The idea of selling a dental practice to the vast majority of today’s dental students may seem unreasonable as most students are saddled with significant debt upon graduation. Most new graduates desire ownership of a practice and with some intelligent fiscal decisions, it can be a reality. Of course everyone knows a dental student who has purchased a new car or gone on expensive vacations courtesy of their student loans. The reality is that student debt is continually increasing as tuition and fees also rise.
According to the American Dental Education Association’s Survey of Dental School Seniors, the 2013 Graduating Class’s average educational debt at graduation was $215,145 (nearly 2.5 times the level in 2000) with public dental schools averaging $189,112 and private dental schools averaging $249,034; and this average includes students with no debt. Only 10.8% of new graduates financed their dental education without debt meaning 89.2% of graduates have student debt and roughly 50% of those graduates have debt levels between $100,000 and $300,000. A massive 18.5% have debt levels between $300,000 and $400,000 and 9.4% have debt over $400,000.
The ADEA’s 2010 Survey of Dental Education showed tuition alone averaging $159,586 for four years of dental school – making it easily apparent why average graduating debt is stratospheric. A recent review of average new dentist salaries reveals graduates average $12,000 per month or $144,000 per year as an associate full-time dentist. However that $12,000 per month disappears when you factor in average monthly costs of living including:
- $ 3,500 taxes
- $ 1,500 rent or mortgage payment
- $ 500 utilities
- $ 1,000 car payment and auto insurance
- $ 1,250 life, disability, health and malpractice insurance
Student loans add another $2,500 per month (or more) in expenses leaving just $1,750 per month for groceries, clothing, gas for the car, health club membership and most important: savings. This could work for a single person, but what if the young dentist is getting married? Having kids? Expenses mount. With credit card or other non-educational debt, missing a single payment or making wrong assumptions about a grace period can have a negative effect on credit worthiness. Without a strong credit score obtaining a loan to buy a practice is highly unlikely. Some estimates state the average dentist requires over 13 years to repay his/her school debt. This conversation relates to purchasers and sellers alike.
For most practice owners, selling a dental practice is contingent upon the remaining amount of ‘discretionary’ money the younger doctor has available. It is an imperative consideration and should be factored in when utilizing transition strategies such as an ‘aggressive’ sales price or an associate to buy or associate after sale models.
When considering aggressive pricing, if a desired price restricts practice net income (after factoring in debt service) so much that the purchaser cannot afford to live, a lender simply will not provide the financing the new doctor needs. There are many instances where lending institutions require a potential purchaser to have either cash in the bank or to bring cash to closing. If there isn’t enough discretionary income besides the “$1,750”, or money previously stocked away, the buyer won’t have enough cash available to close the deal. That doesn’t mean finding the right buyer is impossible, it just requires a different approach.
Associate to Buy
The Associate to Buy dental practice transition model is a classic request of doctors. In this case an associate is going to enter the practice, work for a while and then purchase the practice. This transition is similar to what many doctors experienced when they started practicing and allows the senior doctor to gradually lessen his/her workload and responsibilities. Outside of square footage being the first ‘red flag’, most practices simply do not have the patient flow or income to make this type of transition feasible. Proper patient flow means there are on average two new patients per day to support an associate. To grow an associate’s portion of a practice (without giving up the senior doctor’s new patients), there needs to be at least three to four. What usually happens is the senior doctor slows down considerably to get the associate production profitable enough to pay his/her expenses, essentially give up production/collections they could do and earn on.
Association after Sale
The Association after Sale dental practice transition shares similar constraints with the associating pre-sale including physical plant and patient flow/collections. This is further complicated as the previous owner’s presence creates confusion among staff and patients around who “the boss” is. Most importantly, if your schedule is filled with the most productive and profitable procedures, the new purchaser may not have cash available to pay overhead, bank note and themselves (back to the ‘discretionary’ expenses). Ultimately, a practice sale comes down to cash flow. If the cash flow isn’t substantial enough, the sale cannot happen. These are three of the most often experienced ‘traps’ though there are many others. It is important to take a close look and model a transition with an expert so expectations can be realistic.