I often get asked by dentists whether they should look at ownership or stay an employee or associate. The answer to this seemingly simple question is actually extremely complex. It includes proper examination of a range of factors including the personal situation of the dentist , their tolerance for risk, their personality as well as all the aspects of the practice they are wishing to purchase or the area in which they want to startup.
However what is also important is an understanding of the numbers involved. This post is purely going to be about the financial aspects of ownership vs an associateship. It is an important concept to understand well.
It is EXTREMELY easy for you to know what you are currently earning so we have a baseline earning already. Its different for everyone but I’m gonna use the example of a moderately busy associate with a 5-10 years of experience on a 40% commission structure.
Lets assume the yearly billout after Labs is $450,000.
So the commission is 40% of $450K = $180,000. This can be easily achieved working 4 days a week (two nights and two normal days). You leave your work at work, come home and have time with your family or in the pursuit of your hobbies after work. Good lifestyle, great earnings.
Startup example 1 – Unofficial QLD STATE AVERAGE TURNOVER ($300,000)
In Qld, according to a few dental accountants and financiers that I have spoken to, the average startup will bill $300,000. To me this is a pretty bad result, but it is the consensus. At $300k billings, you will not be able to pay a wage to yourself and you will breakeven with all the business expenses. Depending on rent and your initial investment and repayments of loans, you may even lose some money. In this first year, you will have had an OPPORTUNITY COST equal to whatever you were earning as an associate. For the example associate I used above, they wasted the opportunity to earn a WHOPPING $180,000 dollars!
The value of your business would not have gone up much either. It will just be worth the equipment and the fitout that you paid for
If your practice billings do not improve for the second year and the third year then you really start to suffer with lost income.
Startup example 2 – The average TURNOVER ACROSS MY STARTUPS ($550,000)
If you turnover $550,000, you will be paying yourself commission of approximately $180,000 AND you will also have a business profit of approximately 10% of turnover. The exact amount will depend on your expenses but this is a very positive financial result for three reasons:-
1) You replicated your previous earnings but you were your own boss and did these billings in your own business
2) You now have achieved some capital growth – Your practice is worth more than what you paid for equipment and fitout (provided you didn’t go crazy)
3) You made a slight business profit on top of your own billings so in actual fact, you may have taken home more depending on your loan repayments.
For any practice purchases, you simply have to look at the cash profit and compare it to repayments on any loan you take to see how much better off you will be. Obviously you need solid due diligence to ensure those profits are replicable when you purchase the practice.