Extraordinary times call for extraordinary conjectures. One doing the rounds is that more dental associates than usual will be eying their first practice acquisition in order to secure their income ahead of the expected downward pressure on associate pay in the months ahead. This is a bit like talking to a worried-looking bloke at the bar, discovering he’s just been laid off from the pub after a downturn in trade, and suggesting that all he needs to do to make sure he gets paid is buy his own pub.
Dentistry, like the pub trade, has a ready supply of workers, and it’s universally known that publicans work long hours, like dental practice owners. A further similarity is the increasing pressure on profit margins as costs rise. In dentistry we see an average margin of three to five per cent which suggests most practices (pre-Covid) were run for salary only. At such a low margins we have seen daft forecasts prepared where a buyer is rostered to live off a small £30k salary in order to support a buying application (a fate familiar to publicans). The buyer would be no better off until they sold the business 15 or 20 years down the road. This low level of pay-off versus investment is unusual from a conventional investor perspective. So why, when you know that running a business is subject to unexpected risks, would you conclude that now is the best time to enter that risk game? Perhaps you want to run a business and give flight to your entrepreneurial spirit, you feel you can leverage a competitive advantage, you’re willing to put in the hours, you have a drive to create something and forge a legacy.
The reason is unlikely to be that you want to secure your salary and only your salary, because in no way is that going to be the case. You’re going to have to deal with a mountain of other things. I spoke to a practice owner yesterday whose boiler broke and she was drenched from head to foot. You never know what business ownership is about to throw at you. Things go wrong, things break, people are complicated and difficult to deal with. The best laid plans of mice and men often go awry. So I would caution against overly simplistic advice. This is a confusing time to be an associate. While you are not working you might have a rising sense of panic and feel compelled to dive in to big commitments just because you can, but remember that you can make your situation worse as well as better.
Here is what we wrote for first timer buyers in July 2019 in our Buyers Download Guide. It stands up today with the caveat that business post-Covid will be even more difficult owing to increased PPE costs and restrictions: “On the assumption that this isn’t going to be a charitable venture, the simple objective is to make sure you are better off. Why else would you be taking on the risk? The burden of 15 years of loan repayments should demand it. Making a financial forecast is relatively straightforward, but don’t deceive yourself because of emotional bias. Also make sure you pay yourself a market rate. Getting the finance is not the ‘victory’ in owning a practice, it is simply putting your sneakers on at the starting line.
“So don’t think that the little ‘drawings’ line in the forecast which will pay you £3k per month will magically change once you’re at the helm — it won’t. If done properly the first version of the forecast will say you are worse off, and if you think about it logically this is correct: a practice which has operated the same way for the past 10 years, suffering underinvestment, is not going to be as successful as it could be. This is where your first lesson in practice ownership can start as you reflect and revise the business model. You should be aiming for a minimum of 12% profit for the risk you are taking and the time and money you are investing. We would recommend that you prepare a well thought out business plan, not because the bank makes you, but because it’s the right thing to do for the business.”
We’re here to talk if you’re in need of advice.