The following is a fictional scenario.
Joe is a young dentist with about 5 years of experience. He starts a practice and within 2-3 years he has the practice billing about $900,000-$1,000,000 a year, working 50 hours a week and having 2-3 weeks off a year. He is busy. Very busy. His patients love him and he has a knack for converting ideal treatment. His work is good but not great. He does quite a lot of fixed pros and has recently added implants to his clinical repertoire.
He also spends about 5-7 hours a week, doing admin tasks for the practice. He hasn’t been able to let go of this stuff fully as he just doesn’t trust anyone to do it as good as he can.
Joe looks around him in the dental world and thinks he is extremely successful. Especially when he compares himself to some of his peers. He earns around $500,000 a year including his business profit and the commission he pays himself. Of course he is still paying off his initial loans so the cash he ends up with is a bit less than this.
Joe hears of a practice come up for sale about 15 mins away but closer to the city. It’s billing about $400,000 a year and isn’t profitable at all, but that doesn’t matter to Joe. He has built his current practice from scratch and is extremely confident he can just do it all again with his second practice. Instead of $1,000,000 of billings, he anticipates he will soon have $2,000,000 of billings, granted this will be spread over two locations.
Joe buys the practice.
He decides to drop some days at his first practice and gets a new grad associate to work there because he wants them to fit his style of dentistry. Also he knows grads get paid less and he thinks he can save some wages this way. He commits to days at the 2nd practice. After a year of owning his second practice, his numbers at his first practice have grown slightly to now $1,100,000 in billings. He has 1 year left for loan repayments and things are looking pretty good at this practice. He is a little concerned that the growth rate seems to have stalled a bit.
However, his second practice just doesn’t seem to grow. It’s doing very similar numbers to what it was when he bought it a year ago. He just doesn’t understand why it hasn’t grown when he is doing everything the same.
He also seems to be spending so much time in the practices doing lots more admin and hasn’t had a proper holiday all year.
Anyway, that’s ok, because financially he is doing great and his first practice is helping to pay the bills at the second practice.
Now he sees a “for lease” sign at his local shopping centre close to where he lives, about 30 mins away from his first practice. With very little research into the area, he makes the required enquiries of the agent and starts a third practice!! He figures that the first time around, the startup worked well and it should do well this time too. Plus it’s closer to him! He hires a dentist with 3 years of experience to work at his second practice and and his first one while he sits 3 days a week at his new startup (3rd practice), waiting for patients.
After a year, the new startup, has billed just $180,000. His second practice has grown a small amount to $450,000 but still isn’t breaking even. His first practice has grown to around $1,200,000 and he has paid off all his loans at this practice.
However, the money that came into his bank account has fallen. Firstly he was less busy at his second and third practices so his own billings weren’t as high as when he owned just one practice and was billing $1,000,000 himself. Also, his profits from the first practice have been used to offset the cashflow losses from his second and third practices.
The following year none of the practices grow at all. All of a sudden, Joe starts to regret the going into a second and third practice. He makes enquiries to sell them but realizes he may not recoup his initial investments and will take a loss. He sees no choice but to continue struggling away and soon he starts to eat into savings to offset the losses he is experiencing.
The above is a very very common scenario playing out all across the country right now.
There are a bunch of practice owners who own 3-5 practices with all but one of their practices struggling to turn a profit. The single cashflow positive surgery is keeping the rest of their practices afloat. But over time, as they add more practices around the 400-600k billing range which are not profitable, the cashflow starts to go backwards and they find themselves in quite a bit of trouble. This can be compounded if they have taken out a huge mortgage for their house and bought a flashy new European car.
Sometimes they can sell underperforming practices and take a hit but often, they are in a situation where they are forced to offload their bigger practice to pay down debt.
Owing multiple practices, for the ego boost of owning multiple practices often ends in big issues for owners who had a successful first practice. Be judicious in choosing your second practice whether you buy it or start it.
What were the mistakes Joe made in his assumptions when he embarked on his second and third practices? Can you think about what things Joe could have done differently in this scenario? Current DPO members, please don’t reply 🙂
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After some discussion, I will release part two where I analyze and give my thoughts on the major issues that these types of owners encounter. I know of many owners who are in this situation currently or have been in this situation at some point in the past and they all make some common mistakes.
For owners that are looking to start or buy a second practice in the future, I also highly recommend coming along to my Practice Ownership Seminar in March next year. The seminar is in Sydney and early bird ends at the end of December.
We go into quite a bit of depth as well as provide much more information on everything to do with buying or starting-up a dental practice, these seminars have sold out in previous years so please register ASAP.
We also offer a practice purchase assessment which will do this analysis for you as well as other expert guidance in various areas of practice ownership. Please see the below link for more information.