I was talking with a young dentist recently who was debating the pros and cons of opening her own practice and starting from scratch or buying an existing dental practice where the variables are known. For anyone who’s been in this position before, you know there’s no easy answer. There will be unknowns in both scenarios.
There is an advantage right now to a dental start-up: Baby Boomer dentists aren’t retiring in the same numbers needed to fill the demand of aspiring young owners. The supply of dentists is increasing and only expected to rise as more dental schools have opened in the last several years, and thanks to the lingering effects of the recession in 2007-2009, more seasoned dentists haven’t been in a hurry to transition out of their practices.
The dentist I spoke with said that projecting potential production, loan payments, and income for an existing practice seems more straightforward than the assumptions needed for a start-up. She mentioned a few variables when starting from scratch, like number of new patients, average production per new patient, and speed of growth as being totally unknown variables. It could be easy to either over or underestimate these numbers, thereby throwing off your business plan. So, she asked, with all that considered, what is the average growth and progress of a start-up?
Predicting Start-Up Numbers
I told her that we all do our best with the assumptions we have to make. The good news is that if you have any experience in doing start-ups, or practice business experience, projecting some or most of these numbers shouldn’t be difficult. For example, you can easily estimate some of the overhead expenses like rent, utilities, insurance, and labor costs. Other overhead areas will be more difficult to forecast, like expected number of new patients, average production, collections, and other areas. For these areas, you’ll either need hands-on experience with the operations of a dental practice or the advice of an experienced dental consultant, or maybe both. When you’ve been working in it – “it” meaning dental practice operations – you’re more likely to make better assumptions for the overhead.
Revenue, on the other hand, is trickier. There is a process, and this is how I approach it:
Start with expected new patient flow, first on a daily basis for the first one to three months, then on a weekly basis for the next one to three months, then monthly going forward.
Break those appointments down between hygiene appointments and the average production per patient. Then, break it down further to dentistry appointments and average production per patient.
You’ll find that the average hygiene production per patient will generally remain consistent throughout the months, while the average production per dental patient should be increasing each month for the first year.
After that first year, the average production per dental patient should start to level off. This number can and probably should increase in future years as you add more procedures to the mix.
Next, use the UCR fees to calculate forecasted production. From here, you have to assume what your gross collection percentage will be based on PPO participation. The net production should equal collections after three to six months as your accounts receivable settles down. At this point, you’ll need to ramp up collections based upon adjusted production assumptions.
Other Considerations for Start-Up vs. Purchase
Of course, the numbers that make up a successful, profitable dental practice start with factors outside your control. Dental practice start-ups need to make sure the local community both needs these services and knows who you are. Check out the competitors, what their specialties are and what procedures they offer, as well as their payer mix. Even if you’re entering an area where there is already a general dentist – and that’s your practice area, too – you can differentiate yourself in procedures and other service offerings, and payment/insurance options.
With buying an existing practice, the assumptions on growth and patients will be easier to make. You’ll have a built-in active patient base. First, the right practice has to be for sale; there is good advice out there that cautions against buying a practice when you’re financially ready. Instead, look to buy a practice now, because you never know when a great deal will fall into your lap, and you may have to wait awhile for the right opportunity.
Either way, I encourage any entrepreneurial young dentist to consider the benefits of practice ownership. Don’t be scared off by all the unknowns of starting a new practice from the ground up. You’ll find that many assumptions we make in the early days of a brand new practice are based on facts and experience, and very few decisions will be made with outright guessing.
What other questions do you have for dental practice management, ownership, operations, or financials? Email me at email@example.com and your Q&A may be featured in an upcoming blog.
ABOUT TIM LOTT
Tim provides consulting services to dental professionals and practices. He provides expertise in start-ups, mergers, transitions, tax and retirement planning, financing assistance and budgeting. Some of the specific areas of consulting are associate, partner, and shareholder arrangements; practice management, practice purchase, sales, buy-ins, and buy-outs and related tax issues.