Cornerstone Dental Transitions, 7205 E. Southern Avenue, Mesa, AZ (2026)

08/31/2021

Finding the Right Purchaser

“Beauty is in the eyes of the beholder,” and so it is with the perception of the value of a dental practice. The right purchaser candidate will understand that the real value of a practice is in the long-term income opportunity that it represents. The right candidate will seek to complete a transaction that is fair to both parties. The wrong purchaser candidate, on the other hand, will want to strip away any positive features of the practice and focus on perceived negative features, looking to initiate the very negative “negotiation process” where one party must lose for the other party to win. Trying to sell your practice to the wrong purchaser is like trying to beat square pegs into round holes… it just does not work!

There is a “right” purchaser for every practice, and there is a “right” practice for every purchaser. It is just a matter of putting forth the time and effort to locate that right person for the practice, or the right practice for that person, as the case may be. Putting the wrong purchaser into a practice to get a “deal” done will usually lead to disaster. The wrong purchaser candidate will often “negotiate” themselves out of a great practice opportunity in an attempt to get a lower price or terms the seller would not usually agree to. Square pegs… round holes.

The right purchaser candidate loves the area where the practice is located; the wrong purchaser candidate thinks it is only ok. The right candidate likes the office overall; the wrong candidate only sees problems. The right candidate sees the practice as a long-term opportunity; the wrong candidate only sees problems that need overcoming. Square pegs… round holes.

Not all purchaser candidates are real purchasers. Many so-called purchaser candidates only want to look at practices and read the seller’s confidential financial information, with no intention of purchasing it. These wrong candidates like to feel important and like the idea that some practice owners will spend a lot of time catering to their unreasonable demands for more information. They will attempt to hold the seller and the practice hostage as the seller invests a lot of time and energy in pursuing a transaction with the wrong candidate. Square pegs… round holes.

The right purchaser will be prepared to meet the seller’s price, and terms provided the price and terms are reasonable. On the other hand, many purported purchaser candidates believe that if a seller accepts the terms of the purchaser’s offer to purchase, then they must have offered too much money or terms too generous, and they will be tempted to lower their original offer at every opportunity during the negotiation process. The right purchaser believes in win/win, the wrong purchaser cannot understand a fair deal and will want to win at the expense of the seller every time. Square peg… round hole.

We understand that there are also sellers who want to squeeze the life out of a transaction as well. They love the adversarial process and are ready and willing to take advantage of any young, new purchaser candidate who is naïve enough to accept their overblown price and terms. That’s the way it is and will always be. The right purchaser candidate for this doctor is the negotiator purchaser who sees a practice acquisition as war and is prepared to do battle. This fight is a square peg and a square hole, and they are meant to do battle against one another. One will win, and the other will lose, but this is the way they will go through life, sometimes winning and sometimes losing.

AFTCO has plenty of round peg purchaser candidates for round hole practices, and we know how to identify them and put them together.

08/11/2021

Lifetime Income Potential From Dentistry

Most doctors will practice an average of 35 years. The number of years practicing, multiplied by the income he or she earns over that period, equals lifetime income. A doctor’s lifetime income will be significantly affected by career decisions that may include buying a practice, joining a practice as an associate, or for those risk-takers, starting a new practice from scratch. However, are all these career choices equally wise? Which has the greatest impact on the doctor's lifetime income potential?

Let’s say a doctor purchases an established practice and averages net earnings (after expenses) of $250,000 per year. If he remains in practice for 35 years, he could realize a lifetime income potential of $8,750,000! (That is using today's dollars, and this is after all expenses.)

Now, let's say another doctor decides to go into an associateship and earns $70,000 his first year and $90,000 his second year. He makes a total of $160,000 during those 2 years instead of the $500,000 he could have earned by purchasing an existing practice. The point is, this associateship cost him a drop in lifetime earnings of $340,000. The years he spent in the associateship are gone, and the loss of income cannot be made up. It's lost forever! It is not that associateships cannot work; it's just that many of these doctors never get started on the right track, and it ends up negatively affecting their lifetime income potential.

This same rule applies to any new graduate who decides to go into a 1 or 2-year general practice residency. This income the doctor earns is about $35,000 per year, so there is a lifetime income potential loss of $215,000 for each year they are in the GPR. It takes a long time to make up that kind of money.

Moreover then, there is the doctor who wants to gamble his future on trying to start a new practice from scratch in today's incredibly competitive market. He spends anywhere from $300,000 to $500,000 to get the new practice up and running, and he does not have his first patient yet. If he succeeds in surviving those first 3 to 5 years on the minimal income (or losses), his lifetime income potential will still be lower than that of the doctor who bought the established practice. Potentially by as much as one or 2 million dollars in that practice lifetime!

So, as you can see, purchasing an established practice is the best method of maximizing your lifetime income potential. A few years ago, we worked with a new doctor who purchased such a practice, and he earned more than $250,000 the first year. He then bought and merged another practice and was soon netting more than $450,000 a year (after all expenses and debt service). In 3 years, he has hired 2 associates to work for him. His lifetime income potential will exceed $15,000,000. Not bad for a beginner who thought about his Lifetime income potential.

08/10/2021

Purchase a Practice vs. Startup

Starting up a new dental practice is an incredibly risky venture due to increased competition and an unpredictable economy. A dentist would be wise to consider purchasing an existing dental practice instead of starting a new one from scratch.

It makes more sense to acquire the “goodwill” of a dentist already established in the community. Being introduced to and treating hundreds and even thousands of acquired practice patients accelerates growth and income tremendously.

There is a big difference between purchasing a practice with established cash flow (and substantial net income) versus starting a new practice where growth and net income can be painfully slow.

Consider the following scenario where two dentists went into practice at the same time but ended up considerably different after their first seven years in practice:
1. Dr. “A” purchases an existing practice for $600,000. This practice was grossing $750,000 per year and within two years, this same practice is grossing $1,250,000 per year (it was under-producing). In seven years, Dr. A’s practice produces cumulative gross revenues of $8,000,000 and a cumulative net profit of $2,800,000.

2. Dr. “B” starts a new practice from scratch and invests $300,000 in a new office. In seven years, Dr. B builds it up to a $700,000 per year gross practice. Projected first-year gross revenues are $200,000, second-year $300,000, the third year $450,000, etc. for seven years. The new practice produces gross revenues of approximately $3,300,000 over those same seven years and the projected total cumulative net profit is $990,000.

During those same seven years, Dr. A will earn $1,810,000 more net income than Dr. B! The reason? There was an established patient-base in the purchased practice that allowed Dr. A to be busy from day one and resulted in a much greater seven years gross and net income for Dr. A. Dr. He was busy from the first day he took over the existing practice.

On the other hand, Dr. B had to spend lots of time and effort trying to get established in the community and build a patient base. Patients begin to trickle into the office, and the practice grows slowly over time. The problem for Dr. B is that the overhead is so high while the income is low, so there is little or no profit in the practice for quite a few years.

Dr. A enjoyed a substantial net income from the first month in practice and continued to enjoy a higher income during that entire period. Dr. B took years to get profitable and his Lifetime Potential Income can never catch up with Dr. A.

08/03/2021

Good Debt vs Bad Debt

It would be wonderful if we could all go through life completely free of debt. There are a fortunate few who are born into wealth and have enough money to provide for themselves and go through life free of debt. Then, there are the rest of us who face debt as a fact of daily living (something you learn to contend with, live with, and yes, for many of us, die with it). Unfortunately, it’s even something we can pass on to our children someday. If you are already wealthy, then you may want to read this article to see how the rest of us live. If you are not one of the wealthy, then you should read this article carefully.

It's true that having no debt is the best, but if it is a fact of life for you, then it’s vital that you keep certain things in mind when you are considering debt. There are two kinds of debt: bad debt and good debt. What kind of debt could be right when we’ve always been told that debt is bad? Good debt is debt for an appreciating asset; bad debt is a depreciating asset. Good debt provides income; bad debt provides expenses.

For example, education debt is a fact of life for many of us, but we should view it as an investment in our future. We want to think it will provide us with an opportunity to increase our future income, so that makes it good debt. Debt for an unaffordable expensive car would be considered bad debt since it is an unnecessary expense that provides no income and depreciates. Debt for something that depreciates and provides no income would indeed be regarded as a bad debt. Education is an investment that appreciates by increasing future income potential. The car is a depreciating expense that will provide no revenues and will rapidly depreciate (uses up income instead of providing income). The expensive car may be more fun to have, but the education will be the best investment.

Now, let’s look at good and bad debt for the average dentist who is preparing to enter private practice. Many new, young dentists get caught up with the opening of brand new, shiny offices with all the latest and expensive gadgetry. This idea is promoted heavily by businesses that profit from the sale of such gadgetry. A new dentist can invest tens of thousands of dollars for equipment, furniture, and leasehold improvements before the first patient ever walks through the door. Interestingly enough, no one has ever heard of a patient who was ever drawn to a dental practice because of the equipment the doctor was using. No one has ever had a dentist say that a patient was passing by and looked in his window, saw his new equipment, and decided to pay a visit. It just doesn’t happen.

Now, if you think cars depreciate quickly, wait until you see the resale value of the dental equipment. The resale value of a car may depreciate up to 30% the first year, but dental equipment will depreciate up to 90% of its original cost the first year! Since purchasing new, expensive dental equipment does not produce patients and is a rapidly depreciating asset to boot; it represents “bad debt.” However, buying new equipment that allows the dentist to provide new or additional procedures can increase income and therefore is considered "good debt.”

Now, what is good debt for a dentist? Where can a dentist find investment or income producing debt? Where can a dentist invest in an income-producing asset that appreciates, not depreciates?

The answer...buy an existing dental practice. The doctor incurs debt, but the current income stream of the practice exceeds expenses and debt service (the money required to pay off the debt), thereby providing income (income-producing debt). Good income-producing dental practices do not depreciate, they appreciate. It is not an expense; it is an investment. You will almost assuredly be able to sell it someday for more than you paid for it (if you don’t pay more for it than you should).

Buying a practice is similar in many ways to the purchase of a bond or a bank CD. Both are income producing investments (the CD pays interest; the dental practice provides income). Both appreciate (the interest accumulates in the CD; the dental practice increases in value over time). Also, they both are considered a positive and safe investment. The most significant advantage a practice has over the CD (in addition to the dental practice making you more money), however, is that the IRS allows you to depreciate the cost of purchasing the dental practice even though the practice appreciates! This means a dental practice represents a pre-tax investment, which is considered the most desirable investments made by astute investors. Of course, you cannot depreciate the CD, so this represents an after-tax investment, which is far more costly, and the income from the CD pales when compared to the revenue produced by the investment in a dental practice.

Income producing debt is good debt. Non-income producing debt is bad debt. It’s a simple rule based on logic

07/28/2021

Practice Merger Questions and Answers:
Q: What is a practice merger?
A: A practice merger is a transaction where one doctor sells his/her practice to another established doctor in the same area and merge the practices into one office.
Q: Which location do we use for this practice merger?
A: That is a choice for the purchaser to make. Usually, the seller relocates to the purchaser's office unless the seller's office is larger and can better accommodate the two practices.
Q: Why should a seller want a practice merger?
A: Most sellers would prefer to sell their practice to an established doctor in the same area who already has experience with operating a practice and who is usually more credit-worthy. Many sellers wish to continue to practice for the purchaser after the sale, and a practice merger works best to handle this situation.
Q: Why should I want to buy a practice and merge it into my existing practice?
A: A practice merger is the best investment a doctor could ever hope to make in his/her lifetime. First of all, it is investing in a business you already know. Second, it increases your patient base and leads to more patients, more referrals, more growth, and more profits. Third, it eliminates a competitor. Buying a practice in your area prevents a more aggressive competitor from acquiring it and competing with you. Fourth, a practice acquisition is usually a highly leveraged transaction. You get more "bang for the buck" and a chance for a high return on investment which often exceeds 500% the first year (try to beat that with the stock market or real estate). Fifth, safety; historically 95% of the sellers’ patients transfer with the seller and stay in the practice once the seller retires. It's the best sure-thing you will ever have as an investment.
Q: What if both offices are too small for two practices to operate?
A: There are several ways to use a small office when merging two practices, including off-setting office hours, days or even weeks. The seller is usually ready to cut back to a half-time schedule. A practice merger often presents an opportunity for the purchaser to work a three day work week and still make more money than he/she was making while working a four or five day week.
Q: When do I find out more about this practice for the merger?
A: Confidentiality is crucial. We cannot disclose the seller's identity to you or anyone else until we have determined your actual level of interest and suitability for this potential merger. To do this, we will have to know more about you and your current practice. Once suitability has been determined, and you understand the economic benefits of this practice merger, we will arrange a meeting between you and the seller.
Remember, a practice merger is the best investment a doctor could ever hope to make in his/her lifetime if the transition process is followed carefully.

Cornerstone Dental Transitions

08/31/2021

08/11/2021

08/10/2021

08/03/2021

07/28/2021

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