A business discussion about risk as it applies to private dental practice ownership.
Perhaps every successful entrepreneur or business owner I have ever read about or spoken to has said that at some point in their journey, they took a risk. Many put down their success to a bunch of calculated risks.
One of my favourite quotes is by William Shedd – “A ship is safe in harbour, but that’s not what ships are built for”.
Whether you know it or not, dental practice ownership, especially in today’s challenging environment, is all about taking risk.
Before I go further, let me digress and make one thing clear. There is risk-taking, then there is a gamble which is perhaps a little more callous and then there is downright stupidity. If you think you are opening a dental surgery and will be rewarded for “taking a risk”, think again. Blindly opening in areas which are extremely saturated, with plenty of good, surrounding competition where there is little to no upcoming population growth is NOT taking a risk. At the risk of offending, it’s plain stupidity.
I regularly get approached by new owners seeking advice on how to get their books busier who have mate fundamental errors in location selection. For many of these people, the best thing to do is close their doors. When this first started happening a year ago, I felt sad for these people. Really sad. Now it’s happening with such frequency that I’ve become somewhat apathetic towards it and that is even more sad.
Coming back on point, when it comes to risk, there are many theories on how to approach it, some philosophical and some quite quantitative. However since very early on, I’ve looked at risk from the point of the “worst case scenario”. I’m sure this stuff is written about in books but it’s not something I was ever taught per-se. It came somewhat innately but I’ve since realised it’s the way I approach almost all decisions especially where risk is involved.
So allow me to go back to my decision to buy my first ever practice.
At the time, I was 1 year out of dentistry. I had been offered a place to study medicine at UQ. At the same time, the owner one of the two private jobs I was working at approached me and told me that I soon may no longer have a job as she was wanting to sell the practice. She was a prosthetist and had started the practice so she could get denture patients into her denture clinic next door. The surgery was becoming too much for her.
At the time, I worked 2-9pm three days a week and also Saturdays at that practice. I worked at another practice 8-1 every morning. In my first year post grad, I was billing approx $11,000-12,000 a week and was making approx $4000 as my commission after lab fees Etc. I was doing some hardcore hours though. I had only been at the practice for about 4-5 months.
I asked the owner how much it was billing and how much she wanted for it. It had done approx $400,000 turnover and she wanted $280,000 for it. It was one chair but plumbed for a second. Rent was cheap.
When I sat down with my accountant to discuss things, we did the following:
1) what was I currently earning.
– $200,000 / year. That would grow as I got more experienced if I stayed in the same jobs
2) personal situation
– not married, no debt, live at home don’t pay any rent/board.
3) what I needed to bill at the practice to MAKE the same as I was currently earning
– $500,000 (approx $100k more than what the practice did the last year). However I had only been working at the practice for about 5 months of that year and previously she struggled to get a dentist. So basically this seemed quite easily achievable.
4) medicine and if I wanted to do this
Then we discussed worst case scenario. Digressing again – the job market was very very good for dentists back then. Jobs were easy to get. When I graduated, I had delivered 1 resume (different practice to the one in question). Got a call for an interview days later (this was in September of the year I was graduating, 3 months before graduation). Turned up for interview having prepared thoroughly. Got a tour of the practice, got asked if I can start in December as soon as I graduated, no questions were asked. Done. Full books from day one.
So when we discussed worst case scenario we said what would happen if business went under. Basically I would be on the hook for a $280k loan but would probably easily earn $200k at another job. That was it. I wasn’t married, had no dependents, live at home rent free and had zero debt other than HECS. It wasn’t a hard decision when I quantified and stated the worst case scenario. Obviously for someone in today’s ultra competitive environment who may be married, the worst case is a lot different. However my point is that you need to consider the financial, emotional and even the impact on your family of the worst case. Also you obviously have to be realistic about the worst case.
We also discussed why I wanted to buy that practice and all the upside we could see as well as aims and projections. I considered the area and competitors and thoroughly looked at points of difference I could have over other practices. What could I do differently to bring in patients. Big brainstorm. The fact marketing was non-existent and what I could do. Based on all this, we were optimistically hoping to get turnover to $700,000 in the first 12 months. I slightly exceeded that mark and did $743,000. That was in 2008-2009. I bought that practice with 1 chair. We added a second at the same location and then we moved it to a 4 chair premises. We have now outgrown it. We have purchased land and are getting plans done up to move into an 8-10 chair facility.
Since that first decision to buy the practice, this is the example of the worst case scenario that I use for everything in business. Often when I talk to people who have an issue or are at a crossroads they are extremely confused about what to do but the first thing I do with them is to quantify the worst case scenario. When this is clearly defined, the decision often becomes much much easier and sometimes it’s not even a decision but rather, a no brainer.
1) worst case scenario – what is it and quantify its effects both financially and emotionally.
2) how much do you need to do to have the same level of earnings as you do before you take the risk
3) what is the upside if the risk goes well.
In part two I will give other examples of business decisions where there is risk involved that commonly arise for my clients as well as my own past experience. This will cover examples of equipment purchase, marketing decisions, starting practices, expanding premises etc.