Can I Afford A $700,000 Practice?
Every entrepreneur has heard the adage, “You’ve got to spend money to make money.” In the dental profession, that advice is tempered by the reality of dental school debt, which often exceeds $150,000.
It is understandable, then, that young, responsible, and prudent dental professionals are conflicted over assuming additional debt to move toward goals they set while in dental school.
But the enormous benefits of acquiring an established, high-grossing, highly profitable practice will certainly outweigh the financial risks, if the buying opportunity is good, and the value of the practice is accurate. Other factors, including interest rates, financing terms, and the purchaser’s ability to maintain the production of the Seller are additional considerations.
Viewing the purchase of a high-grossing practice as a financial burden instead of a golden opportunity is a common misperception with many recent grads. While it is true that assuming an additional large amount of debt seems imprudent when one already has substantial financial obligations, when it comes to investing in your professional future, this shortsighted thinking does not necessarily apply. If you are a high producing practitioner, and can maintain the levels of service which exist in a thriving practice, the purchase of a high grossing practice is essentially ensuring a larger income stream for you now and in the future. Of course, increased income from a busy and established practice will greatly enhance your ability to generate and accumulate wealth.
There has been a trend in recent years for more recent grads to consider a practice start up versus purchasing an existing practice. This is due to the lack of practices to purchase in a specific area or the desire of the doctor to design and equip a practice that they want to have their imprint on. If the reason to consider a start up over a practice purchase is the latter, it may be wise to reconsider that decision, as the income loss over an entire career by starting from scratch may never be recouped versus purchasing an existing practice with a solid profit history. You can always invest in an acquired practice by replacing equipment and technology, if it is not an ideal situation.
Before deciding on a “start-up” option instead of purchasing a high grossing existing practice, one must consider the cumulative potential for wealth accumulation. To illustrate this point, assume that you purchase a $700,000 practice, which realizes annual profits of 37 percent — or $259,000 a year, before debt service. Over a 20-year period, without ever considering any increases in income due to practice growth, the accumulated income would translate into over $5.1 million in earnings. Let’s assume that you paid $450,000 for this practice and the loan payments were made over ten years at an interest rate of 8.5%. That would translate into monthly payments of $5,308 over the course of the loan. So does borrowing $450,000 to purchase a potential income stream of $5.1 million appear to be a worthwhile investment versus investing $450,000 in a start up with no cash flow? The answer, of course, is “yes.”
Since many startup differentials range from $300,000 to $500,000, based on location, the investments for a start up and purchasing a higher grossing practice are not so far apart. However, if there are no patients, there is no income, and it will take a considerable number of years to approach the earning stream offered by an existing practice with the high probability of never catching up to the 20 year earning capacity that an existing practice purchase offers.
There is no question that with today’s economic climate getting financing for a practice acquisition is becoming more challenging. Good credit is paramount and approving loans is more difficult for the recent grad. In the end, finding a strong practice with great cash flow and other qualities will be even more critical than before.
When all the factors are considered, the ultimate decision about purchasing a high producing practice rests with you. Only you can decide whether it is the right time to purchase. Only you can determine how much debt and risk you feel comfortable assuming. And only you know how willing you are to meet the demands of a high producing practice. If you assess the risks, review your ultimate goals as a dental professional, consult with your financial professionals and work through the math, you will reach a conclusion you can live happily with, now and in the future.
Dr. Thomas L. Snyder is Managing Partner of The Snyder Group, LLC, a nationwide practice transition and financial management consulting firm. With more than 75 years of experience in the field, The Snyder Group can provide you a full range of services relating to practice transition matters and retirement planning. They can be reached directly at 1.800.988.5674.
If you would like additional help, email Dr. Snyder at email@example.com.
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