Gurtej Varn, leading Wealth Advisor for dentists in Canada, shares the financial aspects dentists need to consider when looking to buy and own a clinic.
Read the audio transcript below:
Dr. Luisa Schuldt (LS): Hi, everyone. Welcome to Brush Up, presented by Oral Health Group, the dental podcast where we speak with industry experts to discuss a variety of topics such as technology, finance and practice management. I’m your host Dr. Luisa Schult, a prosthodontist and periodontist based out of Fonthill, Ontario. Today, we’ll be discussing clinic ownership with Gurtej Varn. Gurtej is a leading health advisor for dentists in Canada. He has been named Canada’s top wealth professional under 40 for 2023. Congratulations! Gurtej has his own podcast called the Dollars and Doctors Show, and is the founder of White Coat Financial Corporation, a full-service private wealth advisory firm for dentists. Welcome!
Gurtej Varn (GV): Thanks for having me on.
LS: It’s a real pleasure to have you and looking over what we’re talking about today, I think this is going to be a very valuable conversation. As much for young clinicians starting out in the field, some of them as associates are considering buying or starting a practice, but also really valuable for those who are a little bit more seasoned and maybe are looking at finding an associate or selling their own practices. It’s really, really going to be a great conversation. Thank you for your time.
GV: Absolutely. I’m excited to be here.
LS: When people are graduating school, they have loads of debt. Not everybody, but some have quite substantial debt. How much do they need to save up to be able to consider buying a clinic?
GV: The technical answer is they actually don’t need to save anything to be able to buy a clinic, because with most major financial institutions in Canada, you’re typically able to get 100% financing on your clinic purchase. So, if you’re buying a clinic for $2,000,000 and you have a $300,000 professional student line of credit, you’ll be able to get $2,000,000 loan from your lending institution in most cases to buy the shares of that clinic and just own it outright. So technically you can buy a clinic your first day out of practice before you even really start earning an income, if it’s an existing clinic. Now, is that a smart thing to do? I would say no, because number one, you’re usually fresh out of school. There’s so much to learn. Luisa, you’re a dentist, so you could probably attest to this, that in dental school, you probably know about 25 to 50% of what you really need to know the day you graduate. And then you learn a lot in your first year and first two or three years. And so, it’s not a smart idea from a clinic management standpoint, but also financial. Really, I find that it’s not a good idea to be buying a clinic when you have significant debts. Personally, whether that is student loans, car loans, even a professional student line of credit, because in the early days of starting a clinic, you will lose patients. You will likely just not be as good at clinic management and as effective as you might want to be, and the profits in the clinic just might not be there to support you paying your loan to the bank in addition to your living costs and your personal loans. So, it is a very good idea to reduce those loans as much as you can before you buy a clinic because you kind of kill two birds with one stone, for lack of better terms. You are learning while you are paying down your loans and then maybe by the time those loans are paid down, if not paid off, you’ll be in a much better position to actually take over a clinic because you understand the actual clinical side of things better. But also the practice management side.
LS: I’m sure patient management, clinical skill as far as speed, is quite different after a couple of years and that can really impact how successful the practice will be. Whether or not other team members are staying on as associates or are leaving immediately can also make a big difference when buying a clinic early on in your career. Is it necessary though? Is this the only option that grads have in the first few years? Do they need to own a clinic to be financially successful?
GV: I would say absolutely not. Of course, owning a clinic – if it is run well – will be a lot more profitable than being an associate. But the old adage of more money, more problems is a very real saying. And when you take over a clinic, you are no longer just a dentist. You are now a business owner and entrepreneur. You are your HR department. You wear a million different hats. So while, yes, there is more profit to be earned, it does come with a lot more responsibility and, dare I say, headache. So, on that note, you can absolutely be very financially successful as an associate. The blueprint for building wealth in Canada is quite simple. It is to earn far more than you need to spend and to take those profits that you know you don’t need to actually spend, even as an associate, and to invest that into buying assets. Whether that is stocks or real estate or other types of assets out there. So, the key metric is to make sure that the spread between your actual living expenses and income are as large as possible. The larger that gap, the higher your chances of building wealth. I have plenty of associates who, I would argue, are in a better financial position than some of the clinic owners I know, because that gap between their actual expenditures and their income is higher than maybe someone who owns a clinic in some circumstances, not all the time, obviously. But in some circumstances. And so, you can absolutely build wealth as an associate, and you can build a tremendous life for yourself, financially speaking, as an associate. You do not have to be a clinic owner to achieve financial freedom.
LS: I’m hearing a few things. So one of them is definitely honing our clinical skills if we want to be in clinical practice, very important. If we want to own and manage a practice – another area of learning for us that we can start prepping for even before buying. And then learning to manage our assets, whether we are associates or owners, sounds extremely important as well. And from what I understand, companies such as your own, White Coat Financial, can support in the latter two and the clinical we have so many resources now. Online, clinical hands-on, many options to work on that. In addition to that difference you’re mentioning where time, responsibility, expenses, that you’re mentioning in owning a clinic, what are some of the other pros or cons of actually buying and owning, potentially managing a clinic?
GV: I would actually split that up into two parts because it’s a little bit of a double-edged sword of owning a clinic, whether it is an existing clinic or building out from scratch. The obvious one, if you’re buying an existing practice, is that you have revenue from day one, hopefully it’s relatively turned key and you can take over that clinic and you have patients from day one. You have staff from day one, you have systems from day one that you can just sort of dive right in and have enough revenue to actually pay the loans that you’ve taken out to buy clinic and, obviously, in a lot of circumstances, it will actually be an associate who buys the clinic from the principal, who might be retiring. And I find that those transitions are a lot easier because the patients already know you. The staff already knows you; you will have less churn when it comes to patients and staff, you’ll be able to retain more people because you’re already a familiar face. And so that’s kind of the pros of buying an existing clinic is you have revenue, it’s turnkey, you have everyone existing. But it’s not all sunshine and rainbows. Buying an existing clinic is more expensive, generally speaking, than starting a clinic from scratch, so you will have the higher costs. You might even inherit some potential staff issues. Very often if you have disgruntled staff or something along those lines, they will usually bring up these problems with the new principal rather than the old one, because they feel like maybe I’ve brought these issues up with the principal, they weren’t handled, now I’m going to bring them up with the new principal and see if I can solve these problems. You’ll typically see people asking for raises and vacations that day you take over as well because, again, it’s a new boss and new rules, so to speak. You also might have patient churn if you are a brand-new associate and maybe the existing patients don’t know who you are, they might not feel comfortable working with you. They might go and see another dentist in the complex or even in the nearby city. The other, I guess, con of starting an existing clinic, is you could potentially have some pretty outdated systems or outdated technology, because, I’ll be frank, if I was a principal and I knew I was going to sell my practice in a 5 to 10 year period, I might not be very motivated to keep the newest equipment, the newest technology and the newest systems, knowing that I am going to sell my practice. So you usually are overtaking maybe some outdated systems and technology and that sort of bundles up the pros and cons, in my opinion, on an existing practice. If you were to buy or start a clinic from scratch, the biggest upside is that it’s typically cheaper. You don’t have to pay for the goodwill, and you have complete control over the systems, the branding, the staff, you have 100% autonomy. Those are really the cons. It is cheaper and you have 100% control. But sorry, those are the pros, but the cons are that you don’t have revenue from day one. You need to start gathering patients and bringing them in to actually pay for the loans that you took out to start your clinic. You also have to wait, you know, for permits, wait times. There’s a lot of drag between the day you decide to lease or buy that unit to the day you can open your doors and start practising. And that could be an extremely frustrating process. It’s also extremely stressful because you have loans and now you’re going to have to associate at other clinics while you’re building up your own. And if you’re doing that, I’m not saying all principals will do this, but very often the principal isn’t going to give you the big cases, the complex cases. You will be sort of limited to bread-and-butter dentistry because it makes sense. If I’m a principal, I’m not going to give you all the best cases. If I know you’re leaving in 6 to 12 months. And again, that’s not everyone. Not everyone does that. It’s just very common to see that. And the other thing, if we’re being frank, is that starting a new clinic, in my opinion, is harder. You have to put in more sweat equity, you have to put in more work. Nothing is turnkey. You have to build it all up from scratch. But those are really the pros and cons of starting a new clinic versus pros and cons of, you know, taking over an existing.
LS: From what you’re mentioning about the first case, buying a clinic, one of the things I’m taking away from what you’re mentioning is the more you know about the clinic you’re buying, the better. All the good things, all the bad side, some of those things that might be hiding might not be hiding as much if you’d had the opportunity to be an associate there. So, if you’ve worked there before or keep your principal on for a certain amount of time, there are some added benefits I would think to that as well.
GV: Yeah, I couldn’t agree more because if you are buying a clinic and you are looking through an appraisal, there is so much between the lines on those numbers. There is culture. There is certain types of staff, there’s personalities. While clinics, yes, are a financial asset, there’s humans behind that financial asset. And if you work there, you’ll understand the humans you’re going to be working with that much better and the numbers will make more sense as well.
LS: Of course, we kind of hinted on this already. When we’re planning, as a recent grad again, what we’re going to do in the five-year plan, ten-year plan, what should we really be doing first? Paying off debt saving, investing or what are some of the factors that might impact how we make those decisions?
GV: I probably should have even started with this. This is a disclaimer that nothing I say here is financial advice. It is just general information, and everyone’s goals are different, so if you are a brand-new grad, your goals are going to differ quite a bit depending on your circumstances. You have a professional student line of credit and it’s $300,000 plus you had to pay for your own undergrad and maybe that was another 50 to $75,000. You’re almost at $400,000 of student loans the day you start practising so your goals are going to be very different from someone who maybe had scholarships, grants and parental support when it comes to school. But I would say, generally, the first step out of school with your first paycheck, so to speak, is to pay down those debts. And that’s my advice to associates today because interest rates are so high. If you were to ask me this question in 2020, my advice would be maybe we can start investing, yeah.
LS: 2% interest rates versus 7% interest rates.
GV: Absolutely. You could maybe start investing in your RRSP or TFSA and other, you know, tax sheltered vehicles. But these days it is, you know, pay down those student loan debts as fast as you can, because the interest on there is quite high and it’s a guaranteed rate of return. The other benefit of paying down your professional student line of credit is it kind of acts as an emergency fund. Something happens and you need to withdraw that money again, you’re still able to on your professional student line of credit. So, you kind of get two benefits for one. And again, this is more nuanced. As you pay down your debt, you might want to start using accounts like the RRSP to reduce your taxes and save for a down payment. And the FHSA potentially even the TFSA, depending on what your circumstances. And so those are kind of the first two things. Home ownership usually gets thrown into there as well because when you’re fresh out of school, you might be in your mid to late 20s and life starts to happen, and maybe you want to move out, maybe you want to buy your own home. So those are the kind of factors that have to be considered because the higher your debts, the harder it is to qualify for a mortgage. But also, the more you focus on paying down your debt, the less of a down payment you’re going to have. Luckily, there are a ton of programs for dentists when it comes to mortgages, like projected income programs, stated income programs, banks are pretty flexible on the type of financing you want. But to sort of wrap up my long-winded answer, these days I’m a big fan of paying down your debt and then moving on to other goals like saving in your RRSP and FHSA before you move on.
LS: Yeah. And you’re absolutely right. It makes a huge difference where Canada is financially overall, those interest rates and everything’s kind of grey, there’s no white and black. Everybody’s personal situation is different. They might be starting a new family; they might have a partner who is either reliant financially on them or has their own income. And these things can really, really change the decision making.
GV: Absolutely. And I find it’s very interesting when I meet with a new grad…let’s say I meet with four or five students that are friends in the same graduating class while they are all usually the same age, and they all went to school at the same place, and they all want to do the same things in the future. My advice to them is so unique to them because of their existing family situation, their existing financial goals, the dynamic that they have with their parents, where they want to live. And so financial planning is a unique one to one thing, very similar to dentistry. Every patient that comes through your door is going to have a different treatment and prescription and diagnosis, even though they might be the same age, same gender and all these things. It’s very unique to everyone. I forgot to add in one more thing that I didn’t mention. Some people might want to set up a corporation this first day that they start practising. But that usually doesn’t make sense unless you’ve paid off all of your loans and you don’t actually need all of the income that you earn. Just to add another tidbit there so I didn’t forget it.
LS: Okay. Yeah, that is also a large part of the decision-making process that young clinicians have to make when they’re going to find that moment for incorporating. So, we focused our attention so far on those younger clinicians. But I did promise we were going to talk about the other end of the spectrum as well. Do you have any advice for dentists who are, you know, they’ve had a successful career ten, fifteen, twenty years now and would like to consider preparing their clinic to be sold or are ready to just do it? What advice would you have for them?
GV: I would say the earlier you can start planning for it the better because the more we can plan your tax situation and your structure and prepare your clinic for sale, the higher your sale price and the more profit that you’ll actually take home from a tax planning stand. So, with a lot of our clients, if they can tell us 5 to 10 years, of course sometimes you have to sell, you know one- or two-year span, but the more leeway we have or the more runway we have, the better we can plan that. And I find that really the things that you need to do the day that you sort of decide that I’m going to sell my clinic, or I will be selling it in the future, is to speak with your accountant, speak with your lawyer and speak with your financial planner. Because we need to factor in, okay, how do we prime your clinic for sale? That’s going to change how you report your financial numbers because, we all know this, as clinic owners, you might actually report far less profit than you’re actually taking home. And you might heighten those expenses, artificially speaking, from a tax planning standpoint. But when you’re going to sell your clinic, you may want that profit number to look a lot larger because when someone’s doing an appraisal, they’re going to want to look at your clinic because they can’t read between the lines that some of those expenses aren’t really necessary. And so, you want to start preparing your tax returns in an effective way. You also want to start doing some housekeeping with your clinic, making sure that systems are clean, that you have standard operating procedures, that your clinic is effectively able to operate without you. And I joke with a lot of our clinic owners, and I say you’re almost going to need to make your clinic ten times better than it is today. And by the time you’re finished doing that process, you might not even want to sell it anymore. You almost have to make your clinic… it’s a very interesting dynamic because you’re cleaning up your clinic, you’re updating your systems, you’re making it more self-sustaining in order to sell it for top dollar. And I’ve found that some people say, well, I’ve upgraded my clinic so much that I actually enjoy working here now. I actually see another ten years that I could do this. And so, I would say that’s kind of step one. You also want to get in touch with your lawyer and make sure all your contracts are secure. Your employment contracts are sort of tightened up. You don’t have a demolition clause in your lease or things of that nature because you want to start navigating those waters before you ever put your clinic up for sale. And this is only if you want to get top dollar. This is in an ideal circumstance where you can plan for it. In other circumstances, maybe you just, you know, you’re not as healthy as you used to be, or you’ve decided that maybe my family life is more important and you want to make that change instantly. You’d still want to speak with your lawyer to prepare for that, but maybe you don’t have the same runway. The other thing I wanted to mention with anyone who does have lots of runway, they have a five-year period, a ten-year period. In a two or three-year period, you want to speak with your accountant, not just to improve the financials on your business, but potentially change your share structure of how you own your business. Potentially you might want to add a family trust that owns the business and maybe adding your spouse or your children to that family trust, because then you can multiply what’s called the lifetime capital gains exemption. There’s a lot of opportunities for you to plan out the sale of your clinic in terms of from a practice management standpoint, from a personal finance standpoint, and a corporate financial structure because all of those things are going to help you, one, improve the price that your clinic sells for, but also improve how much you actually take home from the sale.
LS: This is such sound advice, and it’s as we said earlier, for both ends of the spectrum, it also teaches people who are thinking about buying a practice, what has the seller done over the last few years? Are these permanent changes something that’s going to make their life easier when they start working at the practice or are they going to find challenges where they’ve postponed certain very necessary expenses to make that margin look better there. It’s really nice to see things from both perspectives. Thank you so much for your time, Gurtej. Is there anything else that you’d like to add to our conversation? Any, you know, little piece, a nugget of advice for those young clinicians? I can think of definitely one which is to talk to people such as yourself, who can really help guide them in the decision-making process, and you mentioned a lawyer and an accountant as well. Can you think of any other really valuable tidbits that you would still like to touch upon?
GV: I’d like to say two things and I give this example a lot to any dentist I speak with, whether they are early career, mid career, late career. I always tell them you want to view yourself a little bit like a professional athlete. And I always give the example of Michael Jordan – you want to view yourself as Michael Jordan. Michael Jordan was amazing on the basketball court, but he had a whole team around him to make sure that everything that was not related to the court was taken care of for him so he could focus on being the best on the court. I tell my dentists, I want you to focus on being the best clinician you can or business owner that you can and let me and my team or whoever your advisor is take care of the stuff that’s outside of that because you don’t know what you don’t know. And that’s really the number one tip I have for young associates or anyone who’s in dentistry is focused on the dentistry and have a professional team to manage the actual financial side of things. You’re usually going to end up a lot happier and wealthier as a result of that decision. And the other thing I wanted to mention about clinic ownership, because it’s a question that comes up every single day of the week with my clients when they’re young associates about whether they should buy a clinic or not. And I would I really want to hammer on the point that you do not have to own a clinic to be financially successful. Yes, you will make more money, but it is not mandatory for you to do so. And you really need to understand yourself, your personality, the stress levels that you can tolerate, what your family dynamic looks like. There’s a lot that goes behind that decision beyond money. And I always say this as well, is outside of the money, I personally find it makes sense to own a clinic if you really want autonomy. I think that is the number one driving force between whether you should own a clinic or not. But do I want autonomy over my branding, my procedures, the types of cases I work on, and that really should be the number one driver of whether you want to own a clinic or not. Not the financial aspect.
LS: You were talking earlier about how a clinician needs to wear all these different hats if they are owning a practice. But some of those hats very much, like you say, can be passed on to somebody else. If you love the management side, you might wear that hat a good amount of time. If you don’t, you can have a wonderful business management team that is taking care of all of that for you and you still own and have that autonomy. There’s a lot of different ways to make your professional life fit, as you say, with your personal needs, your objectives, your personality. That’s a great way to put it for us. Thank you so much, Gurtej. Thank you for your time, Gurtej, and to our audience. Thank you so much for listening. Be sure to subscribe on Spotify and follow us on social media to be notified every time we post a new episode. Keep brushing up!