Transitioning from Associate to Owner

In this week’s letter we are going to talk about a process that nearly every pediatric practice owner goes through in their career – the transition from Associate to Owner.

Unless you are one of the rare few lucky enough to transition directly from dental school, to residency, right into your own practice, then the chances are you have faced the agonizing process of making the transition from working for the boss to being the boss. We get a tremendous number of questions about this process, so I figured I would elaborate on it in this week’s edition.

First off, I want to make it clear that we believe that practice ownership is NOT for everyone. The antiquated belief espoused by the old guard that a dentist must own their own practice is detrimental not only to the hundreds of excellent pediatric resident graduates every year, it is deleterious to the industry as a whole. With the evolution of career opportunities in today’s dental industry coupled with the increased demand for work/life balance, there’s an amazing opportunity for an excellent clinician to spend their lives as an associate, achieve excellent work/life balance, earn a very respectable compensation, and retire a millionaire.

For those that belong to the minority group that will choose the path of practice ownership, there are essentially 4 routes available to a pediatric dentist. I’ll list the 4 and discuss a few pros and cons of each one, and then wrap up with some thoughts on how to best navigate any of those paths. (Quick FYI we don’t have any financial interests in any of the names we drop here).

Associate buyout of existing practice

This is by far the oldest model of ownership transition in dentistry, and it is also by far the rarest in today’s DSO-saturated environment. Traditionally, a new or recent graduate would accept an associate position with a dentist nearing retirement age. The benefits of this model are that there exists not only a built-in patient base and business operations, there is also a built in mentor who can guide and educate a new dentist both clinically as well as personally. A tremendous amount of knowledge can be passed from a tenured dentist to a new dentist, and not a small amount of knowledge can be passed in the reverse direction.

There are several pitfalls with this model, however. First off, the average age of a pediatric dentist in the US is around 43 years old. Assuming that the average pediatric dentist will work until the age of 60, that’s a lot of time to wait around as an associate. Sure there are the rare occasions where a dentist is ready for retirement, but 9 times out of 10 I have seen these arrangements deteriorate due to the fact that the retiring dentists was always “just one more year out” from retiring. Combine that with the reality that the associate will not be able to fully treatment plan or practice dentistry the way they want to during the tenure of the current owner, and this can lead to lots of frustration and in the worst cases bad blood.

If you happen to be presented with an opportunity like this, there are a few things you can do to protect yourself as the associate. Make sure the contract is explicit as it pertains to buyout value, timing, and doctor compensation. It’s a simple fact of life that all small business owners think their practice is worth more than it actually is. I don’t care if the current owner is your father – utilize an attorney to create the contract that details the path to ownership. We use Dykema because they know dentistry inside and out.

From an owner’s perspective, just because you’re in the drivers seat doesn’t mean that you get to dictate terms and conditions. The ONLY partnership that has ever worked is one that is mutually beneficial to both parties. Don’t expect sky high valuations for your practice in this model. Rather, focus on finding the right associate and the fact that you are leaving your patients and your team in good hands. Make sure to be realistic about your timing. What are you going to do when you retire? Make sure to have a plan, set a date, and stick with it.

Acquisition of an existing practice

Up until recently, this was an excellent path to practice ownership for a pediatric dentist. The patient base is established, the cash flow is predictable, and the systems for better or worse are in place. With the advent of DSOs backed by private equity, this market has become nearly impenetrable to the average doctor. Over the past 5 years, valuations have become inflated to the point that the practice would not be able to service the debt out of its own cash flow. In other words, the guys with the deep pockets were snatching up everything on the market, leaving only the scraps for independent operators to pick through.

Fortunately, with higher interest rates and a cooling economy, the market has become less frothy. I have seen more opportunities with reasonable asking prices recently, and traditional bank financing is still available for those deals. The most common places to find practices for sale are practice brokers (Watson Brown, Mclerran and Associates, etc). The Pediatric Dentistry Journal has a classifieds section that is worth paying attention to. 4salebydentist.com is another website that I peruse – you can filter by specialty which is nice.

Once you find a practice that fits your budget, is in the area you want to practice in, and is in good condition, it’s time to do your due diligence. A few things to watch out for: What are the remaining lease terms? What percentage of the production is hygiene vs restorative? What is the collections percentage? Is the patient population in alignment with who you want to treat? Are the production numbers consistent month to month and year over year? What condition is the equipment in? What practice management system do they use? There are a ton of data points that need to be analyzed in order to determine whether or not the practice is a good candidate for the transition to a new owner.

Quick tip: I’m not disparaging practice brokers, in fact I am friends with several. But take everything they say with a grain of salt. They only get paid once a transaction closes, so their interests are rarely in complete alignment with yours.

De Novo (Startup) practice

Ah, one of my favorites. How hard could it be? I can’t tell you how many times I’ve spoken with someone in the middle of a new practice build, or 2 years into starting their own practice, that never realized how incredibly difficult it can be. I think a good rule of thumb for estimating how difficult a startup will be is to use the old firewood gathering axiom of get what you need, then double it, then double that.

However difficult you think a startup will be, double it, and then double that.

The CEO of Nvidia, one of the world’s most valuable companies, recently stated that he would never go back and do it all over again, because he knows how hard it is to do now. The amount of effort, risk, and personal agony that it takes to start a practice from scratch far outweighs the benefit in my opinion. Shameless plug here

– find a group like Alcan that specializes in helping you start the practice of your dreams. The heavy lift at the front end isn’t justified in the face of an easy alternative.

If you insist on going it on your own, I’ll give you some unsolicited advice that I give in all of my talks to dental students. You’ve invested $400k in your dental education. Invest another $4k and go sign up for the following classes at your local community college: Macroeconomics, Finance 101, Accounting 101 and 102, and entrepreneurial management. The scope of things you need to have lined up to start your own practice are far beyond the scope of this article, but the foundation to most of it can be found in those fundamental classes.

Partial or group ownership

This type of ownership structure exists in myriad forms in dentistry. On one hand you have small group practices that have a shared ownership pool. These are beneficial in the fact that most if not all of the owners are personally involved in the operation of the business, and there is significant alignment of motivations. This can be a double-edged sword, however, with agreements about the future direction of the practice being the most common point of contention. The value of your ownership interest can also be captive until an exit event, at which point you end up working for a DSO anyways.

Partial ownership of a practice with a business partner or DSO is a very common pathway to practice ownership now. Percentages can vary wildly between organizations, with most taking a majority control of the practice. Again, a double-edged sword in the fact that you get the operational expertise of a business partner, but you give up clinical autonomy (which always happens, regardless of what a majority partner promises you at dinner). If I were to look into my Magic 8-ball I would predict that this will become the most common form of practice ownership in the future in the US.

The biggest things to consider with this arrangement are the overall liquidity of your position and the amount of control you will have. Typically they are inversely related.

Conclusion

The evolution of pediatric dentistry in the US has been overwhelmingly positive for the patient. We have transitioned from a provider-centric model to a patient-centric model, with the main beneficiaries being the children we serve. With this shift comes several changes to the traditional model of pediatric dentistry. Independent practice ownership is not as profitable as it once was, and it is an order of magnitude more difficult. Gone are the days where a dentist can hang her shingle up and live off of referrals.

Today’s pediatric dental clinic requires a high level of both clinical and operational sophistication in order to thrive. My advice to anyone who wants to start their own practice is to take a deep look into why you want to own your own practice. If the answer is work/life balance, forget it. If the answer is more money, that is far from guaranteed with independent practice ownership. Make sure to be honest with yourself and take the time to truly determine if practice ownership fits your life. If and when you are ready to make that transition, give us a call, we are always happy to help.