Practice ownership is a goal for many of our dental clients. However, for most new practice owners, adjusting to the weight and responsibility of managing patient care, practice operations and the financial health of the practice can be daunting. As a practice owner, new financial concepts can catch you by surprise and you may not necessarily know where to start. Forewarned is forearmed, and planning is key. To help you navigate the complexities of practice ownership, we outline 5 key things to weigh up from an accountant’s perspective if practice ownership is a consideration for you.
- Choose Your Business Model – Sole Practitioner vs. Group Practice
Regardless of whether you are looking to purchase a practice or start one from scratch, this is one of the most important considerations as it has flow-on impacts for your structure, premises choice, marketing and branding and your purchase price/setup costs. For new practice owners, the choice comes down to whether you want to produce the majority of patient fees yourself or engage associates who retain a portion of the fees (typically 40%). Each model comes with its own pros and cons.
Sole Practitioner
| Pros | Cons |
| You retain 100% of your patient fees which can lead to a higher profit margin on your fees.
Where you purchase an existing practice, this provides you with the ability to work more in this practice (rather than having to work at a second site). |
No backup dentist to handle the workload (or cover you on your time off). |
| Full control over patient engagement and future appointments. | Your income earning capacity is capped by your own productivity. |
| Autonomy in the practice’s direction without relying on associates. | |
| Less staff to manage (this is often a simpler option for a first-time practice owner!) | |
| Can often be a cheaper practice to set up / purchase. |
Group Practice
| Pros | Cons |
| More patients through associates, which increases revenue and cash flow. Profit is less dependent on the owner’s time in the surgery. | More staff to manage – which can create additional stress and be a diversion from your dentistry (and therefore income earning capacity). |
| You can leverage a greater range of skill sets and therefore dental procedures, which can diversify your patient base.
This is also helpful in attracting younger/newer practitioners who would like exposure to these procedures as part of their career progression. |
Increased operational expenses and overheads. |
| The goodwill (and branding) of your practice is less dependent on one individual. | Patient loyalty may shift to the associate, and they could follow the associate to another practice. |
| If you purchase a practice and retain all associates, you will likely need to grow the fee base before you can work in the practice. |
- Consider Location and Exclusion Zones
When starting or purchasing a practice, the location plays a pivotal role in its success. If you are thinking of a future practice purchase, be careful where you practice as an associate now, as restraint of trade clauses in your contract could prevent you from being able to open/purchase in your preferred location.
Some key considerations in relation to location are:
- Avoid overcrowded markets: Opening in a suburb saturated with dentists can hinder growth and lead to inconsistent patient bookings, making it difficult to forecast revenue.
- Plan for growth: Depending on your business model, consider the potential for expansion. A small, two-room practice might be sufficient if you plan to work solo, but for those considering associates, ensure there is space to add surgery rooms and the necessary equipment. You may not want to set up multiple surgery rooms at the outset but having them available (and potentially plumbed at the start) means that you have room to grow.
- Accessibility and visibility: The ideal location will be easy for your patients to find, travel to and access. This means you need to consider things like street parking, public transportation, and availability of signage.
- Determine Your Financing Needs
After deciding on your business model and location, securing financing is the next big hurdle. There are generally two main routes for practice financing. You can either borrow using the practice (goodwill and equipment) as security or you can use personal assets as security. Some things to consider with both models are listed below.
Securing Against Practice Equipment and Goodwill
| Pros | Cons |
| No need to use personal assets such as your home as collateral. | The loan funds must be repaid over a quicker period (typically seven years) which will impact cash flow. (And your serviceability for other borrowing). |
| Flexibility in the percentage of financing needed (from 100% to partial financing). | The amount you can borrow is based on the practice you are purchasing (or forecasts of the one you are starting) and it may be more difficult to secure the full amount you want or need. |
| When using a specialist lender or broker, pre-approval for finance can be quickly obtained. | Higher interest rates than lending secured against residential or commercial property. |
Securing Against Personal Assets
| Pros | Cons |
| Lower interest rates and longer repayment periods which is kinder on your cashflow. | Involves using personal assets like your home as collateral, which could complicate personal finances in the future. |
| There is more flexibility in how refinanced funds can be used. If you are building or renovating in the practice it removes the need for escrow facilities and allows you to pay amounts directly. | Potentially exposes you to asset protection risks.
This is especially the case where your family home or property is in the name of your spouse who would not ordinarily be exposed to the risk of the practice and finance. |
| Where you have sufficient equity in your home, your choice of lenders may be larger. |
When calculating what you need to borrow, remember to factor in additional costs such as legal fees, DA approvals, design fees, and ongoing consumable expenses, as they all contribute to your overall financial commitment.
Regardless of what assets you secure against, if you are borrowing through a structure, the lender will almost always require a personal guarantee. This means that even if you haven’t used the family home as security, if it is in your name, it still may be at risk.
- Manage Working Capital Effectively
The first 6 to 12 months of running a dental practice can be tough financially. It’s common for new practices to operate at a loss during this time, making it vital to have adequate working capital to cover both practice expenses and personal costs. There are two main sources of working capital:
- Savings: This is often the first route new owners take. While it’s convenient, be careful not to overextend your savings and ensure you still have enough to cover personal expenses.
- Credit Facilities: This includes options like credit cards, overdrafts, or using personal assets as collateral. While it offers short-term relief, using debt to cover losses should be approached cautiously to avoid falling into a debt trap.
- Hedge Your Bets
Many new practice owners opt to hedge their bets by working part-time as contractors while running their practice part-time. This is especially relevant if you are starting the practice from scratch, or you have purchased a practice where both the old owner and associates continue to work in the practice.
This can be a smart move as it provides guaranteed income while your patient base is still growing. For example, you could work three days at your practice and two days as a contractor at another clinic.
As your patient base builds, you can gradually shift to working full-time at your own practice. This strategy helps ensure you have the funds to cover both business and personal expenses in the first 6 to 12 months of operation.
If you do choose this strategy, you need to make sure firstly, that you have trusted people in the practice on the days that you won’t be there. Secondly, that the practice you are contracting at is far enough away from your practice to not cause restraint of trade issues.
In summary, the points outlined above are essential fundamentals that need to be considered before you either start or purchase a practice. Whilst an exciting endeavour, the overall journey can feel overwhelming at the start. However, after the first few months, a “formula” tends to emerge for each practice and as risk tolerances and growth ambitions evolve, we often witness steady expansion across the patient base. At the start it is crucial that every dollar is strategically invested in resources, as too often we see funds wasted on unnecessary items or an overly ambitious desire for rapid growth. Plan well, stay ahead, remain vigilant and carefully manage expectations.
Author
Keegan Du Preez
Accountant – Ecovis Clark Jacobs