Who stole my nest egg?

Sept. 1, 2003
Why is it that hearing the "r" word in your twenties and thirties goes in one ear and out the other? Then when you hit your mid-forties, the "r" word goes right to your heart!

by Doug Cast, DDS, FAGD

"Average" dental practices may be unsellable by the time you retire, costing your retirement nest egg several hundred thousand dollars. But you can take steps today to prevent a loss.

Why is it that hearing the "r" word in your twenties and thirties goes in one ear and out the other? Then when you hit your mid-forties, the "r" word goes right to your heart!

Recently, I talked with a doctor who had just turned 50 about selling his practice and retiring this year. Later, I chatted with a much older dentist who said that he "can't afford to retire!" Last year, when I was playing in a men's baseball league, I got to talking with the other team's first baseman — a police officer — who told me that he was three years away from being 55, which is when he planned to retire. Between pitches, he told me that his retirement income is going to be $110,000 a year. I was so shocked that I almost got picked off first base! The overwhelming majority of dentists won't retire with that annual income. Heck, far too many dentists don't make that much during their working years, let alone during retirement.

While lecturing at the same place, I had a conversation with Cathy Jameson, PhD, about the drop in dental school graduates due to dental school closings. We were discussing how dentists view the closings as good, but that in reality they are clearly missing the bigger picture. Dentists, you see, were quietly celebrating when dental school after dental school closed in the 1980s and '90s. Fewer grads, less competition, right? Well, read on ...

According to the American Dental Association, the number of dental graduates has risen over the past few years from 3,810 in 1996 to 4,367 in 2001. But the number of new graduates in the 15-year period from 1974 to 1988 is higher than the number of new graduates from 1989 to the present. In other words, our nation's dental schools graduated more dentists year after year from 1974 to 1988 than they are graduating today. While a couple of new dental schools have been formed, they do not compensate for the number of dental seats that were lost when these dental schools closed in the past 17 years:

1. Oral Roberts University School of Dentistry — 1985/86

2. Emory University School of Dentistry — 1987/88

3. Georgetown University School of Dentistry — 1989/90

4. Farleigh Dickinson University School of Dentistry — 1989/90

5. Washington University (St. Louis) School of Dental Medicine — 1990/91

6. Loyola University of Chicago, School of Dentistry — 1992/93

7. Northwestern University Dental School — 2000/01

According to the U.S. Department of Labor, "Employment of dentists is expected to grow more slowly than the average for all occupations through 2010. Although employment growth will provide some job opportunities, most jobs will result from the need to replace the large number of dentists projected to retire."

Are you starting to see how this affects your retirement planning? The first group of dentists who graduated in the upswing of dental graduates — the class of 1974 — has now been practicing for nearly 30 years. Their careers are coming to an end. And next year, the class of 1975 will be in the same boat. The following year, the same will apply to the class of 1976. On and on, year after year, for 15 years there will be more dentists nearing retirement than there are dentists graduating who can buy their practices. If you were planning on the sale of your practice as part of your retirement income, you may be in for a big surprise.

Take a look at the profile of recent graduating dentists:

In 1998, 89 percent of dental school graduates had loans that averaged $121,500.

One year later, in 1999, 91 percent had dental school loans that averaged $141,660.

79 percent of the 164,664 active dentists in 1999 graduated more than 10 years ago. (Translation: It is an aging workforce.)

81 percent of these dentists are in general practice.

In 1999, 64 percent of graduates were men and 36 percent were women.

In other words, dental school graduates are now fewer in number, higher in debt, and there is an increasing percentage of female graduates, many of whom will choose part-time careers while raising a family. In addition, some of the graduates will go on to specialty training, GPRs, public health, and the military. Some will begin start-up practices, and some will become full-time or part-time dental school instructors. At the current level of 4,367 dental school graduates for the class of 2001, approximately 3,537 will end up in general practice. Realistically, the number of dentists looking to sell their practices in the next few years will begin to outgrow the number of graduating dentists looking to buy existing practices.

Additionally, it is a fact that some younger dentists will sell their practices early because they no longer enjoy owning a dental practice or will choose an alternate career; some dentists will be forced to sell their practices due to disability; and still other practices will be sold due to death of the dentist/owner. No matter how you look at the numbers, they all point to the clear fact that dental practice acquisitions are becoming a buyer's market.

Dentists looking forward to a nice nest egg from the sale of their practice may find that there will be no nest egg at all due to a shortage of buyers.

It is incumbent upon each of us to look at the acquisition of our dental practice from the perspective of the buyer:

• 91 out of every 100 graduates have significant student loans.

• Buyers will have acquisition debts that are equal to four mortgage payments every month: student loan payment, practice purchase loan payment, office rent payment, and home mortgage payment.

• Buyers will have several practices to choose from because the number of retiring dentists, dentists leaving dentistry, disabled dentists, and deceased dentists is significantly greater than the number of new dentists entering the workforce to replace them.

• Buyers will have to buy growing dental practices that have a healthy new-patient flow (not controlled by the increasing financial constraints of insurance companies) as well as high profit margins. Practices that fit today's norm of 70 percent overhead and production of $500,000 or less will be unsellable!

It also is prudent to consider the aging of our society — many people have old dentistry in their mouths — and the way changes that must occur with insurance reimbursement will impact the buyer. Few, if any, argue that these changes will work in the buyer's favor.

Logically, any dentist in private practice should begin to position his or her dental practice today so that it is financially appealing to a buyer. Although you may not want to retire for 10 years or more, the chances of disability or death — which cause a forced dental practice sale — increase annually.

Because of the financial burden new graduates face, they must buy practices with the highest profit margin available. And the most profitable practices in the country today treat more teeth on fewer patients. Intuitively, the most profitable dentists understand that the business of dentistry is based upon the number of teeth treated — not the number of patients treated.

Year after year, ADA statistics list the insurance industry as the top source of dental revenue. But with an aging society depending more and more on insurance assistance, the insurance industry must limit the number of teeth treated per person. This runs counter to principles followed by most profitable practitioners.

Let me recap this very briefl: More dentists will be leaving dentistry due to retirement, disability, or death. The number of buyers graduating from dental school is less than the number of doctors selling. These buyers are under heavy financial pressure and will need to buy highly profitable practices. Highly profitable practices get that way by treating multiple teeth per patient. The more teeth per patient, the higher the profit margin. However, patients are increasingly dependent upon insurance, which annually pays more than 50 percent of the total dental revenue. These companies profit by ensuring that as few teeth as possible are treated per patient.

In essence, the goals of highly profitable practices are diametrically opposed to the goals of profitable insurance companies. Thus, to build a highly profitable practice, you will need to increase your patients' discretionary spending.

Because nearly all businesses faced increasing competition in the 1990s, scientific research was undertaken to better understand why consumers buy. While the results of this research are beyond the scope of this article, they did point out that consumer spending is heavily influenced by advertising.

Advertising has become increasingly more complex since this research was conducted, so much so that it is now beyond the level of expertise of nearly all dentists. As such, dentists should seek assistance from experienced dental marketing companies.

It has been proven time and again that advertising influences consumer spending. This influence can and does result in patients buying services that are the most profitable to a dental practice; i.e., having multiple teeth restored in fewer visits. When faced with a growing population that has a high level of old dentistry, changes in the way insurance benefits are paid will be forthcoming. It is not possible to predict what these exact changes will be, but it is mathematically and financially improbable that these changes will result in a highly profitable business model for dental practices — that is, multiple teeth restored on insured patients.

There are currently two types of advertising services available in the dental industry. The first is what I call "ego-driven marketing" — advertising and marketing programs that are specifically designed to place the doctor on a pedestal and, therefore, fulfill his or her ego. Ego-driven marketing is the most common form of dental marketing and is the least effective, given the number of buying choices consumers have and their lack of interest in any form of advertising message that says, "Look how good I am!"

The second form of advertising, which is offered only by a couple of dental marketing companies, is what I call "consumer-focused marketing." This is marketing and advertising that is specifically designed to appeal to consumers — it directs them to draw their own conclusion that the doctor is the correct choice. Most major advertising industries (beer, automobile, cosmetic surgery) use the "consumer-focused model" in their ads. Miller Lite, Lexus, and Botox® have exceptionally good ads that appeal to specific viewers, hitting them with the product or service after the message is delivered.

All self-employed dentists over the age of 40 should immediately focus on proven steps to build a highly profitable practice today. Dedicate the next 24 months to implementing effective consumer-focused advertising and communication/relationship training. You are exponentially more likely to sell a practice with these critical items in place than by adding additional pieces of equipment that are of significantly lesser value to a buyer.

Communication/relationship training is widely available to the dental profession, but it has been my experience working with dentists across the country on their advertising that there are actually only three to four well-qualified consultants in this field. Many of the consultants who promise significant practice increases in production and collections are, in most cases, better at promoting themselves than they are at teaching the doctor and staff how to communicate with today's consumers. This article is not intended to endorse or disqualify any consultant.

Many doctors plan on the proceeds from the sale of their practice to assist them financially in their retirement years. Because of a reduction of seats in our nation's dental schools, there will be more dentists selling their practices — by choice, by death, or by disability — than there will be graduating dentists to buy these practices.

This will result in a buyer's market, which will slowly increase, followed by a leveling off period and then a decline, leading to a seller's market. This buyer's market will last approximately 15 years, perhaps longer if there is another drop in dental school graduates in the future.

Consumer-focused advertising is a critical tool for influencing consumer spending, which results in a more profitable dental practice. Because of large student loans and business loans, buyers of dental practices must purchase practices that have the highest profit margins and the lowest overheads. In so doing, buyers will gain the income necessary to meet their increased financial demands.

"Average" dental practices, which continue to increase overhead, will be unsellable. This will result in a growing number of dentists who will not be able to find buyers for their practices. The end result will be dentists walking away from their practices when they retire, reducing their retirement nest eggs by several hundred thousand dollars.

It is not mathematically feasible for every dentist who retires, leaves dentistry for another career, becomes disabled, or dies to have an abundant supply of buyers. As a direct result of a decline in dental seats in the 1980s and 1990s, there will be a growing number of dentists who will be unable to sell their practice when — not if — the time comes.

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