Factors to Consider when Starting or Buying a Dental Practice

Factors to Consider when Starting or Buying a Dental Practice

 

Starting a practice from scratch or buying an existing one is a significant investment, and several important factors must be considered before embarking upon the endeavour. Typically, this discussion of whether to start a practice or purchase one happens after a dentist has worked as an associate after graduation. Working as an associate allows you to gain valuable dental experience and observe a working practice in terms of practice management, human resources, etc. Starting a dental practice and buying an existing one have advantages and drawbacks. In the article below, we have outlined some of the primary considerations for each route.

Starting a Practice

Starting a practice provides you with a lot of freedom in making decisions but also increases risks to your practice.

Benefits

• Complete Control: With starting a practice, you have full control of the most critical factors of your practice, namely, location, staffing, how you decide to operate the finances, branding, and the size, culture and direction moving forward.
• Can be cheaper than buying an existing practice: When purchasing an existing practice, you are paying for the established patient base, existing system and procedures and the established reputation as shown with return patients. There can be significant goodwill factored into the purchase price of the practice. If you are willing to work hard to build your patient base and achieve profitability, you will find that the cost of starting a practice is typically cheaper than purchasing one.

Disadvantages

• No existing patient base: one of the main benefits of purchasing a dental practice is the existing patient base and goodwill. By starting your practice, you will be required to attract patients and stand out in a competitive market.
• Slower return on investment: When you are starting a new practice, there is an upfront cost of Equipment and Supplies (dental chairs, x-ray machines, dental handpieces, disposables and more), Practice Overhead (rent or mortgage payments, utilities, insurance, staff salaries and marketing expenses) and Malpractice Insurance. While you can scale your practice as your patient base increases, many fixed costs are required to run a practice. You may face losses in the first few years as the patient base grows to build a consistent revenue stream to cover your upfront costs.
• Are you comfortable with your practice management skills: As a practice owner, you are essentially a small business owner that provides dental services. While dental school teaches you dental skills, there is a slight focus on being a business owner and an entrepreneur. As you get your practice off the ground, there may be some growing pains.

The most successful start-ups are typically in a relatively under-serviced or unsaturated locations. They start small and only add additional operatories once billings and cash flow can support it, have an established and effective recall program, and hire good support staff.

Acquiring a Practice

When buying a practice, you are inheriting an existing patient base and employees, which provides more stability through the first few years after the acquisition.

Advantages

• Established Patient Base and Reputation: With an existing patient base and goodwill, a purchased practice will be able to provide consistent revenue and cash flow from the date of purchase
• Proven Business Model: An existing practice already has systems and procedures in place, allowing for a more streamlined operation and less frustration. Additionally, it has proven market dynamics regarding location, demographics and pricing, etc.

Disadvantages 

• More Expensive: When purchasing a practice, there is a premium for buying a turn-key operation and the ability to be cash flow positive from the date of purchase. When purchasing, looking at the previous financial statements and analyzing what other practices have sold in the same geographic area is essential to ensure you are paying a fair price.
• Additional Costs: When buying a practice, you typically purchase it as it is. This may mean that the practice could have outdated equipment and décor that need to be updated, which would be an additional cost on top of the purchase cost.
• Availability: When looking for a practice, there may not be one that fits all your goals and the direction you would like to set for your practice. This can lead to a shortage of viable practices available to purchase.

Typically, the smoothest and most successful acquisitions are ones where an associate has worked at the practice for a few years before buying it. This allows patients and staff to be familiar with the new dentist and leads to lower patient attrition. Additionally, if you are purchasing a practice as an outside party, if the selling dentist can stay on for some time can help lead to a smoother transition to the new owner.

Conclusion

While both purchasing and starting a practice can help you reach your goal of being a practice owner, they both have advantages and disadvantages to consider. Typically, purchasing an existing practice can be more profitable than starting one due to the established cash flow and time cost for a new practice to acquire a full patient roster. There are exceptions, such as opening in a less saturated and less competitive market, such as a rural area. This also can have drawbacks, as when it comes time to retire, you may find it harder to sell than an urban practice.

To learn more about the options for financing an acquisition or setting up your own practice, please feel free to reach out to Bruce McTavish, Regional Market Leader - Healthcare Finance, at bruce.mctavish@bmo.com