7 November 2021

Why Some Dentists Dramatically Outperform Their Peers Financially: Pitfalls in the Business of Dental Practice

Ownership

Dentists of similar ability at dental school often end up with vastly different long-term financial outcomes. In 2021 dollar values the difference at point of practice sale and retirement often amounts to several million dollars. Often the cause lies in incorrect decisions taken early in their careers; having locked into irreversible or difficult-to-reverse decisions, dentists who have made bad decisions can find them difficult or in some cases nigh on impossible to reverse. Meanwhile a fellow graduating class friend made good decisions and the financial outcomes of each diverge at an accelerating rate.

How Critical is First Employment?

Whether by luck or choice, some dental graduates are able to secure employment in a well-run privately owned non preferred provider practice and soak up the good atmosphere, thus experiencing how a good practice runs. When years later they own their own practice, they emulate that experience. A good practice imparts work and business habits which cannot be taught at dental school. Invariably the principals of successful practices have smooth running surgeries, high fee generation, good follow up appointment rates and they generate lots of personal referrals, some of which need to be booked to their assistant dentists. Their assistants will receive good mentoring but must quickly polish their patient communication skills to generate follow up appointments and, in reasonable time, personal referrals. 

Smart dental students cultivate relationships with their dental lecturers and demonstrators because they are sometimes able to connect them with good practices in advance of graduation. While dental graduates are keen to start earning a sound income, the size of that income is not as critical as gaining employment in a suitable practice on graduation. Well conducted privately owned practices rank well ahead of corporate or health fund owned practices in this regard. No dentist will ever be near as successful spending a career as a contractor in a corporate practice as they will be in succeeding to ownership of a good practice and running it well. Nor, all other things being equal, will a dentist with experience in a corporate practice conduct their own practice as well as a dentist with substantial experience in an efficient, privately owned practice.

Dental Premises

The best dental premises are usually free-standing premises able to contain three surgeries for sole owners and four surgeries for dual associateship practices located in long established suburbs of major cities, but not the most exclusive suburbs where dentists tend to be too plentiful and real estate overpriced. Premises offered for rent in major shopping centers tend to have prohibitive rent which so impacts practice profit as to make some practices unsaleable. Some smaller country towns have such low rents that it may be best not to own premises.

The New Graduates Jackpot

Best of all for a well performed dental graduate is obtaining employment in a profitable non preferred provider practice located in good premises, the owner of which is likely to retire in about 8 years; in this scenario the dental graduate can position themselves as practice buyer of choice. This is best done by concentrating on both clinical and interpersonal chairside skills, building up personal referrals and hence a portfolio of bonded patients, and by doing everything possible to maintain effective helpful relations with the owner and practice staff.

Positioning Yourself Financially

 The new graduate who is fortunate enough to gain employment in a busy practice and earn a significant wage might be tempted to rush out and buy an expensive motor vehicle, but it is more prudent to be content with modest wheels and begin saving a deposit on their first home. The important issue is to set themselves up with a savings record which will impress bank lenders when they come to purchase a practice. The dentist who has substantial equity in their home will be well situated. The dentist who does not have a good savings record may be turned down or receive inferior terms. 

 

Structuring Borrowings

 Ideally home loans are paid down quickly because interest is not tax deductable, but practice purchase loans should be maintained on an interest-only basis because the net after tax cost of borrowing is well below the rate at which competent dentists grow their net wealth. The gap between the long-term financial net worth of dentists who set themselves up with correctly structured loans and those who don’t becomes huge as the years elapse. Having spent over 33 years advising dentists on financial structuring I have witnessed the disparity in outcomes. When inevitably interest rates rise from their recent historical low point the advantage of properly structuring loans will become more advantageous.

Buying the Wrong Assets

I have long observed that buying residential rental properties turns out to be a serious mistake in the vast majority of cases. The reality is that the two most successful real estate investments for most dentists have been their family home and their practice premises. Their home is a capital gains tax exempt asset. Most dental couples buy a first home, reduce their home loan and then trade up on their “forever” home. Ideally each time they buy, they select a home which they can afford to pay off within 12 to 14 years. Invariably, long-term homes are in areas giving better capital appreciation than residential rental houses. The houses which dentists buy to live in give capital appreciation which is capital gains tax free. It is also exempt from the asset test applying to the capital gains tax concessions applying to the eventual sale of practice goodwill and premises which are classified as active business assets providing conditions are met. Purchase and ownership must be structured correctly. Residential rental properties give very poor net rental returns after the unavoidable landlord expenses which, unlike commercial leases, cannot be passed on to tenants. The worst long-term real estate investments tend to be high rise residential rental units, particularly those bought off the plan. These defy the underlying wisdom of real estate being that land has a scarcity value and well positioned properties appreciate because of locational desirability, but buildings deteriorate. Their ownership invariably conflicts with the proper investment in a dentist’s key four asset classes.

The Huge Incidence of Poor Advice from Accountants

Accounting practices often have prominent signage indicating that among other services they give “business advice”, but many accountants demonstrate poor knowledge of actual business operations as they spend nearly all their time completing as many of the tax returns for last financial year in a timely manner as possible to fulfill their obligations to the Australian Taxation Office. They mistake doing tax returns for knowledge of the businesses of their clients, and in fact have little knowledge as to how dentists gain their patients, how they build up patient relationships and referrals, how the internal allocation of patients should operate, why they may be paying out the wrong debts or what are the differences between good and mediocre practice outcomes. It is often the case that dentists have been advised by an accountant that they are doing well, yet by the standards of their profession their practice outcome is mediocre. Their accountant has a disparate collection of unrelated business clients among which is a dental practice or two and hence they lack valid knowledge on which to compare outcomes. They have a strong tendency to offer poor advice or, when specifically asked about a particular business decision in contemplation, endorse a wrong decision. The consequence of wrong advice from accountants has huge impact. It can and does contribute to a massive disparity in wealth over the duration of a dental career.

The impact of bad accounting advice is most acute when advising dentists who are buying a practice. Often the accountant is anxious to gain a new business accounting client and is heavily conflicted toward advising a purchase even though the practice has significant problems, or particular features not apparent to somebody with little knowledge of dentists and their practices. The standard approach of averaging three years’ financial outcomes is insufficient, particularly late in the next financial year, when close attention to current fee bankings and patient bookings is essential. Nor should the figures be looked at in isolation from the type of dentistry being performed if a practice is highly specialized and reliant on the outcome of one extremely specialized and talented individual dentist who it is near impossible to replace. The only dentists capable of replicating such an individual are already heavily involved in running their own successful practice.

On many occasions I was contacted by a dentists’ accountant seeking advice on how the accountant could value their client’s practice because according to the accountant their client wanted them to do it. The telephone conversation usually went like this:

Accountant: “What is the formula for valuing a dental practice?”

Response: “Tell me about your client’s practice!”

Accountant: “It is a dental practice.” 

Response: “I got that, but how many dental chairs are in operation?

Accountant: (hesitantly) “I think he has three or four!”

Response: “Is there anything special about the practice?”

Accountant: “What do you mean by special? It is a dental practice!”

Response: “I understand that, but does the practice place its own implants or refer them to a specialist? Does it do a lot of crown and bridge or refer significant amounts to a Prosthodontist? Does the owner have an interest in Orthodontics or refer all cases to an Orthodontist? What about root canals? Does the practice have a practice manager? Does it employ a hygienist? What is the rental value of the premises?”

Accountant: “I think I better ask you to do the valuation!”

These conversations indicated that the accountants concerned had at best a superficial knowledge of their client’s dental practices. Subsequently, when sifting through the financial details of the practices to complete valuations, it was revealed that some very costly mistakes had been made of long-term significance. Yet the dentists concerned had at various career stages taken huge financial decisions based on their accountant’s advice or with their accountant’s agreement!

Many accountants have tended to encourage clients to gear into several residential rental units which have a history of giving poor returns but supplant better financial decisions. They suit the accountant because they add to the annual accounting bill, but represent poor financial choices compared to the upgrade of a dentist’s home, reducing home debt, accelerating superannuation funding through a combination of concessional and non-concessional contributions in order to get more capital behind a low tax shield or renovating practice premises to enhance patient appeal and encourage patient referrals.

Some accountants have encouraged individual dentists to add too many chairs not realizing that invisible profit barriers exist because of the principal dentist spending most work time in their own surgery. It is rare to find accountants who actually understand what drives dental practice profitability.

Expensive and Inappropriate Marketing Advice 

I have conducted many seminars with dentists. My approach developed into one of dealing with a series of individual topics briefly. With each topic I spoke to the subject on the screen, briefly for a few minutes took one or two questions and passed onto the next topic. When I got to marketing, I asked each audience to participate in an interactive, “hands up” survey.

My first question was to ask the dental audience to put up their hands if they attracted many new patients by letter boxing their suburb/town. The response was always that no hands went up.

My next question was to ask each audience to put up their hands if they attracted many new patients from advertising in a local newspaper. The response was always that no hands go up.

My third question was to ask whether they believed that they go nearly all their new patients from the personal referral of their existing patients and a roomful of hands went up.

My fourth question was, “Do you believe that you get lots of new patients from your website?” The response invariably was that one or two hands in the audience moved uncertainly; then somebody said, “New patients don’t hear of us through our website—but they go to it after they have been referred to us to find out our location and contact details”. This was then confirmed with the audience overall.

My conclusions from hundreds of dentists are that:

·       Most money spent on marketing gurus by dentists is wasted.

·       The personal communication skills and presentation of those in a practice are of the greatest importance in maintaining the loyalty of existing patients and of generating personal referrals.

·       The appearance of dental premises is significant in the decision of existing patients to recommend a practice to their friends. If the appearance is deteriorating, existing patients may tolerate it but will be reluctant to refer their friends. Money spent on periodic repainting and recarpeting, particularly of areas viewed by the patients, is well spent and has the impact of turning the referrals back on.

·       A website is important as a reference point for those who have been referred. A simple uncluttered site with basic information is adequate.

Much money spent on marketing consultants and expensive one-to-three-year programs is wasted.  I have observed the financial results of closely located practices where one spent a lot of money on such programs and the other concentrated on the basics above—and the latter outperformed.

Summary

Those dentists who are clinically competent, buy established non preferred provider practices, work hard in their own surgery, concentrate on practice to patient relationships and concentrate their investments on their practice, practice premises, long term home and superannuation funding end up worth far more, sometimes millions of dollars more, than those of their peers who wander from this path.

Financial Success for Dentists

Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:

·      Understand key practice valuation criteria.

·      Learn how some dentists inadvertently reduce the value of their practice by $500,000

·      Avoid long term errors when purchasing your practice.

 There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value. 

I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.  

A complete and comprehensive career guide for mature and aspiring dentists.

Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.

—Merv Saultry, Founder Dental Innovations Network

To Obtain a Copy:

·      Go to the Delany Foundation website at http://www.delanyfoundation.org.au

·      Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.

·      Email financialsuccessfordentists@gmail.com confirming that your donation has been made, as well as your name and mail address

·      A copy of the book will be mailed directly to you

All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.

The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.

General Advice

I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. I own, via my family superannuation fund and investment portfolio, some of the stocks mentioned in this newsletter. My website is now available at grahammiddleton.com.

Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.

Best wishes to all 

Graham Middleton