The ultimate set-up

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Buying an established practice is very different from starting up your own dental practice from scratch.
Buying an established practice is very different from starting up your own dental practice from scratch.

You’ve got some experience under your belt and you’re keen to go it alone, but the decision remains: to start from scratch or buy an existing practice? The experts weigh in with their advice. By Amanda Scotland

For most, training to become a dentist involves many years of intensive study in the practical field of oral health, with very little instruction on how to successfully run a business.

Paul Freeman, CEO of Medfin Finance, acknowledges the special challenge associated with being a small business owner in a highly regulated environment. He says that while the process can often be easier for those with more experience, even the most professional and competent dentist in the world will find they need a completely different skillset to set up a practice. To help lift the weight off the people who are deciding to open their own dental practice, you may want to have a look at receiving outside help to assist you in an area like your finances for example. 

For this reason, buying an existing practice is a popular choice as there is nothing to set up. Dr Toni Surace of Momentum Management says it has led to a shortage of practices, and the demand is pushing higher prices.

“As soon as a practice goes on the market, they’ll have a good 10 to 15 people looking at it,” says Dr Surace. “You need to have your name with an agency or someone who sells practices to be advised about upcoming sales.”

Whether a person is more entrepreneurial or risk-averse will play into their choice, however Freeman emphasises the need to focus on the discipline of due diligence regardless of personal risk appetite. “With a start-up it’s a different type of risk. It doesn’t mean you can’t handle it or analyse it, but the thinking and approach is different.”

Practically speaking, the difference in risk is the difference between forensic analysis and forecasting. For an established practice, you’ll need to analyse financial statements, forecasts and past tax returns at a minimum. You’ll want to know if the business is making money, but it’s likely you’ll also want to consider its capacity for growth and the need for any short- and long-term investment into new equipment.

When starting from scratch, you’ll instead need to forecast these things using what you know about the market in general. You’ll need to consult with trusted advisers and scope out the competition. Most importantly, you’ll need to make some critical assumptions about demand for your services in the area and factor in the inevitable ramp-up period. Stafford Hamilton, State Manager NSW—professional finance at Investec, says that sufficient cash flow to get you through those critical first months will be essential. “It can be very unnerving when you start to see the cash flow declining if you haven’t planned for it,” he says. “You need to have a particular temperament to withstand that but when its planned it becomes less stressful.”

Setting a realistic budget will further ease the transition and Hamilton says that when you’re working for yourself, it’s vital to combine the analysis of your personal budget alongside your business budget. “Everybody’s got a desire to set up something complete from day one and have every piece of equipment to look after their patients, but you can end up spending a lot of money and the day you open the door, there aren’t any patients or cash flow. There has to be a careful balance—some things can be integrated later on.”

Dr Surace adds that it can take a typical metropolitan practice 12 to 24 months to become fully productive. The location is one thing you won’t be able to easily change once everything is up and running. It’s therefore one of the earliest decisions you’ll need to make.

Hamilton advises keeping around six or seven postcodes in mind when shopping for a location. Are there existing practices for sale in your chosen area? If not, the decision to start from scratch may be the only local option. Regardless of location, Dr Phillip Palmer of Prime Practice recommends opting for a relatively shorter lease with lots of option periods.

Freeman says that the so-called ‘flood’ of new dentists has received a lot of press. However, it won’t necessarily have a negative impact on you if you structure your business correctly. “In some parts of Australia you could easily argue there’s an undersupply of dentists and an unmet need,” says Freeman. “In more densely populated areas, a higher number of trained professionals will increase your choice as the owner of a practice.” How successful you are will ultimately hinge on your ability to compete in your market.

If you decide to take over an established practice with a solid track record, Dr Surace says you can expect a patient drop-off rate of up to 20 per cent. However the value of goodwill you purchase can be conserved and enhanced through an agreed transition plan with the incumbent.

If this kind of partnership model is right up your alley, it may be worth considering a partial purchase. Dr Palmer says this model allows you to “try before you buy”. But he warns to never enter into such an arrangement on a handshake. “There’s an old saying: ‘A partnership built on a handshake isn’t worth the paper it’s written on.’”

According to Hamilton, one of the biggest considerations you’ll need to factor in is whether you’ll be willing to compromise. “You’re the incomer so will you be willing to live with the way they run the practice and are you being realistic about what you will and won’t be able to change?” He advises getting to know the person or people you are going into business with and determining early in the process whether you have a similar or complementary style.

For whichever model you choose, Freeman recommends surrounding yourself with a team of partners who’ll provide the expertise in three main areas: accountancy, advice, and banking and finance. It is important to recognise the distinction between the three specialties. While accountants can help establish financial and management reporting, tax effectiveness and risk management practices, a financial adviser will be able to assist on suitable levels of income protection and key person insurance to protect your interests. What you really want is to make sure your professional business partners have previous experience with other dentists so they can help establish realistic assumptions about the future of your business.

Once your plans are in place, your banking or finance partner can provide the backing to make it all happen. However, Freeman warns against setting debt levels too high. “If you over-extend yourself, you leave yourself without a buffer if your assumptions don’t pan out. It’s a strong industry and people who are successful have very prosperous careers,” he says. “Don’t skimp on sound analysis and advice because you’re making choices and decisions you’ll have to live with as a business owner over a long period of time.”

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