When you decide to own your own dental practice, it is a tough decision: purchasing or starting? Each option has its pros and cons. But purchasing a dental practice is definitely a more stable and lucrative road to practice ownership. Purchasing an existing dental practice gives you an established patient base and existing cash flow. This allows you to realize profits on day one. Sure you inherit problems with an existing practice. You may have employees who require training, or an outdated practice that may require modifications. But a practice with a proven track record of success usually has systems in place, well trained staff, and cash flow to pay the bills.
I recently attended a seminar where a representative from a leading bank. He said that a new start up, in a competitive market, should be able to generate a positive cash flow by month eight. Let me get this straight. I can borrow up to $500,000 for a start up practice, have no patients or well trained staff, loan payments coming due, and I may be able to take home a paycheck about eight months into the start up venture? No thank you. Regardless of the entrepreneurial vision and passion you might have for dentistry, the start up gamble is just that. A gamble with your future that may cost you hundreds of thousands of lost income over the first five years.
Let’s give an example using simple math. A new dentist purchases an established dental practice for $500,000, which was collecting $700,000. Within two years, the practice is collecting $1,000,000. Years four and five the practice is collecting $1,200,000+. In five years, the practice collects $5,000,000+ and the net income to the dentist is $2,000,000, or 40%.
This same dentist decides to start up a practice for $500,000. The first year the dentist collects $300,000, the second year $450,000, the third year $600,000 and $750,000, $900,000 years four and five. In five years the start up office collects $3,000,000 and the net income to the dentist is about $1,000,000, or 35%. Remember there was no paycheck for most of year one.
Even using very generous numbers for the start up example, the difference is $1,000,000+ to the dentist over five years. The existing patient base, patient acceptance, and cash flow exist from day one. Of course there are professionals in the dental industry that will differ in opinion. They have to, their commissions depend on it. Some may even claim that your start-up practice will succeed if you “deck it out” with new equipment, fancy décor and modern technology. But the reality in a competitive dental market is very different. The highest default rate in the dental industry is a start up practice. Ask any bank and they will validate that statistic.
Remember, this is not a 1 year or a 5 year income decision, but a 25 to 35 year income decision. When considering purchasing or starting a dental practice, remember this: instead of gambling your future on a start up practice and taking years to become profitable, do the math with an established dental practice to maximize your chance of success.