Should You Start Up a Dental Practice?
By Douglas C. Alexander II
SAALFELD GRIGGS PC
Some doctors buy existing practices, but others may choose to build their practices from the ground up. This approach is not for the faint of heart, but for those with sufficient energy, enthusiasm and entrepreneurial spirit it can be an exciting alternative to buying. Like all things in life there are advantages and disadvantages. First, let’s explore some of the basic differences between buying and building. Then we will briefly describe the basic steps to a practice start-up.
The primary advantage to purchasing an existing practice is that it is proven. The seller has presumably operated in that location for an extended period of time and has been successful. The practice will be priced based on its cash flow and if priced properly you should be able to produce sufficient revenue to both service your debt and to make a good living. The risk of a practice purchase is relatively low if your clinical skills and people skills are good. There is a reason that lenders are willing to loan in many cases 100% of the purchase price plus additional operating capital to new dentists who come out of school with significant student debt – it is because the statistics show that buyers of strong existing practices will be successful and pay their debts. However, that lower risk to the dentist comes at a higher price. You are not just buying dental equipment and leasehold improvements; you are purchasing the goodwill of the practice. The goodwill consists largely of the patient base, as well as the seller’s reputation and location. Goodwill often constitutes more than 50% of the purchase price. Instead of building goodwill, you are buying it. Thus, the cost of initial entry will be higher, but the risks of failure or slower growth will be minimized.
In contrast, when you choose to pursue a start-up, you begin with a clean slate. The benefit is that you can build your practice from the ground up just the way you want, including location, equipment, office setup, staffing, employment practices and marketing. You take none of the “baggage” that may come with an existing practice. You get to select everything. In most cases you will spend less than buying an existing practice with its goodwill, but you will be assuming the risks associated with building your business once you open the doors. If you are successful and if that success comes quickly, you will have made a very good decision. However, unlike buying a practice where you can step in the door and simply start practicing dentistry, with the start-up there are lots of things you will need to do before you even open for business. They take time and diligence and you will need a team of skilled professionals to help provide guidance and carry the load. Of course the tradeoff of more work and more risk is the potential for higher reward. You are building something from nothing! The list of action items to build a start-up practice is significant, but if you surround yourself with the right team of professionals it is certainly manageable. Here is a list of some of the major things you will need to do and some basic considerations:
1. Find a Suitable Location –
a. Location, Location, Location – this adage is just as true in dentistry as it is in real estate investing. The first step to building your practice is to find a location that will lead to success. Visibility and access are important because you are trying to attract new patients. Finding a skilled and experienced commercial realtor who is familiar with the needs of dentists and spaces that may be available and suitable for a dental office without excessive remodeling costs is critical.
b. You also want to evaluate demographics. How many dentists are located within a short distance of your chosen location? How saturated is the market? Are there ways in which your practice will be readily differentiated from your competitors? Is the community growing? Consultants can be hired to assist in doing a demographic study and this step can help you pinpoint the right place to locate your practice.
c. Converting space that is not set up for dental operations to dental suitable space is not an inexpensive prospect. Most spaces you find will require substantial leasehold improvements including plumbing which can be costly. You will want to have a contractor who is experienced in building out dental spaces on your team so that you can get an accurate estimate of anticipated costs for a remodel and the time it will take to complete. Be sure to consider remodeling costs before committing to a lease.
d. You don’t want to rent too much space, because every additional square foot will cost you more per month, but make sure you have room to grow. You will be making a significant investment in your office. Relocating later is both costly and disruptive to your practice. Consider how many operatories you will need once you have grown the practice to optimize your profits. You don’t have to equip them all at the start but you should have some space to expand as you need to.
e. Whether you rent a space or buy one, you should have legal counsel skilled in evaluating commercial leases and property purchases assist to make sure that the terms are commercially reasonable and that you will have the flexibility you need to grow in that location. Not all leases are the same. Buried in what appears to be a lot of “boilerplate” language are some key points that need to be considered. You execute a lease without legal advice at your peril.
2. Equipping the Office –
Once you have found the space, you will need to purchase and install all of the equipment that your practice will require. Discuss this with the team of experts at the local dental supply. They can help guide you through the process. They have probably seen just about every possible configuration of office imaginable and know what works well and what does not. They can help you buy smart and maximize your limited investment dollars. Remember, you are assembling the foundation of your dream office, you are not building it all today. Be sensible in what you purchase, knowing that you will have time to add more equipment and additional specialty items as the practice grows.
3. Insuring Against Risk –
A variety of insurance coverages will be needed. That insurance will be both to control your risk and to satisfy the requirements of your lender as a condition of borrowing. You will need malpractice, property casualty, disability and life insurance in place before you open the doors. In addition you may want to consider “employment practices” coverage which will protect you from claims by employees. Find an insurance broker who specializes in serving dentists and who can provide you competitive quotes for each type of coverage you need. Don’t put off making contact with the broker and applying for your coverage. Sometimes getting a response from the insurance company underwriter can take more time than you anticipate and can delay closing on your loan and moving forward with construction or start-up.
4. Money – Show me the Money!
Money is another key component to building your practice, and you will most likely need to borrow it from the bank. The money is needed for a whole host of items, including the security deposit for your leased office space, construction costs, equipment and supply purchases, fees payable to consultants including demographics, accounting, marketing, insurance and legal. Another use not to be overlooked is your need for operating capital – the money you will need to pay your employees and keep the doors open for the first few months while you are building the business and have too few patients to break even. Use an experienced lender who has helped their clients building out and starting up other successful practices. This is not the time for a lender who has not worked with dental start-ups to learn the ropes. Your banker can be an incredible resource both in terms helping you in your analysis and helping you assemble a skilled team of experts to help. Your bank wants you to be successful, and their advice and input is invaluable.
5. Marketing –
The day you open your doors, you patient list will most likely look like a list of your close family and friends. You need patients!! The only way to get them is to have an effective marketing plan. Your marketing will likely include direct mail, print advertising, personal contact with potential patients as well as referral sources, and certainly the web and social media. You should be developing a marketing plan. Unless you were a marketing specialist before going to dental school, your best bet is to engage a marketing firm which specializes in helping dentists, particularly those who are building from scratch. Make this contact early and engage your expert. You need to anticipate the cost of your marketing efforts, and you can actually begin some marketing before you even open the doors. The more you can build relationships and attract patients to your practice quickly, the sooner your practice will become profitable and reduce your need to live off of borrowed capital.
6. Personnel –
You won’t be running your office by yourself, so you need to begin thinking about how you will recruit and hire assistants, hygienists and office staff. You may want to keep your numbers small at the beginning, but don’t underestimate the effort it will take to interview and select appropriate personnel for your office. You should have personnel policies prepared by legal counsel so that employees have a clear understanding of how the office will operate and what the rules of operation will be. You may be tempted to see if you can find policies adopted by a friend, but these policies do change over time as the law changes. They need to be current, and they need to be appropriate for your operation. This is where it is better to avoid cutting corners and having policies prepared by your attorney that will work for you as your practice grows.
7. Accounting Issues –
As a new business, you will certainly need help setting up your accounting system. That includes not only basic tracking of income and expenses, but also establishing a payroll. You will want a dental CPA to help you set those systems up. However, as important as this is, your CPA can and should also be your go to resource for developing your cash flow plan for the practice and projections for the first 12 months. You will need this as you consider how much money to borrow and the bank will want to see your projections as well. A CPA who specializes in handling accounting matters for dentist will be a key member of your team.
8. Legal Issues –
There are a number of legal issues to be considered with a startup. Your dental lawyer, with input from your CPA, will recommend a form of business. Choices typically include a professional corporation which makes an “S” election, or an LLC. Changing your entity later can be done, but sometimes it comes at a tax cost in addition to unnecessary legal and administrative costs. It is far better to do it right the first time, anticipating what your business needs will be over time rather than just today. In addition to setting up your business entity, your lawyer will assist with making certain tax elections, reviewing your lease and construction contracts, and drafting your personnel policy. As with any other professional you hire, you will be best served if you engage counsel with extensive experience working with dentists.
Only you will know whether buying or building is best for you. Building a start-up practice can be exciting and very rewarding. The list above is not intended to be all inclusive. You will find lots of little things to add and details to be attended to. If you put the right team of professionals together, your odds of success will be vastly improved. One day you will be able to look at your established profitable practice and proudly say that you built it, that it is all yours!
For more information related to dental practice start up, please contact Doug Alexander at 503.399.1070, or DAlexander@SGLaw.com.
About the Author:
Doug is licensed in both Oregon and Washington and has been representing dentists in sales, transitions, and operational legal matters for over 30 years. His practice predominantly focuses on the representation of dentists throughout the Northwest. He leads the firm’s dental industry team which includes lawyers specialized in representing dentists in all types of business legal matters, including real estate and land use, corporate and tax, employment, litigation, employee benefits and estate planning. He regularly speaks and writes on dental related topics. References and a list of representative transactions are available upon request. Visit http://www.sglaw.com/industry-teams/dental-practices/ for more information.