Alternative paths to practice ownership

In a recent survey by a major supplier, over 2/3 of dentists coming out of school had a strong interest in owning his or her own dental practice.  That certainly makes sense.  If a doctor wants to develop his or her own craft and/or achieve the best possible financial return on the investment in dental school, ownership is the way to go.

That path from graduation to ownership is fraught with pitfalls.  Among the top issues, getting financing has become an extraordinarily challenging process.  Especially since the financial crisis of 2008, finding loans requires outstanding credit, material down payments and liquid collateral.  

On top of that, if you are opening a brand new office, choosing a location is an uncertain proposition.  Even the world’s largest retailer, Wal-Mart, has not perfected site selection.  They regularly go through store closings.  Given that, imagine the challenges faced by a single-office dentist in finding the right location that will continue to be the right location 5 to 10 years in the future.

If purchasing a practice, there’s the uncertain nature of the existing patient base.  Maybe the previous doctor had some treatment headaches that will pass to the new owner or the receivables are a mess and essentially hidden from the purchaser until that purchaser tries to collect (this, sadly, is not terribly uncommon).

Those are simply the top ones. There are a number of other things that arise when employing the traditional build or purchase methodology.  While the traditional method works quite well for some, others seek alternative methodologies that may alleviate some of these headaches.  Here are 3 of those alternatives:

Alternative 1 – Work as an associate in a large practice supported by a Management Service Organization (MSO)

One example here is the ownership program at Aspen Dental. Here, the dentist works an associate in a dental practice supported financially and operationally by a large national practice.  After a period of time, usually a couple of years, the doctor has the opportunity to own the practice.  There are quite a number of advantages here.  First, when the associate is ready for ownership, a lot of these companies have the financial resources to compensate the selling doctor and give the purchasing doctor good repayment terms without involving an outside financial institution.  Second, these organizations have more sophisticated marketing programs with larger budgets than their competitors.  This helps to drive patients in the door.  Finally, these groups tend to have established systems both for practice operations and practice sales so that the process of changing ownership is very organized.

On the downside, freedom is limited.  If the purchasing doctor wants to buy an office in two years and build a new office a few miles away, the company handling the purse strings may not agree with that plan and try to point that doctor in another direction.  The author of this piece was once a member of such an organization and can attest to the fact that these companies want to be involved and provide guidance on every major decision.  In addition, the purchaser may have to commit to a long ter

Alternative 2 – Participate in a real estate or sale/leaseback arrangement 

Here, instead of the primary asset being purchased being a base of patients or equipment, a large portion of the price is the real estate and building in which the office functions.  Of course, the selling doctor must own the real estate.  Here the advantages include owning an asset not specific to the practice.  In a bad situation, you could shut the practice down and lease the space to another practice (including the previous owner) or a Five Guys franchise, theoretically, to earn income.  Secondly, financing gets a bit cleaner.  While many banks may have difficulty setting a value on a dental practice and intangible assets like patient contracts, they can easily value commercial real estate all day long.  On the downside, the total investment jumps considerably.  And even if the financing is secured, the purchaser assumes a lot of extra debt without any operating solutions being implemented.

Alternative 3 – Immediate ownership in an existing facility

Here, a doctor enters an existing office that isn’t currently open every day of the week.  For example, there may be an orthodontic practice running 1-2 days per week and a general dentist sets up his or her own practice that operates during the current “dark days.”  The new doctor pays a daily rent to the existing doctor. One example of this is the program at Dental Timeshare.  Several advantages here.  First, the new doctor takes ownership immediately.  Even though the facility is shared, the practice is the doctor’s own.  Second, the investment to get started with ownership is minimal.  With the facility and equipment already in place, the new doctor simply needs to purchase any supplies specific to his or her specialty and everything is set to go.  Third, an existing potential referral patient base exists along with an established marketing and operating strategy to bring in new patients.  That gives the new doctor a head start on building his or her patient base.

On the downside, you have two practices that are now roommates.  Sharing of days, supplies and staff needs to be worked out and accommodated just like any other space sharing arrangement.  If you are not a teamwork type of person, this may not be for you.