Secrets to Buying Your Ideal Dental Practice was published in 2016. A LOT has changed in the last several years but the fundamentals of practice valuation remain the same for an individual dentist looking to buy a dental practice. This excerpt is posted with the permission of the author.
I designed this short book to give quick, concise business information to any dentist considering buying a dental practice. My goal was to keep it efficient and short, not wasting time on nonessential fluff. After reading this book, you will know how to use basic concepts and have a good handle on the key numbers of a dental practice in a few minutes! My goal in writing this book was to show how dental brokers and consultants approach this process and how you can do the same thing. By understanding some basic math and mastering the language of the experts, you can potentially save and earn additional hundreds of thousands of dollars over your career. You may be asking yourself why you would want to buy a dental practice in the first place. The answer is that you would like to have an established income stream. The practice you invest in should have a long-documented history of cash flow. You are always better off starting with existing patients and money coming into the office rather than with a beautifully equipped new office with no history of patients. If you choose to have a start-up practice, you will need to hire and train new employees. With a practice purchase, you have trained staff and equipment in place and ready to produce on day one. From a financial perspective, it is almost always better to buy than to start from scratch. Owning a practice is not for everyone. Many dentists do not want the additional responsibility of ownership, and that is understandable. Buying an existing practice is not for everyone. Some dentists prefer to start from scratch because they want their practice to have their own stamp from day one, but it is always good to understand your options.
We will review what you need to know in a simple step-by-step format to make it easy to understand. You will immediately see how to use this system in your own practice, or with the numbers the seller or practice broker is giving you. You will also have action steps that you can take today. Let’s be real; it’s not that complicated! Once you see the key metrics, it really can be a cookbook methodology. The main takeaway should be the percentage of your personal production you take home after making your practice loan payment if everything stays constant. In other words, how much money will you take home if you buy a particular practice? You may be asking, why do I want to know that? The answer is, for most dentists, the main option, other than buying a practice, is to be an associate. You will want to compare the purchase opportunity against what you would make as an associate. You want to compare your actual take-home pay after buying the practice to other opportunities. The alternatives we give up are our opportunity costs. Everyone will make different decisions based on the data and their personal situation, but at least you will be able to analyze the data to make a good decision for you. You might find a practice that will allow you to make 25 percent of your personal collections, but guess what? You are a surfer, and the practice is located in Malibu, California, and that sounds great to you. If you know what the numbers should be, and you still want to buy it, then go ahead and buy it. At least you will be making an informed decision, and you will know your opportunity cost. This book should in no way replace hiring experienced professionals to help you navigate through this process. In fact, that should be one of the first things to do: find an experienced broker, attorney, and CPA. As a buyer, remember that a broker is assuming that you will engage in a reasonable effort of due diligence using the financial information and access to the practice you are given. This book can provide you with the right questions to ask the broker, your attorney, and your CPA.
Some Key Ideas
Any business plan will not survive its first encounter with reality. The reality will always be different. It will never be the plan. — Jeff Bezos, founder of Amazon.com
Everyone has a plan till they get punched in the mouth. — Mike Tyson, boxer
If you think you might want to own a practice, start by writing a vision of your ideal office. I know this already sounds like fluff, but it is something simple to do and encourages you to think about what an ideal practice looks like for you. That way, you have a good idea of what you want, and things will start to fall into place. Be prepared to make some small changes as you begin your research, because you never know what you don’t know. I suggest that you write down this vision before you contact a broker because you will be more concise describing what you are looking for to the broker.
Warren Buffett, one of the most successful investors in history, always knows what he is looking for in an opportunity. Buffett says, “We try to exert a Ted Williams kind of discipline.”
In his book The Science of Hitting, Ted explains that he carved the strike zone into seventy-seven cells, each the size of a baseball. Swinging only at balls in his “best” cell, he knew, would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the hall of fame; swinging indiscriminately would mean “a ticket to the minors.” Ted Williams was to baseball what Warren Buffett is to investments today.
Buffett goes on to say, “Only work with people you like and…run your business as if you own 100 percent of it; it is the only asset in the world that you and your family have or will ever have; and as if you can’t sell or merge it for at least a century.”
Warren Buffett also says to stick with businesses you understand and that are relatively simple and stable in character. The famous economist John Maynard Keynes always advised potential investors to put large sums of money into enterprises you know something about. To paraphrase Keynes, put your eggs into just a few baskets, but watch those baskets closely! Or, as Thomas Watson of IBM put it, “I’m no genius. I’m smart in spots and I stick around those spots.”
Once you have a vision of what you want your practice to look like, how do you “watch your basket closely” or “stick to your spots”? You do this by understanding the key metrics of your practice. And the one metric above all others is, how much are you earning as a percentage of your personal production after debt service? Once you understand that number, you will understand all the other numbers.
Next up: in Part 2, the essential business terms — overhead, EBITDA, cap rate, and the rest of the language you’ll need to speak with brokers, lenders, and CPAs.