It is a privilege to have served the dental profession for many decades. There are many lessons to impart when one has experienced dentists thriving in spite of challenges including interest rates of 20% during the early 80’s, real estate melt downs, including that of the early 90’s, SARS, 9/11, dotcom bust, Covid, etc.
Consider these guiding principles when launching your career and buying a dental practice.
Launching your career
A) Continuing Education – An Excellent Investment
Regardless of the state of the economy, student and other debt, continuing education (CE) often generates an excellent return of investment. Where one has significant debt, consider CE courses which will pay for themselves in a year or less. Hence, prior to taking CE, determine how this skillset will help you to serve patients more effectively and comprehensively reflecting on the related service/fee code.
CE can be viewed as a way to acquire more tools so that you can competently handle more jobs. CE may help you to pay down your debt.
B) Best Investment for a Given Level of Risk
The path to become a dentist is rigorous, demanding, and time consuming. Therefore, it should be no surprise that a dentist’s best investment for a given level of risk is owning their dental practice. It is a stable profession/business in spite of the economy and competition.
C) Timing the Market
Timing the market, whether it involves purchasing a practice, home, other investment is not suggested. Instead, consider what needs you have and whether the purchase addresses these needs. If one has obligations/needs arising from supporting one’s family, paying off debt, including student debt, then does this purchase address this obligation/need/debt?
D) Immunize Yourself Against Viruses
From a financial perspective, “financial viruses” arise from liabilities including loans and other circumstances which will generate future demand for money such as supporting family members, children’s educational costs, medical issues/costs, retirement, etc. To immunize and protect yourself against these financial viruses, it helps to have matching assets which offset these current or future liabilities.
Example:
You currently own your dental practice and rent space for your office at $8,000/month. You expect to be practising for 20 years and retiring in 20 years’ time and living 30 years after your retirement. Buying your own dental building will result in financial pain now, through forced savings and borrowing money. This financial pain should be compared with the rent you would have paid had you not purchased your dental building. In 20 years’ time, this dental building should be debt free and providing a retirement income via rental income. This is an example of immunizing yourself against a known future financial virus/liability. Retirement creates the need for money and your debt free dental building serves to pay for this need.
Buying A Practice – Guiding Principles to Consider
1. Long Term Investment
Buying a dental practice is a long-term investment. How do we know this? Banks who lend dentists money to buy dental practices do so using repayment terms of 10-12 years. Banks expect it will take you 10-12 years to repay them the loan you borrowed to buy your dental practice. Compare these 10-12 years with the number of years they usually lend you money to buy computers, hardware, software, equipment of 3-5 years. Hence, when buying a dental practice, your investment horizon should be long term. If you intend to buy and flip your practice shortly thereafter, expect to incur a loss and we do not suggest buying a practice to flip. It is not in the patients’ or your best interest to buy and flip a dental practice. Given the decision to purchase a practice should be with a long-term horizon, don’t base your long term decision on short term circumstances or facts. If you think current interest rates are high and may be lower in a year or two, then the “temporary” high interest rates should not be the reason to not buy a dental practice.
2. Fishing Rod vs. Fish
Your own dental practice, dental building, and education are a fishing rod. Why? Like a fishing rod, you can use it to feed your family. Protect and preserve your fishing rod. Doing so, protects your family. Your practice and education generate cash to feed your family. Your fish consumes cash. Examples of fish include expensive cars, boat, cottage, jewelry, home, etc. When I include a home in the fish category, it creates a fire storm. Many think a home is the first “investment” they should purchase after graduating. Looking beneath the veneer, a home consumes and does not generate cash. Additionally, wherever one buys a practice, there are usually several homes for sale but only one or a few practices for sale. Also, buying your home first may restrict your geographical search for practice opportunities and may create a financial hurdle when applying for loans to buy your practice.
3. Static Energy vs Kinetic Energy
Many dentists took physics. A fundamental physics concept is static vs kinetic energy. It takes much energy to get a car from zero to cruising speed and much less energy to maintain cruising speed once it has been attained. That is the essence of static vs kinetic energy.
The lesson of static vs kinetic energy applies to the business of dentistry. Hence, it is a better use of one’s money to pay a premium and buy a practice with 1,400 active patients, than get a practice with 400 active patients at a bargain. The time, sweat, stress, and pain one will endure to build a practice with 400 active patients into a full practice with 1,400 active patients is greater than paying a premium for a full practice in the first place.
4. Time is Money
If you are currently making $180K/year and take home $120K/year after taxes as an associate, this sets the hurdle when buying a practice. Hence, an associate making $180K/year should ask, “If I buy this practice, after paying all expenses, bank loan, repayments, will I have at least $120K/year after taxes?” Consider that the associate’s time in this case is “worth” $120K/year after taxes.
5. Humans With or Without Teeth Need Dentists
Humans with or without teeth need dentists. Humans make dentistry, to a great extent, recession and disaster resistant. The events of 9-11, Covid and SARS, 20%+ interest rates support this assertion. Dentistry is an essential service.
6. Dentists in the early 80’s survived 20%+ interest rates.
How did dentists survive 20%+ interest rates in the early 80’s? A major reason was the lack of dentists relative to the population, i.e., less competition. Additionally, most dentists did not buy a practice. They started a practice from scratch with no patients and thrived as the competition was much less. Today dentists face greater competition than in the early 80’s when interest rates were 20%+. Today one can buy/have a practice that is less saturated with dentists by identifying areas where the ratio of patients to dentists is 1,400:1 or more. Contact your provincial dental association who may supply you with this and other demographic information/data.
7. Risk, Value and Cost
One may incorrectly conclude that starting a practice with no patients at a cost of $1 million is less risky than buying a practice, paying a premium, at a cost of $4 million which generates cash flow of $700K. One may incorrectly think that since the $1 million startup cost is much less than the $4 million practice purchase that the risk is less. When you review the cash flow from the startup option and compare it with the purchase option, you realize that the $4 million purchase option is less risky because of greater cash flow and greater the certainty of the cash flow. Cash flow and the degree of certainty or predictability of cash flow determines the risk. If a practice has been generating $700K cash flow each year for the past 5 years, then the chances of the practice generating $700K in year 6 is much greater than a practice that was previously generating NIL cash flow.
It is better to pay a premium and buy a purchase that has a history of generating stable cash flows than to buy a bargain practice whose historical cash flow is up and down/volatile. Focus on value not cost.
8. Having served dentists since the 1980’s certain things remain constant.
There is much greater risk of dentists sustaining financial ruin from drugs, gambling, alcohol, and divorce than from rising or falling interest rates, some virus or disaster. Indeed, many disciplined dentists have done exceedingly well financially in spite of whatever the economy has thrown at them. These dentists spend less than they make, accept disappointments as a lesson learned, never making the same mistake twice, and smooth out their “highs” and “lows”, never getting too depressed or celebrating too much. Dentistry has been and is an enduring business and investment. It is still an exceptional profession.
About the Authors
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Basil Nicastri*, CPA, CA and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca / louise@dcy.ca / basil@dcy.ca / eugene@dcy.ca. Visit our website at www.dcy.ca. This article is intended to present ideas and is not intended to replace professional advice.