If you understand the concept of Lifetime Income, you can see how Practice Ownership can really change the long-term view of your wealth. The natural segue is a question we get frequently by our Bootcampers:
Should I start from scratch or buy an existing practice?
Starting a new practice allows you almost infinite control over the location, design aesthetic, staff, equipment, software and even business name. Plus, there’s the intangibles like the excitement and pride of starting a business from scratch. These are all great pros, but most of them are short-term stuff. I’m trying to get you think of the long game.
But the ONLY way to really see it is to dive in and do some math…
Build: Let’s say you needed a loan to build out your dream practice that amounted to $350,000. This would include money for lease payments, construction, plumbing, equipment and some working capital. If you did a 10-year loan at 5% interest, your payments would be approximately $3,700 a month. But since you have zero patients, you wouldn’t be able to start making payments right away. Not to worry though, because many banks have deferrals that allow you to start paying after a couple of years for this type of loan.
So to start making payments, you’d probably want to be netting at least double that ($7,400) to have money for other expenses and maybe even pay yourself a stipend. If we used the very conservative (and awful!) office overhead of 70%, you’d need to be collecting about $25,000 a month.
Needed Monthly Revenue
$7,400 / 30% net = $24,666/month
According to Dental Economics, it would take about 18–24 months to get to that production level. You would spend that time building your practice to a point where you could start paying back the loan — and you would be paying yourself little to nothing. You would also likely be a dental associate elsewhere to collect income (the banks sometimes require this).
As you grow your fledgling practice, you will have to create systems and processes from scratch and learn by making mistakes. You’l need to develop (or hire out) organizational expertise to manage the office, technical expertise to setup the office software and computers and business skills to solve problems you run into. You can certainly do research and learn about techniques online but these will be reactive rather than proactive. And you’ll have to balance this while going back and forth between your associate job and your business.
Once you’ve developed a critical mass of patients, you’d start working there full-time and paying yourself a salary. This would gradually increase as the revenues allow it. It’s a great way to start a business and banks make it possible by allowing you to defer loan payments and/or associating elsewhere.
BUY: But now, let’s say we BOUGHT a practice for the same loan amount of $350,000 with the same interest rate. Dental Economics estimates that general practice prices are about 60%-80% of the gross annual revenue. So let's assume 60% in this example which means a $350,000 selling price would yield approximately $583,000 of annual revenue. If we assume the same 70% overhead, you’re left with almost $175,000 which is about $14,500 a month. That’s plenty to make your $3,700 loan payment AND pay yourself. Even if you paid yourself only $8,000 per month, you’d be making $96,000 a year. Remember, this is DAY ONE.
Monthly Revenue Post-Purchase
$583,000/12 months x 30% net = $14,575/month
Plus, the practice that you buy will have the benefit of experience. Workflows and processes will be in place, the staff will be well-oiled (or certainly smoother than a brand-new staff), vendors will already be selected, and most importantly, there will be a patient base with a full schedule.
Now factor in the lifetime income referenced in the above article. In a few years, the dental start up will be WAY behind in terms of total dollars generated. And there’s no way it can possibly catch up.
I’m not saying starting from scratch is a bad idea. I’m just highlighting the differences when you look at the long-term. You may be in an underserved market and starting from scratch makes the most sense. In the end, it’s completely up to you. Just make sure you’re factoring the long game into your goals.