01 Nov Same Problem – Different Results
Let’s assume that two dentists, Dr. Innovative and Dr. Common, each had a solo practice. Both practices were located in the same part of town. Each dentist seemed to be stalled out in their practice growth. Each felt their practice was located in the right part of town, but each felt their practice was located in a less than adequate facility. Each dentist realized their practice needed more high-quality, fee-for-service patients to get to the next income level. Each dentist had decided it was time to consider a significant change in their practice environments. Each dentist had accumulated $60,000 in savings and each were willing to invest their entire savings to better their practice situation.
As you will soon see, although each dentist was in virtually the exact same practice situation and each dentist also had the exact same amount of money to invest, the career decision that each dentist made created significantly different results.
Dr. Common’s story…
Dr. Common was still renting the same office he had when he started his practice eight years earlier. His monthly rent was only $650. Dr. Common’s practice was currently grossing about $300,000 and, with an overhead of only about 52%, his income was adequate. However, Dr. Common was concerned that he was no longer achieving much growth. In fact, his practice had grossed about the same for the last 3 years or so.
Dr. Common knew that in order for his practice to grow to the next level he needed to attract more quality, fee-for-service patients. After visiting with colleagues and reading various dental trade journals, Dr. Common decided that he needed to relocate his practice to a more upscale, modern dental facility.
Although Dr. Common’s rent was quite low, he also did not like the fact that was still paying rent. Many of his colleagues had advised him that he needed to own his own building so he could build equity in real estate. So, Dr. Common decided that not only did he need a better facility, he needed to purchase property and build a new dental office exactly like he wanted.
Dr. Common contacted a realtor and located a commercial site that he felt would be a great location for his new dental office. He was very pleased when he discovered that he could acquire the land for a mere $70,000.
Next, Dr. Common contacted an architect and began designing the facility. Since he planned to practice in this facility for many years, he wanted the dental office built just right! Dr. Common even had the foresight to plan extra space for future growth. He decided that 2,400 square feet would be enough for his present and future needs. Dr. Common had the construction plans drafted and submitted the plans to various contractors for bids. Again, Dr. Common was pleased when he discovered that one construction company would be able to build the new facility (excluding the land cost) for a mere $180,000.
Dr. Common then arranged to purchase new furnishings that he and his staff felt were more appropriate for his new, modern office. Again, Dr. Common was pleased when he discovered that the new furniture, wall coverings and other office knick-knacks could be purchased for only $50,000.
Dr. Common had planned wisely and was very pleased that his total investment in the new facility (including new furnishings) would only be $300,000. Dr. Common visited with his banker who assured Dr. Common that they would be able to finance 80% of the total cost. Dr. Common’s entire investment would only be $60,000 (perfect since this was exactly how much Dr. Common had accumulated in savings).
Dr. Common was also able to acquire a combination of new and used dental equipment to replace some of his existing equipment as well as equip the additional operatories in his new office. This equipment note would only be an additional $1,100 per month with no down payment! Dr. Common really felt like this was a great bargain since he would have both better and more equipment to better serve his patients.
Dr. Common proceeded with the project, and one year later proudly moved into his new dental office. He and the staff were extremely excited. At last Dr. Common had the office of his dreams. Everyone in his office had been involved in the plans for the new office, and moving in seemed like a considerable accomplishment in the advancement of Dr. Common’s dental career!
Everything was now in place. All Dr. Common needed to do was to get working to pay for his new practice environment.
That’s when the problems began.
Dr. Common’s monthly bank payments for the new building, furnishings, insurance and taxes totaled approximately $3,100. His new equipment note amounted to an additional $1,100 per month. Dr. Common’s investment decision created an additional monthly obligation of $4,200. With a larger facility, Dr. Common’s utilities and telephone expenses also increased by about $350 each month.
Dr. Common had approximately $3,900 more in monthly overhead obligations over and above what he had been paying while in his previous dental facility. This amounted to an increased cash outflow of $46,800 more each year.
Unfortunately, building a new office facility did not result in generating a significant increase in new patient flow for Dr. Common. And to make matters even worse, a new low-fee, high-volume dental clinic moved into the area. This new clinic was advertising heavily and apparently was getting most of the patients Dr. Common hoped to attract with his new facility. Dr. Common’s practice production began to decline just when he needed an increase in income the most. As his income fell, overhead shot up to more than 85% of his collections.
Dr. Common began to panic. The new office quickly lost its glamour when he was jolted into the realization that the cost of paying for the office was taking such a large portion of his personal income. He had read that a new office generated new business because of the enthusiasm of the provider and staff. Now he was discovering, too late, that the expensive new office generated little to no quality new patients, just additional overhead! His personal income dropped considerably. Those monthly bank payments caused a great deal of stress! He was trapped into cutting corners wherever possible, dismissing staff, worrying more, working more and earning less.
Unfortunately, Dr. Common’s sad story is a very common story. Dr. Common’s patient base and income did not increase as he expected. In fact, his income dramatically decreased. Dr. Common also had no savings to fall back on any longer. However, Dr. Common does have a new building and maybe the increase in property values will one day offset his current losses.
Life is not so good for Dr. Common!
Dr. Innovative’s story…
Dr. Innovative also felt the need to make a significant change. His practice was also grossing in the $300,000 range and also appeared to be stalled out with no significant growth occurring for the past few years. Dr. Innovative also needed more quality, fee-for-service patients in order to take his practice to the next level.
But, unlike Dr. Common, Dr. Innovative was not convinced that investing in a new office facility was going to solve his patient base needs. Dr. Innovative could not see how his patient base could possibly grow quickly enough to offset the major spike in overhead a new office facility would create. Dr. Innovative figured there must be a better way to achieve the practice growth he was seeking. Dr. Innovative decided to schedule a consult with a PARAGON practice transition consultant to explore his options before making any final decisions.
Dr. Innovative learned about practice mergers in a complimentary consultation with a PARAGON consultant. He also learned that an older doctor in the area was wanting to sell his practice and retire. The PARAGON consultant explained that the seller had approximately 1,200 fee-for-service patients that will need a new dentist! The PARAGON consultant showed Dr. Innovative what his practice financial results could conservatively look like if Dr. Innovative acquired the seller’s practice and merged the practices into seller’s larger facility. Dr. Innovative was able to see how a practice merger would increase his income substantially as well as immediately! Dr. Innovative could also see that these financial projections were ultra-conservative since they did not consider any growth due to Dr. Innovative being a bit more aggressive than the seller or the fact that the seller was referring out many procedures that Dr. Innovative liked to provide to his patients.
The PARAGON consultant further explained that the seller had a nice large office, but that the equipment and furniture was outdated and the office décor was not the best (honestly, the décor of the office was actually quite dull and drab). The PARAGON consultant showed Dr. Innovative how the transaction could be structured to provide Dr. Innovative with the funds needed to redecorate the seller’s office and also replace some of the seller’s old equipment with some more modern equipment. PARAGON even knew where Dr. Innovative could obtain some great used equipment if he opted to not pay top dollar for new equipment.
After reviewing PARAGON’s merger projections and talking with a few of PARAGON’s merger purchaser clients, Dr. Innovative decided that acquiring and merging the seller’s practice made perfect sense. Dr. Innovative realized that immediately increasing his fee-for-service patient base by some 1,200 patients overnight (literally) could only be achieved via a practice merger. Dr. Innovative also understood how internal growth over and above PARAGON’s projections was a virtual given.
Dr. Innovative began the acquisition/merger process and was able to acquire the seller’s practice and merge his practice into the seller’s facility within 60 days. With PARAGON’s assistance, Dr. Innovative was able to borrow 100% of the funds needed for the acquisition of the seller’s practice as well as enough working capital and improvement funds to cover the cost of the move of his practice to the seller’s facility, an upgrade of the seller’s older equipment, and the redecoration of the seller’s facility.
Dr. Innovative’s total bank note for the entire transaction amounted to about $4,000 per month. For this $4,000 monthly commitment, Dr. Innovative added an additional $20,000 in gross income to his practice the very first month. By the fourth month of the acquisition/merger, the practice’s gross income increase leveled off at about $25,000 per month. After the monthly bank note payment; monthly lab and supplies expenses on the additional acquired production; and additional staff costs due to the increased practice size, Dr. Innovative’s personal income increased by about $17,000 per month…more than $200,000 per year over and above Dr. Innovative’s annual income prior to the practice acquisition/merger transaction!
Like Dr. Common, Dr. Innovative now has a much larger office facility. However, unlike Dr. Common, Dr. Innovative also has a much larger high-quality, fee-for-service patient base; lots of additional income; and, a brand new healthy attitude. The low-fee dental clinic down the street does not impact Dr. Innovative’s practice at all. Dr. Innovative’s acquisition/merger transaction immediately increased his patient base with loyal, fee-for-service patients who value the traditional dentist/patient relationship and are not attracted to the non-personal, commercial form of patient delivery of such low-fee dental clinics.
The increased patient flow and significant increase in income allowed Dr. Innovative to add an associate to his practice. With his new associate in the office, Dr. Innovative was able to reduce his clinical time a day a week without seeing a loss of personal income. In addition, Dr. Innovative and his family are able to enjoy some long overdue extended vacations while his associate keeps the income flowing in his absence.
Unlike Dr. Common, Dr. Innovative still has his savings in tact (in fact, now even much more in savings). Dr. Innovative is investing significant funds into his retirement plans each month and earns far more money each month even though he works less than Dr. Common. Dr. Innovative experiences far less stress than Dr. Common. Needless to say, Dr. Innovative enjoys a significantly better quality of life than Dr. Common.
Life is extremely good for Dr. Innovative!
Investing in your practice is wise but the investment option you select can provide results that are as different as night and day!
Contact PARAGON to schedule your complimentary consultation to learn about your valuable options. No obligation… just a very worthwhile education.
