If you’re reading this, you’ve most likely already cleared the first hurdle to owning a dental practice: Making the decision that buying a practice is the path you want to take with your career. After all, it’s not an easy one to make. Whether you’re just out of dental school, working in corporate dentistry, an associate dentist in a private practice, or continuing to build your dental empire, the financial commitment of ownership can seem risky.
It can also be immensely rewarding, especially when you take the proper steps to position yourself in the best way possible financially and mentally.
If you’ve gotten to this point in the consideration process, you likely understand the many financial benefits of owning a dental practice. We’ll list the top ones here as a refresher.
- Security – Leaving your employment status to someone else is risky
- Profitability – The average associate makes 30% of collections, the average owner makes 40% or more
- Tax Planning – Practice ownership offers many opportunities to lower your tax burden
- Retirement Planning – Ownership allows for more vehicles to save for retirement in tax-advantaged accounts
- Investing in a Community – Laying down roots in a community can be very rewarding
- Building an Asset – Owning a successful business allows you to build equity, similar to buying a home vs. renting
The many benefits aside, the prospect of navigating the buying process can be daunting for both a first time buyer or an existing business owner. Thankfully, it doesn’t have to be. According to CPA Sarah Oliver, the key is to plan, prepare and build a partner network you can trust.
“The buying process can be intimidating and can lead to some emotionally charged decisions,” says Sarah. “Having an advisor to help not only create a plan, but to help remove the emotions, pull you out of the weeds and give you the confidence that you’re doing the right things, in the right order, is essential.”
Sarah counsels prospective owners to think long and hard about what type of practice or partnership they want. Do you want to buy 100% of a practice? Buy into a partnership? Start your own? Even if you’re already set on which direction to go, it pays to talk to a trusted advisor who knows the dental industry. Each ownership scenario should be considered both from a short- and long-term perspective to truly judge which one is right for you.
That decision will lead you to the next step, choosing the area you want to target. Sinking roots into a community is vital for the long-term success of a dental practice, so choose the city, town and community wisely. You’ll want to be there a long time. This is where consulting with a dental practice transition specialist can really pay off.
“Things like the demographics, competition and economics of a location are obviously important. But equally as important is being sure that the community is right for you and your family,” says Sarah. “Consulting with a firm that specializes in helping dentists buy and sell practices, like our partner NDP, can help you check off all those boxes.”
Now that your target location is defined, it’s time to think about how much cash on hand you’ll need to get approved for a business loan. The good news is, business loan lenders will typically lend 100% of a dental practice loan with no money down, so you don’t need to worry about saving for a down payment.
You do, however, need to make sure you have enough liquidity, or cash readily available to look attractive to lenders and get the best rate possible. Typically, lenders require the buyer to have anywhere from 5% to 10% of the total loan amount in liquid capital. Let’s say your loan is $700K, you’ll need to have between $35K and $70K in liquidity.
With a ballpark figure of how much liquid capital you will need for loan approval in mind, it’s time to start saving money. Developing and sticking to a budget isn’t easy. Between student loans, credit card debt and living expenses, saving money is always challenging. That’s why Sarah counsels her clients to give themselves ample runway, starting the savings process anywhere from six months to a year in advance of the purchase.
“It takes time to build up the savings required to buy a dental practice, but it also takes discipline,” says Sarah. “Can you live without that new car for a year or take that big vacation next year? Everything adds up, and a good financial planner can help find creative ways to save while not affecting your lifestyle too much.”
Other ways to improve your financial position include paying off small loan balances, keeping rent low and holding off buying that new car during the savings process.
To save money even faster, Sarah recommends focusing less on paying down student loans during this time, in order to build liquid cash faster.
“Most first-time dental practice buyers focus on paying down student loans to look better to the banks,” says Sarah. “It might seem counterintuitive, but lenders really want to see cash and tend to look past student loan debt.”
Home mortgages fall into that category as well. According to Sarah, a home mortgage doesn’t have to be an inhibitor to purchasing a practice.
No matter where you are on the path to purchase, educating yourself at every point during the process can help smooth out the bumps down the road. You can find helpful resources at the CWA and NDP websites, covering everything from prioritizing your savings to a downloadable buyer’s checklist.
While doing independent research is important, Sarah stresses that the most crucial part of the process is to resist the urge to go through it on your own.
“Building that team of professionals around you will always get you to your goals faster with less stress along the way,” says Sarah.
To help her clients keep track of who to bring onto the team and when, Sarah created steps to follow throughout the buying process:
- Choose a Location by consulting a dental practice transition specialist
- Develop a Savings Plan with the help of a trusted CPA
- Build Liquidity Faster with the advice of a financial planner who specializes in dentistry
- Explore Your Loan Options with a banking partner you can trust
- Understand Any Legal Ramifications by adding an attorney to your team of advisors
- Engage a Tax Advisor or CPA to walk you through the tax consequences before negotiating your purchase
- Buy Your Practice using a partner that specializes in locating, valuing and buying dental practices like NDP
With a little patience, a lot of discipline and the right team in your corner, owning your first, or next dental practice will soon transition from dream to reality.