Think “20” When Purchasing a Practice
If you are considering purchasing a dental practice, there are numerous factors that need to be considered. First and foremost is the practice you are interested in located in an area where you and your family want to live? If the practice is not located in the immediate area where you plan to reside, what is the cost in hours /days per year in time just dedicated to driving? For example, if your round trip will be two hours per day and you plan to practice 5 days a week, that equates to 10 hours per week of “windshield time”. So, if you plan to practice 48 weeks per year, that equals 480 hours or 60 days of driving time annually. Commuting time is a variable that you should consider.
Another major consideration is your ability to handle the clinical production of the selling doctor. This becomes critical if you are purchasing a solo practice. Dental lenders will make sure that your potential acquisition is one that you can handle, as they will not approve a bank loan if they feel the purchaser cannot match the clinical performance of the seller. Banks will review your production report to make sure that there is a proper match. If you plan to buy into a partnership, this may not be as critical since you can be mentored by a partner over time to increase your production and possibly your service mix.
Finally, we think the most important variable that you must consider is the historical net income that a practice has generated. When you purchase a practice, you are buying purchasing assets but more importantly you are buying a historical income stream. If you have to pay an additional $25,000 to $50,000 more than what you feel a practice is worth it frankly is meaningless over your career especially if the practice’s cash flow and net income is strong. We have seen too many young practitioners walk away from a great business opportunity as they too often get fixated on price!
If the practice you are considering is in a location that you desire and has the physical characteristics that you will enjoy, paying a higher purchase price than what you were expecting, should be a minor issue. It is the practice’s net income that makes the difference long term.
When I lecture to dental students about purchasing a dental practice, I tell them to “Think 20”. By that I mean, if you assume that your dental career will cover a span of 20 years, consider the total income that you are capable of generating over that period. You can think 25 or 30, as well, but the point I want to make is the same. Let’s look at an example to bring home this point. Assume you are interested in purchasing a dental practice that has gross receipts of $900,000. This practice’s operating overhead is 63%, so the net profit is 37% or $333,000. The sale price of this practice is $675,000. Assume that you qualify for a bank loan and can handle the practice clinically. Without factoring any annual income growth over this 20-year period, the total net income you will generate over you career will be minimally $ 6.6 Million! If you manage the practice well, keep overhead low and take proper action to grow the practice’s receipts, this career income total can be substantially greater than what we have illustrated!
For example, if the practice only grows at a rate of 3% annually and you continue to manage your overhead at 63% the total net income generated over 20 years increases to $8,950,000. So, ask yourself the critical question: is borrowing $675,000 to generate $6.6 million in career earnings a prudent business decision? As a dental business owner and as long as you manage your practice well, you’ll never get fired from your job and this level of income is there for you to enjoy thus reaping the rewards of entrepreneurism in making you a multi-millionaire over your dental career!
Originally Posted on The Dentist Network by Thomas L. Snyder, DMD, MBA, Senior Director, Henry Schein Professional Practice Transitions