Steven M. Ziegler is vice president of Ziegler Practice Transitions Ltd, a dental practice transition firm that specializes in orthodontic practice transitions. He has personally been involved in hundreds of orthodontic practice transitions in all 50 states over the past 13 years and lectures to current orthodontic residents and practicing orthodontists on various aspects of the transition process. Ziegler also maintains the company’s website, handles all marketing efforts, and manages its Practice Matching Program.[/sidebar]
It is that time of year again and a new class of orthodontic residents will soon find themselves being released into the real world. With student debt looming and a strong desire to finally break free and show the world just what they can do, the soon-to-graduate and recent graduates have some soul searching ahead of them:
“My student debt is astronomically high. Should I just get a job as an Associate so I can start paying it down?”
“I know I don’t want to be an Associate forever, so would it be better to borrow a little more money and start building my own practice now?”
“Could I borrow even more money to buy an existing practice? Is that really a good move?”
One thing is certain: a decision needs to be made and as early on as possible. In fact, these issues should have been thought over throughout one’s residency, with a pretty clear path being determined early in the final year. No matter what path a young orthodontist chooses, preparations need to be made and that takes time. Associates need to find and secure jobs, Practice Builders need to put together a business plan and secure financing, and Practice Purchasers need to find an opportunity, negotiate, and sign the contracts and secure financing—all of this should be done well before graduation, but that is another story.
So, how do you orthodontic residents begin to determine the “right” path? There are a number of questions you should be asking yourselves:
- “Where do I want to live and practice?”
- “Do I have any desire to run a business and manage people, or am I really only interested in clinical orthodontics?”
- “Do I follow others’ leadership well, or do I want to be my own boss?”
- “What does a successful career mean to me? Is it about being happy with what I do? Is it about a certain patient-load or a certain income level? Is business just a means to living my personal life the way I want?”
The answer to these important questions can ultimately reveal the right path for you. If you want to live in a specific geographical location and there aren’t any practices for sale or any job opportunities in that area, then your only option is to build a practice. If you have no interest in running a business, then perhaps working in a clinic would appeal to you. If you are looking to maximize your income though, buying a practice is the clear choice.
Many current residents and recent graduates are very concerned with their student loan debt, and, as a result, they often think the best option right out of school is to work as an Associate in a large clinic or group practice in order to focus on earning a higher income early so they can pay down some of that student loan debt before incurring even more debt through the build-out of their own practice or the acquisition of someone else’s practice. Since no ownership position will be offered, a high salary is often used to entice young orthodontists to forgo ownership and work as a hired gun. The problem with this scenario is the very reason an orthodontist chooses this path—higher income—just does not pan out over time, usually not even over the length of the contract.
Consider a practice grossing $1,000,000. Overhead for orthodontic practices is typically in the 45% to 55% range, so let’s just assume this practice has overhead of 50%. If the owner-orthodontist of this practice decided to hire an Associate to handle all of the clinical duties, he/she might offer a high salary of $200,000. This allows the owner-orthodontist to keep the remaining $300,000 profit for managing the practice. Not a bad deal—the owner-orthodontist makes a lot of money for merely managing the practice and the employee-orthodontist has a very high salary right out of school. Such a scenario would likely have a 3- or even 5-year contract to further entice the Associate and to make the effort of finding, hiring, and training the Associate worthwhile for the owner.
Now let’s look at that same practice, but with a different scenario. Instead of continuing to own the practice and running the front office, the owner-orthodontist decides to hire the recent graduate for 1 year as an Associate, then sell the practice. The Associate salary for that first year might be only $120,000 because it is also tied to the sale of that practice. The Buyer will then have to borrow around $800,000 to buy the practice. The Seller may even want to be hired back as an employee after the sale. There is less pay, a huge loan, and the Seller’s postclosing salary to deal with, so this cannot be as good a deal as the Associate scenario, right?.
Wrong. And here is why.
In the Associate scenario, the young orthodontist will make $200,000 per year for up to 5 years, but will be busy managing the patient flow of a million dollar practice that would net an owner-orthodontist $500,000 per year. Clearly, continuing this relationship beyond the 5-year contract would not be a wise move for the Associate, because that Associate is eventually going to want to earn the level of income afforded an owner who is doing virtually the same amount of work, save for a relatively minor amount of practice management. Further, at the end of the 5-year contract, the young orthodontist has nothing but the $1,000,000 of salary, less whatever has been paid to student loans and whatever has been used to pay for the Associate’s normal life expenses during that time.
In the purchase scenario, the young orthodontist will make $120,000 in Year 1, but will then make $500,000 in Years 2 through 5. In addition to normal overhead, there will be the acquisition loan payments, which would be roughly $100,000 per year, and there might be a $100,000 salary for the Seller in Year 2, the first year of ownership for the young orthodontist. So, the young orthodontist’s salary in Year 2 would be $300,000 and in Years 3 through 5 would be $400,000. That is a total of $1,620,000 after debt-service over those same 5 years that the Associate nonowner only made $1,000,000. Even more significant is the fact that at the end of those 5 years, the Buyer would still own the practice. Not only would there be a continuation of the higher earnings, but any practice growth would belong to the young orthodontist. In the Associate scenario, any growth would only line the owner-orthodontist’s pocket, not the employee-orthodontist’s.
It is clear that buying a practice is a better move than being an Associate, but what about compared to starting your own practice from scratch?
Assuming we are comparing apples to apples and we are talking about similarly sized practices with similar overhead and gross, the lifetime income earned by building a practice from scratch will never reach the lifetime income earned when buying an existing practice. When starting from scratch, a young orthodontist must borrow money before there are any patients, any staff, any equipment, even a space in which to practice. A location needs to be leased and built-out. Equipment needs to be purchased. Staff needs to be hired and trained—by the way, they will expect a salary from day one. Supplies and instruments need to be ordered, utilities paid. There are expenses in advertising … the list goes on and on. All of this would need to be paid for before a single patient walked through the door and handed over the first check. The young orthodontist would need to borrow all of that money, plus enough money to live on, which includes payments toward student loan debt. Then, once money starts coming in, all of that practice build-out debt would need to be paid off before any significant income starts flowing. Compare that to the purchase of an existing practice that already has a well-trained staff, functioning equipment, referral sources, an established, finished location, and best of all … patients in treatment who are paying money on a monthly basis! In a purchase scenario, the Buyer is making a very significant income from day one, even after paying the acquisition loan, and it is that high income from day one that puts this option far ahead of the start-up option.
There’s no way around it: buying an existing practice is the best way to maximize income and pay off your student loan debts as quickly as possible. OP