Editor’s note: This is the fourth article in a series exploring the business aspects of the dental profession, from starting a practice and marketing to hiring staff and finances.
There are lots of terms in a financial evaluation. A lot of people think that as dentists, we do not need to know all the numbers. However, as a new dentist making one of the biggest — if not THE biggest — decision of your professional life, it is important to understand the basics. At the New Dentist Business Club, we teach these basics over a four-part workshop every year to interested dental students and new dentists.
Why is this important?
While you should always have a trusted dental specific accountant do a deeper dive with you on the numbers of a practice, it is important for you to know what YOU are getting into. This is your practice after all. This is your business and something that will dictate your life ahead. Knowledge is power. It’ll also keep you from wasting time with lots of practices that do not meet your requirements.
Here are some of the common aspects of a practice evaluation:
- Know the misnomer that “production” is. A lot of our patients choose to take the dental insurance they are offered by their employers and use the benefits at our practices. Understand that not all practices will be collecting 100% of what they produce. So be wary of hearing things like “the practice produces $1.5 million, hence it is a good practice for you to buy.” The production, while a good starting point, is not the end all be all.
- The important number that all of us as new dentists need to know about buying a practice is the net income that we would be able to draw from the practice. Can we survive on that income? Can we grow our family with that income? Always underestimate the income you would make on a practice purchase. It is easy to think that you would buy an average practice and make it spectacular. However, chances are that the previous dentist did their very best with it and it could be a challenge for you to find something that works.
- EBITDA is a number that tells you how healthy the practice is in terms of cash flow. I once saw a $2 million producing practice with negative EBITDA. It made my heart sink to think of the dentist who buys a practice like that and goes into a lifetime of worry, not knowing better.
- Look at some of the typical costs in the practice. What does their payroll and rent look like? Typically, these are two numbers that are very difficult to change even with a new owner. Letting people go in the first few months of practice ownership and attempting to change the location because of rent disputes are not looked at very kindly by patients.
- Have a specialist evaluate the lease. Chances are you might need some negotiation to better your terms. A lot of people balk at high rent figures. If the location is in the middle of a busy intersection and the rent is high, think of your rent as a marketing expense. On the other hand, if your rent is very low and you are in a medical/dental building with several other dentists practicing in nearby office spaces, you would have to increase your marketing efforts to attract patients and repeat customers.
Assembling your team
Find an accountant, lawyer and mentor to be on your advisory team while finding a practice to buy. Ask for referrals and speak to at least three other dentists your teammates have worked with in the past. This process feels almost like performing a background check, it will take some time and be tedious. However, it is well worth the effort!!
PRO TIP: It took me more than six months to find people I was comfortable working with. Find people who will be willing to teach you, without any agenda.
Dr. Sampada Deshpande is a general dentist based in Seattle. A foreign trained dentist from India, Sampada earned her DDS from the University of Washington in 2018, where she is also a current LEND trainee. Outside of clinical dentistry, she enjoys teaching at the New Dentist Business Club, biking with her husband, and reading books on Finance & Management. You can reach her directly at @dr.deshpande on Instagram or visit her website www.sampadadeshpandedds.com for more information.
Editor’s note: We know that finding the right practice can be overwhelming and time consuming. That’s why the ADA created ADA Practice Transitions (ADAPT), a service that matches you with practices that fit your practice approach and lifestyle. We provide customized resources to ensure you feel confident in your decisions and an ADA Advisor supports you during each step of the journey. Learn more at ADAPracticeTransitions.com.