a dental practice, you need to know how the selling dentist intends to transfer that goodwill to you. This may or may not be something the selling dentist has thought about. It may mean that the selling dentist will want (or need) to stay on for a while to ease patients through the transition. How this works will vary from practice to practice. It’s a good idea to retain your own consultant or broker to help evaluate this and give recommendations of what will work best.

If the selling dentist is not retiring, you may need to obtain a non-compete agreement to keep the patients from being syphoned off.

The Practice’s Patient Base

In addition to what is discussed above, it’s a good idea to look at things such as the types of insurance the practice accepts and how many patients are with each plan, the patient demographics (older patients or young families, for instance), and how patients are retained. This information can help you project future cash flow.

What are the Seller’s Plans?

Is the selling dentist intending to stay on as an employee or contractor? If so, for how long? Does this match with your vision for the practice? While it is common, you should be wary of a selling dentist who may want to exert control rather that ease transition. However, if the selling dentist doesn’t want to stay on, you should consider whether you will have access to the doctor in case you need to consult regarding past patient treatment plans or accounts receivables.

What to Look Out for When Buying a Dental Practice

Pressure to Rush into Closing

While it may be understandable for a seller to be anxious, do not allow yourself to be rushed. Any step that is skipped will only run to your detriment, not theirs. It’s in your interest to be cautious and take the time necessary to complete all of the due diligence. A seller rushing you into buying a dental practice may be hoping that you’ll overlook a defect. It’s simply not worth the risk.

Seller Refuses to Disclose Information

If a seller refuses to make the requisite disclosures, or suggests you don’t need to see complete sets of records, or otherwise obscures information, it is likely there is something they don’t want you to see. While a dental practice can be a complex operation with legitimate issues of confidentiality, you have absolutely no incentive to overlook any detail, especially those being requested by your team of professionals (lawyer, accountant, business valuator, broker).

Declining Production or Poor Patient Retention and Recall

Sometimes selling doctors cut their hours in anticipation of the practice transition—looking forward to retirement, for instance. While this is not the best practice, it does happen. However, if there is declining production, be sure to determine the cause and make sure there isn’t a larger problem that you will be buying. The same goes for low patient retention and recall numbers. If you see this in the records, you need to know why. If the patients are going to another practice, you need to know where and why. You may want to ask the staff about this—often they have a good sense of patient issues. If the selling dentist won’t give you access to staff, that’s another red flag.

Employee Turnover

There are a lot of factors why employees leave (or are dismissed). But if the practice records indicate an unusually high turnover rate, it could indicate that wages are too low, meaning you may have to increase your payroll and benefits costs. It could also mean that the selling doctor is either poor at hiring or a bad manager. This can have an impact on the practice’s reputation and goodwill, if patients are having negative experiences with the staff.

Overreaching Non-Disclosure Agreements (NDA)

You should expect to sign an NDA before you get anything but the most basic information about a practice. For a variety of reasons, the selling doctor has a strong incentive to not let it be know the practice is for sale. However, if the NDA includes terms such as trying to establish an exclusive relationship with you as a prospective buyer or imposes an unethical requirement prohibiting you from looking at other practices for sale, you should not sign. When buying a dental practice, you need to keep all of your options open.

ddsmatch Southwest has Experience Matching those Buying a Dental Practice with The Right Seller.

When we look for the right buyer for our sellers, we consider your lifestyle and location goals, clinical skills, personality, and professional needs before we present you with a confidential list of sellers seeking to transition out of practice or bring on a new partner or associate. The ideal ddsmatch Southwest buyer candidate will have a comparable clinical skill set as the seller, associate experience, a desire to reside long-term in the geographical area of the practice, and requisite financial qualifications. If you are considering buying a dental practice in Texas or New Mexico, contact us today to review our extensive network of dental practices.

Whether to Start or Buy a Dental Practice

As you think about your career in dentistry, there are three main questions to answer. What will be the focus of your practice? Will you go out on your own, or join an existing practice? And if you go out on your own, should you buy a dental practice or start a new office? Here we’ll discuss what’s involved involved in starting a new practice, and give you some things to think about as you consider the costs.

No doubt about it, the costs of starting a new practice are high. If you are independent and enterprising, and willing to put the time and effort into creating a solid and detailed plan, financing with reasonable terms is available. Buying an existing practice can be similar in cost and you’ll get everything in one package, with adjustments for depreciation of assets.  You will also benefit from a couple of pretty big assets that aren’t involved in starting a dental practice: the practice’s reputation and patient base.

Whether building from the ground up or buying, you need to consider many of the same principles.

What You Probably Already Know

When you start a new practice, your practice has to be located somewhere. You have some options here. You can buy a piece of land and build a new building on it. You can lease a piece of land and build a new building on it. You can lease a piece of land with an existing structure. Or you can lease space in a multi-tenant building. The last option is probably the least expensive, but may be the most restrictive in terms of what you can do in your space and in the common areas.

What is the most advantageous option will likely depend on where you practice. Leasing within a multi-tenant building might be the smart move in an urban area whereas buying is probably more practical in a rural area or small town. Even if you lease, it’s highly unlikely the space will be ready for you to move into. You’ll need to budget for the lease (which, unlike an apartment lease, will probably involve a substantial down payment of several months’ rent up front) along with costs for renovations, including decorating and furnishing.

Other major costs include:

 

  • Equipment: this will include everything you need to provide clinical care and operate the practice. Chairs, handpieces, imaging equipment, computers, printers, office supplies, etc.
  • Employees: eventually employees will be paid out of revenue, but, when you start or buy a dental practice, you have no revenue. So you need to budget to pay your hygienist, your receptionist, and whoever else you’ll need (along with your lawyer and accountant) to have a functional office. Also, you’ll have to provide insurance and other benefits. Remember that your patients will probably spend more time interacting with your staff than with you, so it’s important to put the time into carefully selecting the right people (it will take more time that you think), then compensating them in a way that makes them happy to work for you.
  • Marketing: how are you going to get patients through the door? You’ll have to advertise and make your community aware of you and your services. Here it might be best to start small and increase your advertising budget when you can or if its needs a boost. For more on modern dental practice marketing, read our post on the topic.
  • Operating costs: once you’ve staffed and equipped your office, your costs don’t stop. Supplies have to be replaced as they are consumed. Staff has to be paid every month. So do insurance premiums. And utility bills. And so on.

 

What You Might Not Know

Unless you’ve already ran a small business, there are a lot of costs that might not be on your radar. These can include:

  • Self-employment taxes: You aren’t going to just be a dentist. You’ll also be CEO (literally, if you organize your practice as an S-corporation). You’ll also be the human resources department and bookkeeper. However you manage it, at the end of the day, it’s up to you to make sure all of the necessary taxes are being paid, including Social Security and Medicare. This isn’t just what comes out of your paycheck, but includes quarterly payments you have to make as an employer.
  • Health insurance: whether you offer this as part of an benefits package for your employees or not, you’ll probably want to have health insurance for yourself and family. In addition to purchasing a plan and making the premium payments, you may want to consider a health savings account or flexible spending account for additional out-of-pocket expenses.
  • Vacation time: when you’re an employee, you may enjoy the luxury of paid time off. Not so when you’re self-employed. Anytime you aren’t working is time you aren’t earning. Maybe you won’t take any time off in those early months, but, after a while, this will be something that you will need. Be sure to plan well for it.
  • Retirement: you might be inclined to put this last, as retirement is, chronologically, last. But it’s something that will be easier the sooner your start, and it’s highly unlikely that you’ll regret planning for the future. Discuss this with your accountant or financial planner to create a plan that is right for you, including options such as an IRA or other savings plan with tax advantages.
  • Maintenance and repairs: it’s smart to create a monthly budget for maintenance and repairs. You want a surplus because some months, you won’t need much, but others, you will. If you’ve used your monthly allotment for a building repair and then have equipment malfunction, you don’t want to have a disruption in your ability to see patients.

This is not a comprehensive list, but gives you something to start with. If you’re starting as an associate, take a look at the practice you’re working in and make notes about what you see that you will have to take care of (and pay for).

ddsmatch Southwest Can Help You Buy a Dental Practice

At ddsmatch Southwest, we have available practices in Texas and New Mexico. As part of our Trusted Transition Process, we specialize in matching the right buyer with the right practice. We understand this is about more than just exchanging money for the keys to a business: its a career choice with far-reaching consequences throughout your life. We want our clients and whoever is on the other side of the transaction to walk away feeling like they’ve each gotten what they wanted out of the deal. If you are interested in buying a dental practice or an associateship, contact us today and find out if we have the right practice for you.

Review the “Don’ts” of Dental Practice Marketing

Being a dentist who owns their own practice is really two jobs in one. First, you are a dental care provider. After all, you went into dentistry to be a dentist. But you are also an entrepreneur. When you start or buy a dental practice, you have taken on all of the financial risk of that business just as any small business owner does. You want it to be the best it can be—to take care of your patients, your staff, your family, and yourself. In a large part, your practice is your legacy. This means that in addition to providing the highest quality dental care to your patients, you also want to put that same level of quality into the business side of your practice.

So, while you went into dentistry to practice dentistry, as long as you are running your own practice, you cannot ignore the competing responsibilities to properly manage the business of your practice. When we say “competing,” we don’t mean there has to be a compromise in the quality of care your provide. Rather, we mean that the business responsibilities will compete for your time, a finite resource. This month, here at ddsmatch Southwest, we are running two articles focusing on good and bad business practices: some simple “do’s and don’ts” to help you manage your practice. These basic principles can help you grow your business and sustain a level of success that will pay off in both the short and long term.

This article will focus on a few “don’ts” for promoting and growing your business. If you’ve not run a business before, you’ve probably already realized is a bit more complicated that it looks. Here are a few things to avoid going forward that will make it easier to get your practice to operate at the level you hope to reach.

Don’t Rely on Traditional Marketing, the Marketplace has Changed

When you are starting or buying a dental practice, you can look at what the practice has done in the past—or what other local practices are doing—to market themselves. Are they hyping specials? Discounts? Are they lowering prices or advertising what insurances they accept? If so, they are engaging in traditional dental practice marketing.

That may have worked well in the 20th Century, but not today. Dental patients have more choices than ever, and more access to information. Although they aren’t experts, consumers in general are better informed than previous generations. When someone wants a dentist, they start online, most likely with reviews. Look at those reviews, and you will see what patients care about most. Sure, cost is a factor. But customer service, the attentiveness of the staff and care provider, and the quality of care are all a priority. The fact is, consumers are looking for the nexus of value and quality overall, and most are willing to pay a little more for a better experience and quality of care.

Chasing the low-price consumer is a losing game. You’re competing against cut-rate providers for customers who will not stay loyal to your practice if they think they can get a better price. Also, you’ll be forced to cut your margins so tight that you may end up reducing your cash flow to a point that could be detrimental to your business.

What you want for your practice is not an ever-shifting patient base with no loyalty. What you want are the smart consumers who understand the quality that you offer and are willing to pay a fair price. Those are the patients that will keep coming back. That stable patient base is essential for a healthy dental practice (and will be a big asset when you want to sell your dental practice).

Don’t Overlook What Your Patients Care About

Another common mistake is thinking that your patients will think about dentistry the way you do. You are an expert with training and experience. Your patients just want their teeth to look and feel good. Exactly how that happens is what they are paying you for.

The more technical something sounds, the less potential patients will care. Do you have techniques or technology that will enable them to smile again? To be free from pain and discomfort? That they care about. A lot. However, they will care about it at about that level of detail. If you’re buying a dental practice and updating to the equipment with the most advanced technology, go ahead and advertise that. But don’t explain what the technology is. Explain what it does to better patients’ lives in terms they can understand (a good rule of thumb is to keep everything at about a 6th Grade reading level).

Remember, it’s not about compromising the quality of care, it’s about making it accessible.

Don’t Neglect Social Media

Social media performs two important functions in marketing, and any dentist who neglects their online presence will lose patients to one who doesn’t. First, on a human level, it allows you to engage with your patients and potential patient base. It gives them a feel for who you are, what your practice philosophy is, whether you are someone they want to take a risk on with their money and their mouths. With less people watching broadcast television, listening to terrestrial radio, reading print publications, or paying attention to traditional advertising, your social media presence is one of the best, most direct ways of engaging with your market.

Second, an up-to-date, well-optimized website, linked to social media and YouTube channels, with a steady stream of backlinked content, signals to the online search algorithms that you are an active, healthy, legitimate business that will appeal to consumers doing searches in your area. Active engagement and promoting quality website content across social media channels is an essential piece in keeping your website at the top of local search rankings. And whether you like social media or not, it’s key to modern marketing.

Don’t DIY Your Marketing

If the last few paragraphs aren’t sitting well with you, that’s fine. You don’t actually have to do this yourself. In fact, it’s probably better if you don’t. Online marketing is an ever-shifting shell-game. Once people learn how to work the search algorithms, the algorithms change, often on weekly basis. Online marketing requires the expertise of people who are staying on top of these changes, which is, in itself, a full-time job.

Hire an online marketing company to build your site and work with them to produce quality content. Maybe you have a young, savvy receptionist or hygienist who, for a little extra in their paycheck, will engage with patients on Facebook, Twitter, and Instagram. Trying to do it yourself will cost you time you don’t have, and will not be as effective. Plus, the experts help track where new patients are coming from and can continually optimize to ensure your marketing efforts are paying off and where you need to adjust.

When Buying a Dental Practice, Use a Dental Broker

Just as you are not an expert in marketing, you also probably aren’t an expert in selling or buying dental practices. But here at ddsmatch Southwest, we are. We take the combined experience of hundreds of dental practice transitions from all across the country and put that to work to match the right buyer with the right seller. Give us a call today and find out how we can help you get the right practice.

Loans for Beginning a Dental Practice

Getting a loan for starting a dental practice, or buying a dental practice can seem like a daunting prospect, and rightly so. This will be one of the biggest, if not the biggest, decisions of your career. And you have to make it at a point in your professional life when you have the least amount of experience, either in dentistry or in business. That’s the bad news.

The good news is that if you choose the right lender, one who understands dental practice lending, and you’re prepared, it can be a lot simpler that you might think.

Choosing the right lender is the easy part, you just need a reputable bank with experience lending to dentists—that is, one that understands how practices need to be financed.  They’re not hard to find. The financial preparation can be the hard part. But it doesn’t have to be if you understand a few things about the practice lending process.

Dental Associate Experience Reduces the Bank’s Risk

How much experience do you need before starting your own practice? Honestly, not much. Lenders report that 60% of dentists seek to set up their own offices within the first five years of their practice. But that doesn’t mean you can just walk out of dental school and into a bank expecting to get a few hundred thousand dollars. While many lenders don’t require much experience (more on the reasons for that below), they will be looking for some experience—at least one or two years as an associate. The reason for this is that most young dentists gain invaluable experience in those first couple of years: working in a real world office with patients from the general public, managing staff, increasing hand speed, and creating a track record of production. There is no real substitute for that experience.

There may be an exception for someone with good dental intern experience, or someone who has worked in a family practice and understands the business and administrative sides of a practice already. But these are going to be the exceptions. This will be reflected in the fact that a bank will typically lend less to someone right out of school because its a riskier prospect. The idea is that time working as an associate reduces the bank’s risk because the doctor has an established record of managerial experience and production. Without this, you’ll have to work much harder to convince a bank to lend to you.

Typical Debt (Including Student Loans) is Not an Obstacle

First, you might think that a few hundred thousand dollars of student loan debt doesn’t seem all that typical, however, you have to remember that we are not talking about lending, generally. We’re talking about lending to a dentist starting out a practice. Given that the average dental student graduates with somewhere between $200,000-$400,000 in student loans, within this demographic, your student loan debt is probably typical. The offset here is that loans for starting a dental practice or buying a dental practice are among the lowest risk loans. The default rates are very low and dental practices generate a high cash flow. This is why banks are willing to loan large amounts to dentists, funding the entire cost of starting up a practice, where in other industries, the borrower would have to invest up to 20% of their own capital.

Given these factors, lenders know that new dentists will have debt. As long as that debt appears to be typical, it won’t be an issue. In addition to student loan debt, its typical for a young doctor to have a mortgage, some credit cards, maybe even a luxury car payment. The concern is not having debt, but whether the debt is excessive and whether the practice that the loan is for is reasonably projected to generate an adequate cash flow to cover the loan repayment, along with the other debts, keep the lights on, and the staff paid.

Credit Risks are Still Credit Risks

While typical debt is not a problem, and while that typical debt can add up to quite a bit, banks are still going to balk if they find red flags on your credit history. Dentists generally have a reputation among bankers as being among the most financially dependable borrowers, however, you won’t benefit from that reputation if your credit history indicates an inability to manage debt. Lenders typically want a credit score in the high-600s. You should be concerned about the following things, if they’re reflected on your credit report:

  • A short sale or foreclosure on a home
  • A pattern of late or missed payments
  • Taking on too much debt
  • Excessive credit card debt
  • A low asset to liability ratio

Red flags can also appear with the practice you are proposing to buy or build. These can include:

  • An expensive build-out
  • High costs for remodelling or re-equipment an older office
  • A negative trend in the practice’s collections
  • A young dentist seeking to purchase a high-end practice (typically, a doctor should seek to establish a practice that can be profitably run at the doctor’s current production and managerial ability)
  • Relocation to an area where the doctor has no established community (there is less to keep a doctor there if the practice experience’s problems)
  • A poor production record for the doctor seeking funding
  • Disciplinary actions
  • Probationary periods

Banks with dental industry experience are looking, in essence, at a combination of the doctor’s ability to responsibly run a practice and produce at a level of profitability that will allow repayment of the loan, and whether the practice is worth the amount being asked for. The bank has to be comfortable with both parts of this equation before it will take on the risk of the loan.

Loans Types for Starting a Dental Practice or Buying a Dental Practice

Typically loans for dental practices are 10-to-15-year fixed-payment products. Some banks will offer a 20-year loan, reducing the monthly payment amount. And some offer an alternative to fixed-payment loans, where payments may be low or even deferred during the first months, allowing a new practice to build momentum before starting with low payments which will increase over the first couple of years. The variable-payment loans let a new practice invest in equipment, staff, advertising, and other things needed to establish and grow the business.

Something unique to dental practice loans is they can include money specifically earmarked as working capital. This means that the bank understands that, just as you don’t have 20% of your own capital to invest, you likely don’t have a large cash reserve to keep a business afloat as it operates in the red during those first months. For instance, a typical dental practice loan from Bank of America may include $75,000 for working capital and an additional $25,000 if the doctor wants to bring on a practice management firm to help increase their business training.

SBA (Small Business Administration) loans are often a preferred choice by lenders. SBA loans are guaranteed by the federal government for 75%, greatly reducing a bank’s risk. SBA loans have other because they are loans are designed for small business like the one you are considering. They also are available for ground-up construction, which many conventional banks won’t offer.

Have a Plan

Before any lender is going to work with you, you’re going to have to show them why it’s a smart investment. You need to have two things. First, is a vision for your practice. What will it be? Where will it be? Why that type of practice in that location? And why are you the one to be trusted with it? You should be able to answer any of these questions with thoughtfulness and confidence. This will show you’ve really considered your choices, and that they are being made intelligently and responsibly.

Second, you’re going to need a solid business plan. This is the document that shows what your costs will be, how those costs will bring revenue, and whether that revenue will be sufficient to support the practice, its staff, and repayment on the loan. For more on how to prepare to prepare your plan, read our recent article, “Five Financing Questions to Answer Before Buying a Practice.”

In addition to your business plan, the lender will probably also want to see your tax returns, dental license, resume, production reports, documents which report all of your financial assets and liabilities, demographic information about the location of your practice, and financial records from the practice (if you’re buying an existing one), or any other information they find relevant. Once all of the paperwork is properly submitted, preapproval is typically completed within a week.

We Can Help You Find the Right Practice

Here at ddsmatch Southwest, we specialize in matching the right buyer with the right seller. If you are interested in buying a dental practice in Texas or New Mexico, we can help you find the practice that best fits your vision for your dental career. Contact us today and find out how we can help you.

Buy, Sell, or Start a Dental Practice

RK: Randy Kinnison with ddsmatch Southwest, just wanted to thank you for being with us today and answering a few questions that we’d like to share with our potential clients and customers. If you would just please introduce yourself and kind of describe the relationship that ddsmatch has with Blue & Co. and the business valuations that you guys prepare for us.

MH: Good morning Randy, and thank you for the time. I’m Matt Howard with Blue & Co.  I lead our business valuation team. We do approximately over a hundred dental evaluations a year for ddsmatch and other dental needs. We’ve just really carved out a nice niche in it and have a lot of fun with it.  I am a dental CPA and also an accredited business valuator and a certified valuation analyst. So, I have certain credentials that are specific to valuation. Our relationship with ddsmatch Southwest is, we are the third-party, non-biased valuator that comes in and gives you a true market test for what your practice is worth at the date of our valuation.  We’ll be looking at the practice from an industry perspective trying to help both seller and buyer know what a true fair market value price is for the practice.

RK: Thank You, Matt. Just describe a little bit about the BV [business valuation] and what it entails. I know the first part of the business valuation always has the historical numbers of the practice as well as the performance. So, if you would just tell us a little bit more about the BV and what it entails.

MH: Certainly. With any small business or personal service company, the biggest noise in the practice would be the owner’s noise. What I mean by that is anything that’s inside the practice that is not necessarily operational or is basically something that the owner has decided to do at the practice that doesn’t exactly reflect the operations of the practice. A lot of times a seller will own the building, and in owning the building, they’ll pay themselves a lease rate for that building. Sometimes, that isn’t a market rate. And sometimes, it’s a little bit above; sometimes, it’s a little bit lower. Our job in this process is to really work through the practice to make sure it shows the historical financial statements. Basically, we help sanitize or normalize the numbers as we see them and as the true operations of the practice are reflected. So, our part in the valuation process is we will collect data. We’ll go through the data. We’ll enter it into our models. We’ll ask very specific questions about that data about maybe aberrations and the financial performance over time. Sometimes, a dental supply category jumps ten percent over a year. We want to really understand everything that’s going on inside the practice.  Then as we go through it, we would release a draft document for discussion with the seller. That document would be completely … a conversation piece to talk about the variables that we took into consideration, the market effects that impacted the valuation price to really just helped you understand exactly how we came up with that number. And then after that conversation, with any input from the seller, we’ll move it to a final, and then that will be the piece to share with any potential buyers as they consider the practice.

AE: That’s great, Matt. Hey Matt, Andy Edmister here jumping on the call with you. I have a few more questions. Thanks for joining us today. Matt, when would you recommend a dentist start preparing for a sale? And, why would you recommend him at that time?

MH: Yeah, a great question. I wish it’s a question that a lot more sellers kind of investigated not the year before they’re considering the sale. So, some things to take into consideration is knowing yourself and knowing what your aspirations or your goals are for the practice transition. What I mean by that is, a lot of dentists will wait until they’ve slowed down some, and we have something called a decreasing revenue stream, that’s where the collections slowly over time have started to decrease. That’s just basically reflective of the seller or the owner wanting to start to slow down. There’s nothing wrong with that if that’s an intentional decision you want to make. Unfortunately, when we see that in an evaluation, and even when banks see that in our evaluations as they consider financing this for a buyer, it does have to be taken into consideration. So, a decreasing revenue stream in the valuation world is not exactly ideal. More of what we like to see is if they’re an immature practice that’s either consistently growing by inflation or at least steady in the collection perspective. So, as you understand who you are and what your goals are, I do think it’s an important thing to consider when to sell and maybe selling before we start decreasing your output or decreasing your hours. That’s the first key. I would say anywhere from five, maybe even a little bit over five years, would be a good time to meet with your ddsmatch Southwest broker and start discussing what you want to do in the future and what does that look like in your mind from an ideal perspective taking all the different desires that you have into consideration. They’ll be able to help you walk through when may be a good time to even bring in an associate; or maybe when it’s a good time to think about something; maybe a couple of years before you thought you would; just so that we don’t run into that decreasing revenue stream which would impact the valuation price.

AE: Okay, that’s great advice. Basically, to sum it up, keep your foot on the gas until you get through the evaluation and the transition of the practice to maximize the value of the dentist’s practice.   

MH: Precisely, I couldn’t have said it better myself. Yes, trying not to minimize the fact that yes, you want to slow down; however, you also want a good price for your practice.  Obviously, those two things go hand in hand.

AE: Okay, well, thank you. I’m gonna move on to another question. The question pertains to purchasing in a practice or doing a de novo or startup practice on your own. What do you see is the benefits of each or the cons of each; and what would you recommend to a new dentist client of yours.

MH: A great question. And, a question that comes up quite often. As a person coming out of school, the ideal part of buying a practice is the fact that you’re walking into cash flow day-one.  What I mean by that is, you are paying a fair market value price for the practice; and then, you’re making money. You’re walking into, hopefully, a three hundred, four hundred, five hundred, and up thousand dollar collection practice which helps pay your bills day-one. That’s an obvious benefit of buying a practice. The problem with starting a practice is this: it’s a three to sometimes seven-year journey to maturity or average collections of a de novo. So basically, the first year you’re probably going to feed the business as in bring money to the table to keep it going as you build up that collection stream. The second year, you might break even or maybe pay yourself a little bit but definitely not up to industry standards. The third year, between the second and third years, during these startups is where we see you making some progress towards paying yourself a reasonable wage. Still probably not what you could get out being an associate at another practice. But you’re on your way. And then, that fourth, fifth, six, maybe up to seven years could get you, hopefully, up to average. An average is somewhere around nine hundred thousand dollars of collections, hopefully, dropping somewhere about to two hundred and fifty to three hundred thousand dollars bottom line. These are all guesses. Every marketplace is a little bit different. Every geography is a little bit different, but that’s just in general.

AE: Okay, well, good answer, thank you. I’m sure that will be useful for a lot of people watching. Next question. When would you recommend or what do you think is the best time for a dentist who is where he wants to be, but he’s not sure if he’s ready to bring on a new associate. What would a dentist do to say, “hey am I ready, or am I not ready to bring on the associate.”

MH: Again, a great question enough, and a complicated one sometimes. Every practice has a limited amount of resources, of ops, of time for the staff to not hit over time. So, there’s a lot of variables that play here. Typically, we like to see over a 1.2 million dollar collection practice, in general, that way there’s plenty of room for an associate to come in, inherit some of that revenue stream as the seller wants to back off a bit and transfer some of their patient-base over to the associate. Let’s just look at this from both angles. A seller wants to have an associate for the benefit of growing and continuing to serve the patient-base well. If you’re booked two to three months out, that’s not a very good patient-service quality for your patient. So, you need to come up with a constructive way to service them quicker and have a better overall experience for your patients. A lot of times that’s where an associate will come in. Therefore, you can help address the backlog and give to the associates.  From the other angle, the associate has the ability to make money day one, not build up a new business inside of a practice. They might get some sort of guarantee the first year, but you’re gonna move them to some sort of production or collection-based compensation after the first couple of months or even maybe after a year at the most. It’s important that it’s a formula that doesn’t only work for the seller, but it also makes economic sense to the buyer. Typically, buyers these days have quite a bit of student loans that they need to address, so they need to make a certain amount inside the practice. Associateships work great if there are enough collections and the seller wants to slow down a little bit and maybe back off a day, and open up some collections to the associate. And then obviously, there’s a lot of other variables, but those are just some general thoughts.

AE: Okay, well that’s great. What kind of tools could you offer as part of ddsmatch Southwest? What could you provide to help dentists decide if they are ready for an associate or not on an analytical side just on the numbers besides a gut feeling and wanting to slow down.

MH: Yeah, that’s also something that we’ve seen over and over again coming up is, “am I a good candidate for an associateship? Does it make sense for my practice to do this?” So, what we’ve come up with is an associate IQ or quotient that helps walk you systematically through the practice with about ten different areas that we look at to make sure that it makes sense for the practice to bring this on. Does it make sense from the owner side? Does it make sense from the associate side? Some things we’ll look at is if you only have three ops, and you want to bring in two dentists a day, that does not make a lot of sense. After looking at a bunch of these different variables and intricacies of the practice, we will come up with a quotient of how you rate on a scale of 0-100 for being a good candidate for how many associates. We’ll walk you through the entire process. Does that answer your question, Andy?

AE: Yeah, I think that’s great, in that way, they can make an educated decision on where they’re at currently and if their business can support another dentist. But also, it shows them what they would need to do to grow to get to that point.

MH: Exactly, the last thing that anybody wants, and we run into this occasionally as well because people jump into associateships, is after a year the associate goes away. We’re stuck holding the bag here–of all the attorney fees and the professional fees to get that to happen, and then have that asset, have that partner walk away. That’s really tough for a practice, especially, if you’ve grown it significantly and can’t keep up with all the work coming in the door. It’s very important that an owner of a practice considers all the variables in play as they consider this major decision that can affect the valuation of the practice and can affect your stress levels as well.

RK: Very good Matt, thank You. Randy again. We have another question. We get a lot from dentists that are preparing to sell their practice, and even if they are a few years out, they ask a question, “should I invest in any major equipment purchases? Or, what should I do to make the practice more attractive to a buyer?” What does that do, normally, to evaluation? Does that help evaluation or not?

MH: Yeah, you’re absolutely right. That question comes up quite often. I’ll use a house as an illustration here. There’s a couple of different types of upgrades for remodeling that we can take into consideration. When you’re buying a house, you fully expect the roof to be leak proof. That’s just part of the standard price of the house. It doesn’t add anything if you find out the roof has all sorts of problems that need to be replaced before I pay you the price that you quoted. So, with that kind of consideration inside of a dental practice, certain things like x-ray heads, chairs, and normal standard-of-care type assets at the practice, you absolutely need. If you redo them a year before selling the practice, it’s not really gonna make a significant difference in the value of the practice. Some things that would make a significant difference in the practice, let’s say two months before you sell your practice, is adding a cerec machine or something that’s not been in the practice previously that hasn’t affected the income or the collections of the practice. There’s a couple of different things to consider, to remodel the practice. If you still have shag carpet in the practice, it probably needs to go before you start marketing it. So, those types of considerations and things that will bring it up to a higher standard-of-care could make it more valuable. However, you’re probably not going to get a one-for-one pay back on your investment. I guess my end-all be-all recommendation is five years before the practice sale, unless you’re really making your practice digital or doing something that’s bringing it up to standard-of-care, any other significant remodels at that point would probably not be a complete one-for-one return on your money. Does that make sense?

RK: Yes, that makes great sense. Thank you for that clarification and answer. One other question we’d like to ask you, Matt, once we get down the road matching a buyer and seller together and negotiating the asset purchase agreement, there’s always the question of asset allocation which plays a pretty important part for both sides. Do you mind touching on that a little bit?

MH: Yes, so what we’re talking about here is let’s say we come up with a price, and the price is one million dollars for the practice. The practice price is set, and we’ve negotiated that. At the end of the day though for both parties at play, really even more acutely to the seller is, it’s not just the price, it’s the overall deal that makes it a good or bad deal for you. What I mean by that is this, the million dollar price is great; however, it’s not about what the price is. It’s about what you keep. Obviously, what I’m referring to here is taxation. As you come up with the purchase price, and it’s an asset sale, inside that sale you would have two different buckets to place things in that the IRS expects you to fill out on a certain form. How much of the price is going to be assets? And, how much of the price is going to be goodwill? Those two buckets are very important. For the goodwill side on the seller’s side, amount that is going to be potentially subject to capital gains. Capital gains is a big deal because the difference between that and ordinary income can be significant. We can talk about over ten percent difference here. That’s a big deal for a million dollar price. Ten percent is a hundred thousand dollars. It could be that important. The asset side is anything that’s called an asset in the sale. That would be more advantageous to the buyer. That means they can depreciate those assets quicker than goodwill. Goodwill they can amortize over fifteen years as under current law. To the seller, goodwill is important. To the buyer, assets are important.  It’s a little bit more important to a seller though. To a seller, that difference between capital gains and ordinary income can be quite significant. To the buyer, it’s a difference of when can I depreciate something; when do I get the tax write-off for this asset or goodwill. It’s the difference between five years to 15 years. They still get it. It’s just a question of when. For a seller, it’s a one-time deal. It’s either goodwill or it’s either assets. The more that’s goodwill, the better for the seller. And really, that is just subject to negotiations. It’s not really mandated by the IRS in any way. It’s based on what are the negotiated rates allocated to each bucket.

AE: What would you advise a young dentist in an associate for a couple of years, or two to five years out of school, paying off debt? They came to you saying, “I think I’m ready to look at purchasing my first practice.” What would you review with that dentist and how would you prepare him to be ready to engage with Randy and myself to find him a practice?

MH: Some of the first things here is have you spent the time clinically to get your hand speed up, to make sure, that whatever you’re looking at buying, you can actually do or can you document that you can do that in the that new practice? Something else or the bank will be looking at is have they been able to produce at the levels of the practice that they’re buying. That’s one important element. The second important element is taking a look at what does their world look like. Have they gotten in a couple years out of school. Have they been able to create some sort of emergency fund? Do they have some sort of margin in their life? That sounds very logical but a lot of times a buyer is not a good candidate because they don’t have any kind of safety net in their life. So, the third thing that I would talk about is do you know what you’re looking for? Do you know a geography? Have you really studied what area you want to be in and what that practice might look like? Having a clear direction and intentionality about the practice that you’re buying I think is an important thing for a dentist to address to a broker at ddsmatch Southwest because they really need to know that you’re fully vested in buying in a certain area, for a specific purpose, with a certain clinical skill set. Does that answer your question?

AE: Yeah, Absolutely I think that’s great. There’s a lot of young dentists out there that are just kind of on the edge, “am I ready?” It’s scary to start your own business.

MH: No doubt about it. I walk through maybe twenty buyers a year. and Some of the same elements that you’re just discussing here come up often. It can be a terrifying thing. You just need a really good board of directors to walk you through. I mean a great CPA like myself and a great attorney to help you understand the logistics of the transaction and how to structure it. Beyond that, if you have the right people on your team as advisors, we’ve been through this a hundred plus times just helping you through that is part of what we do.

AE: Well, thank you very much, and again we appreciate you taking the time today. You’ve been a huge partner and a huge help not only for us but especially for our clients, so thank you, very much, Matt.

MH: I think that this has been a great conversation and great questions. I think these are key elements to any transaction as these will come up at some point in the process. It’s nice to have a heads up for your sellers or even the buyers out there to understand the dynamics at play. Again, ddsmatch Southwest is a great brokerage. They really walk their clients through everything. It’s an open process. They invite your advisors in to help you through it. I’m a big fan.

To find out how ddsmatch Southwest can help you with your practice, call today.

Starting or Buying a Dental Practice?

The dental brokers at ddsmatch Southwest are often asked about whether it’s better to start a new dental practice or buy an existing dental practice. If you’re reading this, chances are you are considering starting or buying a dental practice. You may have questions like “what income is typical for an average dental practice?” or, “how can you know you’re ready to buy a practice?” Below we shine a light on some of the basics you should know. Read more