Buy a practice or start cold?

After years of schooling, training and associateships, a decision must be made. Do you buy an established practice or search for a location and "start cold?"

Robert J. Mallin

After years of schooling, training and associateships, a decision must be made. Do you buy an established practice or search for a location and "start cold?"

One needs to evaluate a few aspects of beginning a practice in order to come to a logical conclusion. What needs to be considered?

* Mentoring/companionship

* Practice philosophy

* Historical patterns

* Financial considerations

Mentoring/companionship

It`s your first week. You`re alone in your office - without the ability to "beep" someone for help - and a patient has a seizure. It`s reality time. Suddenly, you realize the advantage of having another experienced person nearby to comfort and aid you. And not only for this exaggerated scenario, but also for the more mundane problems that a younger practitioner hasn`t faced.

For example, a patient presents with bizarre symptoms. You`re at a loss for a diagnosis. Chances are the doctor with 25-35 years of experience has coped with similar problems. Or, you spend an hour locating and treating an emergency problem and the patient says loudly, "How much??!! Are you crazy?!" Maybe there`s a better way to handle the case and present the fee? Again, years of experience can`t be gained overnight.

But these years of experience can be used to a new doctor`s advantage when a smooth transition is planned and the selling doctor is willing and able to share his expertise. There are so many clinical and behavioral situations that occur that only years and years of experience and judgment can provide the smooth solution.

This is a very valuable, and not quantifiable, asset that`s acquired in a buyout.

Practice philosophy

This is an area about which too little has been written.

Years ago, L. D. Pankey, in a foreward to Peter Dawson`s book, said "... It has been said, and I think with generosity, that the general practitioner`s index of competency is as follows: 2 percent are masters, 8 percent are adept, 36 percent are students and 54 percent are indifferent."

You need to know whose practice you`re buying. The indifferent? The student? And will you be comfortable with this philosophy? Every practice has a philosophy - whether the owner knows it or not. You need to explore, in-depth, what the vision of this practice was. Or, did it have a "vision?" Or did it bump along from day to day, crisis to crisis, problem to problem?

You need to decide. If you don`t fully agree with the philosophy, can it be changed? Will you lose patients? Can you estimate how many? Will you gain patients? Patients are not fools. They know when they`re treated less than optimally, but often stay out of a sense of loyalty. When a new, better "vision" is instituted, they will welcome the change for the better.

If you decide to start from scratch, whatever philosophy you hold dear will become the vision of your practice. It will provide the impetus toward excellence or mediocrity - your choice. Thus, your practice will assume your dental philosophy.

Historical patterns

We have all seen or heard about the major demographic shifts that are occurring in our country - urban, suburban, rural. Demographic studies need to be done and reviewed so that, whether you buy or start fresh, you`re comfortable with the demographics of the area you`ll serve. Demographics, by their very nature, are a fluid, not a static, consideration. They are constantly changing. Thus, they need to be monitored on a continual basis.

Other factors can impact a purchase. Do most of the patients come from one area of social contact of the owner? Can you duplicate the attraction? This is part of a historical pattern.

Financial considerations

This probably is the most important benefit of buying a practice.

Let`s look at the economics of a five-year time frame of a "cold start" vs. buying an existing practice you`re comfortable with. (See Figure 1)

Let`s look at the assumptions I`ve made. I let the "cold start" grow at a phenomenal rate of 500 percent over five years. I let the established practice grow between 4 and 5 percent a year. I calculated a 35 percent net for the "cold start," because the early lean years would demand a lesser profit. I allowed a very reasonable $150,000 for leasehold expenses and equipment for the "cold start." In short, I gave the "cold start" every advantage ... and look at the results. Buying the established practice allows you to earn four times as much as the "cold start."

Might a miracle practice exist whereby a "cold start" does better? Sure! But it`s a darn sight more apt to be the "established practice" purchase that exceeds (far exceeds!) the stagnant growth I projected. I barely kept up with inflation!

No. Regardless of demographics, regardless of changing disease patterns and dental demands and regardless of dentist/patient ratios, the purchase of an established, viable, income-producing business will financially outperform a "cold start" every time.

Robert J. Mallin, DDS, CFP is both a dentist and a Certified Financial Planner. He has authored many articles and lectured extensively on financial and practice-transition matters. He owns PPC of NJ, Inc., a dental practice broker/financial planning firm. Dr. Mallin is a member of American Dental Sales (ADS).

More in Money