Many dentists choose to work in one physical office and are able to produce enough dentistry and earn sufficient income to achieve all their financial goals. However, over the past few years, it seems that more of our clients are strongly considering opening a second office. This major career move can be extremely advantageous, but it also comes with financial risk and significant time constraints on the doctor.
Prior to opening a second office, there are many things that the doctor needs to consider:
- Is my existing practice consistently performing profitably
- Does my current office no longer offer additional space to grow?
- Do I have the capacity to do more production if given additional space?
Answering yes to these questions is a good start. But one must consider the demands associated with a second practice as well.
Consider the time, attention and money that goes into your current office. The same demands will come with your second. What aspects of your career bring you enjoyment? Is it practice management, or are you happiest when you can really focus on becoming a clinical expert. Does additional debt make you feel uncomfortable, and are you content with being the sole doctor in your practice? All of these psychological details should also be thought through before making a decision.
Once you have determined you are ready to move forward with the process you will now be faced with even more considerations:
- Should I purchase an existing office or start up a new one, and where?
- Do I need an associate to help with the additional production and oversight of the new location?
- Do I want to incur more debt for the second location or use cash?
In the beginning of 2015, a client mentioned that he was interested in owning a second dental practice. The client currently owned one office with collections of $2,200,000 in the previous year. The practice already had an associate doctor producing 50% of the doctor production, as well as a solid hygiene department producing 33% of the overall office’s production. The practice’s prior year overhead was 60% of collections before doctor costs and perks. Compensation for the associate doctor equated to another 12% of overhead. Overall, the practice’s financial health was great.
This particular client’s practice was in a standalone building, with no ability to expand the practice’s overall square footage. The practice had just built out its final two operatories two years prior. Extended hours were offered during the week so adding additional hours to the schedule was difficult. The practice’s schedule was consistently full for both the doctors and the hygienists so additional marketing efforts to continue to grow this office would have a diminishing level of return for the practice.
At this point, the client decided that they were ready to begin the process of adding a second location.
Physical location: The client’s first step in this process was to begin a demographic analysis of the surrounding area. The goal was to find a nearby location that would not cannibalize the same patient population as the existing office but would still be within a reasonable proximity to avoid unnecessary travel time. The demographic study identified a handful of areas that were suitable.
The client’s situation was further analyzed to determine that buying an already established practice was a better option than starting up a new office. Buying an established practice was going to be the more expensive route, but in most cases it ultimately proves to be well worth it. The established practice would provide the client an immediate patient base and, therefore, immediate cash flow. Additionally, the established practice would have experienced staff where a new office would need to have a staff assembled and trained on how to operate a dental practice.
Adding an associate: The seller of the practice stayed on as a provider in the practice and was paid 33% of his net collections (after courtesies & refunds). Buying an existing practice afforded this client the opportunity to keep both the selling practice doctor and employees on staff. If this is not possible, and you currently run a single doctor practice, a new associate will need to be brought on.
Since you cannot be in two places at once, it will need to be decided where you want to spend your time. The existing practice, or the new one. Most pick a hybrid model where they spend 2-3 days at each location, especially during the practice transition period.
Payment: The client identified a practice for sale through a practice broker in one of the suitable areas. The practice identified had collected $1.8 million in both 2013 & 2014. The practice had some overheard issues that we identified during the due diligence period. The largest issue was the practice’s staff costs that totaled 39% of collections (excluding doctor salaries). The target practice also had supply costs that were 10% of collections. This allowed the client to offer a purchase price of $1,115,000 on the practice.
This price included the value of accounts receivable. The value of the accounts receivable was approximately $200,000. By purchasing the existing accounts receivable, the buyer was able to begin collecting normalized cash flows from the practice in the first month as opposed to borrowing additional working capital and waiting 30-45 days for insurance reimbursements. The deal was structured as an asset purchase, as opposed to a stock purchase in order for the buyer to be able to deduct 100% of the purchase against their taxable income. The client then set up a separate entity that elected subchapter S status. This new entity purchased the assets out of the seller’s entity.
Next came the discussion on how to come up with the cash to purchase the practice for $1,115,000. Similar to when financing a house, many will decide to put down 20-30% cash down and finance the rest. The current interest rates is also very important to consider when determining how much money to pay in cash versus finance.
The client received financing proposals from multiple lenders. The lenders all had financing offers with terms ranging from 7 -10 years. The client felt like the longer-term of 10 years would be better for this acquisition since there were practice overhead issues that needed to be fixed. The interest rate on the loan that we selected was 4.5%. After considering the interest rate is fully tax deductible, the effective rate is only about 2.5%. With these low financing terms, the buyer decided to borrow 100% of the purchase price and put no cash into the deal. This allowed the cash the client had on hand to be invested in other areas.
After the Acquisition:
Once the purchase was completed, changes begin to take place right away. The buyer was able to quickly implement staffing efficiencies between the two offices by leveraging role sharing for front desk and office staff. The staff costs decreased from 39% of collections prior to acquisition to 24% in the first full calendar year after the acquisition (this saved the client about $300,000).
The practice was also able to increase collections to over $2 million after acquisition. The increased growth was largely attributed to adding doctor days. The seller stayed on for a year, and the buyer also hired a new doctor to work in the practice who was paid $700 per day. In that first full year after the purchase, the net-free cash flow earned was approximately $300,000 with a very minimal initial investment.
Additionally, the value of the practice increased substantially due to the growth in collections and decrease in overhead. At the end the first year, the practice would have likely valued 15-25% higher than when it was initially purchased.
Having a second office can be a very lucrative way to increase your income as well as your overall net worth. However, deciding you want to do it is only the first step. Thinking through and understanding the implications of each decision, from location to financing terms is imperative, yet can leave you feeling exposed. As you go through the process it is important to seek out help from colleagues and advisors and consider all your options.