Don’t Buy a Dental Practice Until You Understand This

0:00 So, if you're looking at buying a dental practice, there's really only one number that matters. There's really only one thing that you care about when you're buying a practice, and that's how profitable is this practice going to be. Now, there's tons of people who will give you quote unquote estimates of how much you're going to be making if you buy this practice. Traditionally, that's what accountants do. And accountants will tell you, "Oh, we have this formula that we're going to use where we plug in what the seller did over the last few years, and we're going to calculate how much money you're going to be making when you take over the practice." They say, "We're going to give you this financial due diligence, and we're going to do this projection to determine what your income's going to be." But the problem is accountants, they do not

0:45 understand the actual dental business. At least most of them don't. There might be a few who do. Now, I actually started out as an accountant. I then went to dental school and became a dentist. I then bought a dental practice and have actually run a dental practice. I then went through the process of selling the practice and I have since helped a bunch of different dentists buy practices. So I have seen what the process looks like for not just myself but also hundreds now of other dentists going through the process of buying a practice. And I can tell you with a guarantee that just because an accountant says you're going to be profitable at a practice, that does not mean that you are actually going to be making decent money at that practice. 100%. If you are a business

1:32 owner, especially a dental practice owner, you're going to need an accountant, you're going to need a bookkeeper, you're going to need help with your tax planning and strategy. But I wouldn't necessarily recommend listening to an accountant when you are trying to figure out if a practice is worth buying. The reason is an accountant is going to look at what the seller of the practice was able to produce and they're going to then have a formula to try to estimate how much you're going to make in the future if you grow the business based on what the seller was doing at a certain percentage per year. The big huge massive problem with doing it this way is that the seller of the dental practice is not going to be there, at least not

2:17 full-time once you take over the office. The production of the office moving forward and therefore the profitability of that office is going to be determined on what you as the buyer are able to produce. And that is not dependent upon what the seller was doing. I've seen it over and over again where a dentist will buy this big massive practice or at least what they think is a big massive practice because the number was high because the profit number was high for the seller. But when they take it over they find out that hey actually there aren't that many active patients at this practice and the reason that the seller was able to produce so much is because the seller was producing a lot per patient. This is where it gets dangerous is when you buy a practice that the

3:02 seller was producing a lot and there are not that many patients at the practice. Most dentists look at the seller's profit and they assume that they're going to earn the same amount as the seller. Right? Accountants, brokers, bankers, they all rely on these sellerbased assumptions. The profit of a dental practice is not transferable. The profit of a dental practice is based upon what you as a buyer are able to do. So, how much you make when you buy a practice is determined by you times the number of active patients at the practice. That's it. The seller has absolutely no bearing on how much money you're going to be making when you take over this practice. The only thing that matters is the number of patients and the amount that you are personally able

3:48 to produce per patient. I'm going to show you a formula that you can use to decide how much you're going to actually be making when you buy a practice. I'm going to show you how to focus on profitability for the buyer, the buyer profitability, not the seller's profitability. I'm going to help you learn how to avoid being misled by practice brokers and sellers by showing you these inflated earnings numbers. IBIDA, whatever that means, and broker marketing. Now, IBIDA means earnings before interest, taxes, amortization. Basically, what that number is is profit. But with some businesses, businesses that are taking out a lot of debt and doing a lot of fancy accounting things, they have to give you this EBIDA number to try to kind of go back and show you what the profit was before all

4:35 the fancy accounting tricks. With dental practices, you don't care about that because you are going to run the business your own way. You're going to be hiring your own accountant. you're going to be doing things differently than the seller was doing it. The only thing that really matters is how many patients there are at the practice and what you're able to produce on those patients. So, by the end of today, I hope you have a better understanding of exactly what you're looking for when you're looking at practices. And I'm going to try to give you a framework that you can use so that when you look at practices personally, you're able to evaluate if this practice is actually going to be profitable for you as the buyer. All right. So, the number one thing that matters is buyer profitability. Buyer profitability is the actual income that you will keep after expenses and loan payments. This

5:22 number determines if the practice is worth buying, how much risk you'll be taking on, whether your lifestyle and goals are going to be realistic when you own this practice, what price it makes sense to offer for that practice, and this number cannot be found on the tax returns or the P&L. And no accountant is going to give you this number. No practice broker, no seller is going to give you this number. This is a number that you have to personally calculate by looking at a bunch of different numbers. And I'm going to be honest with you, most accountants aren't even going to know what you're talking about when you say buyer profitability. They're going to say, "Oh yeah, we'll we'll tell you what the profitability is." They're just going to look at the seller's profitability and then use some sort of very basic spreadsheet like say, "Oh, we're expecting you're going to grow by 10% each year and in 10 years you're

6:08 going to double blah." That's not how it works in real life. In real life, you're taking over a business and we need to determine how much money you are actually going to be making at this business. And before even getting to the formula, it is smart to look at your actual finances and determine how much money do you need, how much money do you want to be making in order to meet your lifestyle demands. If you're living in Tennessee, Georgia, Alabama, your number is going to be a lot lower than if you're living in New York City, you know, in San Francisco, Los Angeles, Seattle. If you're living in one of these big, more expensive cities, that number is going to have to be higher. And if you're living in a more rural area, that number can be a little lower. If you have a big family and have a lot of responsibilities, that number is going to have to be higher. If you have expensive hobbies and things you like to

6:54 do, that number is going to be higher. There's nothing wrong with that. If you're enjoying life, if you're spending money on things that you like to spend it on, and you are able to make the money in order to support that lifestyle, great. You just need to be clear with yourself about how much money you personally want to be making each year. And then I would also add a little bit extra because you want to make sure you're saving for retirement. You're probably not going to want to do clinical dentistry for the rest of your life. As a dentist, you can easily be at a point where you're making twice as much as you need to live off of. If you get to where you are happy living off of $200,000 a year, which in most parts of the country is going to be a very good lifestyle, you make four or 500,000. Yeah, you got to pay some taxes, but you could easily be putting away $200,000 a year towards savings that you could then

7:41 later use for retirement. Or if you decide you want to keep working later, you just have a lot of money that you can buy a bigger house, do whatever you want to do with. The key is just figuring out that number. And then when you look at practices, you need to make sure that those practices are going to be able to support what you want to support and leave you with some additional money left over. Ultimately, any practice can get you to your goal. The question is not if it is possible to make $600,000 at a dental practice. The question is not if it is possible to make a certain amount per patient, blah blah blah. Anything is possible. You could do a startup with zero patience and make a million dollars in your first year if you are extremely good at marketing, extremely lucky, happen to be

8:27 in an extremely necessary area of town where lots of people need a dentist and there's not that many dentists around. Like if you're in the perfect scenario, you can make a lot of money with no patients at the practice. But the problem is there is so much more risk with a startup. Sure, there are some dentists who are profitable in the first, second, third year of a startup, but a lot of dentists are not profitable for years and years when they do a startup. The other issue that you can face when you do a startup is not that you're not quote unquote profitable because it's possible to be profitable working 5 days a week and making $10,000 a year. Yeah, technically you're making a profit, but it's not enough to support any type of lifestyle, and it's taking

9:14 up a huge amount of your time. So, the goal is not just to be profitable. The goal is to be profitable enough to meet your goals while working as few hours as possible. And the more patience that you have at your practice, the lower the risk is when you take over a practice because you are going to have more patients to produce on. Let's say you take over the practice and 200 patients leave. If you had 2,000 patients, you lose 200. Not a big deal. If you buy a practice with 400 patients, 200 patients leave, that's a huge deal. With basically any type of investment that you make, buying a business included, the number one thing that you need to

9:59 ask yourself is what is the potential reward from this? And what are the potential risks for? If you put your money into a savings account, extremely low risk, but the the potential for profits is fairly low. Right now, you can maybe make 4%. Oftentimes, it's down 1 to 2%. It just depends on what the market's like. But relative to other types of investments, you're not going to be making very much money in a savings account because the risk is so low. You put your money into the stock market, an S&P 500 index, something like that, your returns are potentially quite a bit greater than a savings account, maybe two to three, maybe four times as much. But there's a risk. There's a risk that the stock market could go down at a time that you wanting to take that money

10:45 out and then you have to take a loss. savings accounts, you're basically guaranteed that you're not going to lose any money unless inflation is greater than the interest rate, which does happen sometimes, but for the most part, you're pretty much guaranteed you're not going to lose money if you put it into a savings account, but you're definitely guaranteed you're not going to be making a ton of money off the interest from a savings account. Stock market, you might make quite a bit more money, but there's some risk. But when you start getting into really risky things, there's chances you can make a lot of money or lose a lot of money. things like investing into crypto. You hear about people who this happened, you know, five, six years ago when crypto was really small and now it's big. And people make, oh, I just quadrupled my money. I made 10x. I made 20x what I invested in crypto. Yeah, but so many other people also invested at the wrong

11:32 time, sold at the wrong time, and lost money. For everyone who gained that amount of money, there were 10, 20 times as many people who lost money. That's because the risk was so incredibly high for something like that. So with any investment, your goal is to look at what's the risk and what's the potential reward. When you're looking at dental practices, the risk is determined by the number of active patients that are at that practice because the more patients you have, the risk that you're going to have a practice where your schedule is empty. Also, the reward, how much money you're potentially able to make as you get more patients at the practice, increases. So, if you think about it

12:17 this way, the more patients you have, the lower the risk and the higher the potential rewards. As with any investment, you're trying to increase your potential rewards and you're trying to reduce the potential risks. With a dental practice, the number of patients at that practice is going to both increase your potential income and decrease the potential risks. Therefore, the only thing you really really need to be looking at when you're looking at a practice is how many patients there are there and then how much can you produce as the buyer and then you multiply those out and you can estimate what your revenue is going to be. And then when you take into account that the average practice is going to be running at something like a 60% overhead, you take

13:03 40% of that revenue number and that's going to give you a pretty decent estimate of what your income is going to be when you take over this practice. So that brings us to the buyer profitability formula. The first step of which is going to be estimating the buyer's revenue and then you're going to estimate the buyer's profitability based upon that revenue. So, in order to get buyer estimated revenue, you're going to take the number of active recall patients. Now, do not just listen to the broker or the seller to get the active patient number. The reason is they are going to give you this highly inflated number that they're calling active patients. Oftentimes what it is is they look at the report the practice management system and they print out a report that says these are the number of patients that have been seen in the last

13:49 24 or 38 whatever months they're going to use 36 sometimes. That's not really that helpful. What you want to know is how many patients are actively on the recall list to see a hygienist right now. You don't care about someone who came in one time to have an X-ray done on a tooth that was hurting two and a half years ago. That is not going to help you make money in the future. The only thing you care about is how many patients are actually at the practice right now when you buy the practice. How many patients are going to be there? And actually what you really care about is how many patients are going to be there in the future in the first year that you are working at the practice. So right now when you're looking at the practice actually doesn't matter. What really matters is how many patients are going to be there. Now, no one can actually

14:36 look at the future and predict it. So, you got to do your best bet at estimating what that number is going to be. Now, I have a previous video, I will put a link to it at the end of this video that actually goes into how to calculate the number of active patients at the practice. A quick summary of that is you want to figure out exactly how many patients there are through one of three methods. First method, best option, obviously not actually a good option, but it's the best if you could theoretically do it, is you stand there at the door and you count how many patients are coming into the office for 6 months. Okay, you can't do that obviously. Other two options you have, you look at the schedule, you go, you find a month, like look a month or two ago, you count how many patients came in for hygiene for that entire month, and you multiply that out in order to get an estimate of how many active patients

15:21 there are. If you multiply that number by six, you're going to see how many patients are going to come in 6 months. The thing is not every patient is going to come back at exactly 6 months. Ideally, they would, but some come back at 6 months, some come back at a year. So, in order to kind of get a rough estimate, I like to multiply that number by nine. That kind of averages out. If half of the patients are coming back at 6 months, half are coming back at 12 months, the average patient's going to come back at about 9 months. So the number of patients seen by a hygienist in one month times nine is going to give you a pretty decent estimate of the number of active recall patients. Another way to do this is look at the production by procedure report and you can look at recall exams D0120s. You can look at the proies. You can look at

16:06 child proies. You can look at perio maintenance appointments. You can look at a bunch of different numbers and try to get an estimate of how many actual recall exams there were. It's a little bit more complicated than just looking at the recall exam number because some dentists will do recalls at every hygiene appointment. Some only do it every other hygiene appointment. Some will actually do more recall exams than they do proies. I don't know how they're doing that. I guess there's no hygienist available. They don't feel like doing the cleaning, but they still want to do the exam. So, patients come in for just an exam. these kind of things happen. So, this is one of the reason it's hard for someone like an accountant who doesn't actually have experience in a dental practice to really help you understand and estimate these numbers because they're not really going to understand what's going on when why is

16:53 the the estimated recall why is the recall number higher than the proy etc. Like it's a case by case scenario and you have to actually understand what's going on in the business if you're going to look at the production by procedure report. And so a lot of accountants don't even look at production by procedure reports because they don't even know how to interpret it. They just stick to the the numbers of the seller and then they just assume that you as a buyer are going to be able to replicate what the seller was doing. But that is not a good assumption to make because sometimes the seller is overproducing like crazy on patients. Sometimes the seller is doing things that are just really unethical. You know, maybe they're treatment planning things that don't even exist and don't even need to be done. If you buy a practice like that, you're going to be in trouble because you're not going to want to do that type of unethical dentistry on patients. So, back to the formula. We've

17:40 got that number of recall patients. We're now going to multiply it by 0.8. The reason we're multiplying it by 0.8 is because some of the patients when you take over the practice are going to leave. You're going to have patient attrition. That is part of buying a dental practice. There's no guarantee that all of the patients are going to stay. This number is obviously an estimate. There are things you can do to try to increase the number of patients that are staying at the practice when you take it over. We don't have enough time to go over that right now, but just a quick summary of a few things you can do. You need to make sure you are in network with all the insuranceances that patients have. Even if the seller was out of network, you probably should go in network. The reason is those patients were coming to see the seller because

18:25 they had a relationship with the seller. They are not going to have that same relationship with you. If you come in and they were seeing this dentist out of network and they have the option now to go see someone new and be in network and pay half as much as they were paying when they were out of network. They're going to say, "Well, this new guy might be nice. This new girl who's taking over might be nice, but I can go across the street and get my work done for half as much." So that's exactly what they're going to do. So, especially when you start out, you need to make sure you're in network with all of the insurance companies. Another thing you can do is try your best to keep as many of the staff on during the transition as possible, especially the hygienist. The patients may have been coming to see that hygienist for 10, 15 plus years, depending on how established this

19:11 practice was. Those patients have sometimes better and more lasting relationships with the hygienist than they do with the dentist. Oftentimes, patients are coming to the practice to see the hygienist and they don't even know who the dentist is. They don't care. They're there because they know that hygienist. So, if you keep the hygienist that has been seeing patients for 10 years, you're likely going to have a much better time at retaining patients than if you take over the practice and it's just you and a bunch of new staff. So, once we've estimated number of recall patients, we've timed that by 0.8 in order to take into account something like a 20% attrition rate. We're then going to look at the number of new patients the practice sees. Remember, we're trying to see what kind of production are you going to be able to do in a single year at this practice. Number of recall patients

19:58 times 08 lets you know the existing patients, but you're also going to get new patients in at the practice. So, you can add in those new patients. For the sake of this estimate, I like to use the number of new patients that the seller had, not some madeup number that you're guessing that you might be able to have at this practice if you are working on marketing. The way you figure that number out, you look at the number of comprehensive exams that were done at a practice. Maybe you also need to look at limited exams. Once again, that's just highly dependent upon the practice because some dentists, every new patient is going to be a comp. Some dentists have some new patients as limited, some as comps. Every dentist is different, but comp exams is the best way to quickly estimate how many new patients

20:44 there are. Now, be a little bit careful because there are some insurance companies that will actually allow you to do a new comprehensive exam on existing patients after a certain number of years. And some dentists who are really into the numbers and really savvy will have figured that out. And so, they might be doing some comp exams on existing patients. So, once again, you got to look at all the numbers. You got to look at all the documents. You can't just make assumptions based upon the first thing that you see because every practice is different. You have to be asking the seller a lot of questions about these numbers to verify things because every dentist is different and every scenario is a little bit different. But for the most part, you get that number of comp exams, you're getting the number of new patients. Once you add together recall exams, taking into account attrition plus new patients, that's going to give you the total number of patients that you are

21:30 projected to see in your first year of ownership. It's very simple. Now you are just going to multiply the number of patients by how much money you are able to produce per patient per year and that is going to give you your first year revenue. So how are you going to calculate this buyer revenue per patient number? I mean the easiest and most straightforward way to do it is look at what you're producing at your current associate job. Find out how many patients you saw and just divide that number out. Now, make sure that the number you are using for the number of patients doesn't count patients that you've seen multiple times in a year as multiple patients. You want to figure out the actual number of patients, not

22:18 the number of appointments. There are a ton of different ways to do this, a bunch of different reports that you could use to try to estimate what this number is. Also, if you're at an associate job where you're not that busy and you have 20 minutes at some point, just go back and count. Just look at a month and see how many patients did I see in this month. Then you can multiply that out in order to figure out the actual number. Take your total revenue, divide it by the number of patients, and that's going to give you your buyer revenue per patient. Now, keep in mind that when you are the owner of a business, you are also going to be receiving income from what the hygienists are doing at your associate job. If you were at an office where there are multiple dentists and you're just looking at your personal production, then you need to take into

23:03 account that an additional 25% or so of revenue is potentially going to be generated by the hygienist at the practice. And so you can actually add that back in. If you're at an office where you're the only dentist, well then you just look at total office production and that'll give you a decent number of what you're going to be able to do at your total office. So that's going to depend on your individual situation as an associate. Overall, you're trying to figure out what can you produce with an entire office in a team with you at an office in a single year per patient. So once you have this buyer revenue number, it's pretty simple. You're just going to take your buyer revenue, you're going to times it by 0.4, and then you're going to subtract out any practice loan payments. And then that'll give you your buyer profitability for your first year. Now,

23:49 why am I multiplying by 04? That's assuming that you're going to run your practice at a 60% overhead and you're going to keep 40% as profit. Can you do better than this? Yes, absolutely you could. Can you do worse than this? You could, but I don't recommend it. Aim for at least 60. My first year of ownership, I was able to keep this number about 50%. Some dentists are able to do even better than that. The average for dentists who are at least kind of trying is usually about 60%. And so for the purposes of this estimate, I want to say overhead is 60% and you're going to be able to net about 40% of the revenue and take that home as your profit. So buy revenue times 04 40%. Take out practice loan payments for the entire year.

24:36 That's going to give you your profitability. So how do you figure out what your practice loan payment for the year is going to be? I mean, you can just go to Google and you can type in something like um loan payment calculator, payment calculator, right? Loan amount. You just figure out how much are you going to be buying the practice for. And then you also add something like 100,000 because you're probably going to want some working capital. So, let's say you're buying a practice for $800,000. You want 100,000 in working capital. Your practice loan is $900,000. Most loan terms are at about 10 years. Sometimes you can do 15. If you can afford 10, it's better because you're paying less in interest. You're going to get it paid off faster. Interest rate, I've seen as low as like 4.8 right now. I've seen some people get as high as 6%. Some people as high as

25:21 10% if they have some sort of bankruptcy in the past or something, but on average, you're probably going to get right now around 5.5%. Hopefully better, but we'll use that for our estimate here. And this will give you your monthly payment right there. $9,700 per month. Multiply that out. This one's pretty easy. It's about $10,000 a month. So about $120,000 a year for your loan payments. So in this example, let's say your revenue that you calculated is a million a year. Your buyer revenue million times point4 gives you 400,000. You subtract out 120, you're left over with $280,000. So, most likely you're going to be taking home about $280,000 if you buy this practice. Now,

26:08 keep in mind when you're paying back that $120,000 per year practice loan, you are not actually paying that as an expense because that is really an investment. Once you pay that practice loan off, you are then going to have an asset that you can sell. It's like an investment account where it's probably going to grow in value if you're going the practice. You don't even have to pay the entire loan off before you could sell the practice. The first practice that I bought, I sold it fairly soon after buying it. I still had a lot left on my practice loan, but I sold it for about twice what I paid for it. Therefore, I had enough money to pay off the practice loan and still take a pretty decent profit home with me. So overall, if you pay back this loan in 10 years, your

26:55 total interest expense is going to be $272,000. So $272,000 divided by 10. I guess we didn't really need a calculator for this, but so you're spending like $27,000 in actual interest expense per year. And so if you really wanted to be more accurate on this buyer profitability, maybe instead of subtracting that 120, you just subtract the 27 and that gives you the actual amount of equity you're building in addition to just the cash flow. But for the purpose of this estimate, we're estimating buyer profitability. Maybe a better word would be buyer cash flow because there is some profit that you're making that you're not yet realizing that's going to be held up in the equity of the practice. Once again, this is

27:40 this whole thing is just an estimate, but it's going to give you such a better estimate than if you just simply look at what the seller was doing and multiply that out. And next, I want to show you why it is important that you estimate revenue and profitability this way rather than just looking at the sellers. So, why isn't this common knowledge? Accountants calculate seller profit, not buyer reality. Accountants are going to look at how much the seller was doing. They're going to multiply that by 10% each year, saying, "You're going to grow it a little bit and say, "This is what you're going to make." That can happen. That might work out. It might not. The thing is, brokers and sellers and banks and accountants, they're all incentivized to have you buy this practice. Their business is predicated

28:28 on you buying this practice. And especially for the seller and the broker, the more you spend on the practice, the better because the broker is going to get a commission on the sale. And so the more you pay, the more that broker is going to get to keep. An accountant, on the other hand, the accountant is probably a little bit more on your side than a broker, especially if you hire the accountant because the accountant, they'd be happy with you paying less for the practice. They might help you a little bit on negotiating, but they're not going to truly understand how profitable the practice is going to be based on the sellers. But they're also incentivized to have the deal go through as quickly as possible because their goal is to get you on a monthly retainer where you're paying them a certain amount of money each month. And so the sooner that you close on the practice, the sooner you're going to enter into their monthly retainer

29:13 where they can charge you for their services. So, if a practice comes along that maybe it looks good on paper, but it's not going to be that profitable for you in the long run, the accountant, first of all, might not really understand that because they say, "Oh, well, the seller was profitable. I thought you would be profitable." Yeah, the accountant thought that. But you're not going to make money based on what the accountant thinks. You're going to make money based on what you're actually producing. So, don't just go based on the accountant's thoughts. The accountant is probably going to be a little bit overly optimistic because they want you to buy quickly so that you will use their services. The brokers and the banks are getting a commission. Banks, be careful with banks. Bankers get a commission based upon the purchase price. They want you to pay as much as possible for a practice. They, if

30:00 there's multiple practices available, they're going to steer you towards the more expensive ones because their return is higher when you buy a more expensive practice. There's nothing wrong with buying an expensive practice. In fact, if you can find an expensive practice that has a lot of patience, that could be an incredible practice because you might be at a position where you could already hire an associate to work there with you and then you're making significantly more than you would if you were working as a solo dentist. But what makes a big practice good is not that the revenue or the profitability was high for the seller. That is not how it works. Because remember, sometimes sellers are overproducing on patients or maybe they're not even technically overproducing, but they're just doing a

30:45 lot of dentistry. If you come in and the seller just did a ton of crowns, a ton of implants, a ton of ortho, you know, all the lower interiors are straight, all the top anteriors have brand new crowns, and you're going to come in, there's not going to be that much work for you. So, I'm going to show you an example here on a Google sheet. two practices that are both the seller was producing $800,000 per year. However, if you as the buyer buy these practices, you are likely to have very different outcomes in your first year of ownership. All right, so here we have seller revenue for practice one, $800,000. It's a lot of money. Practice number two, also $800,000. Practice number one, seller made $400,000, not $4 million,

31:31 $400,000. Good profit. Practice number two, $400,000. If you're an accountant, if you're a banker, you're looking at these two practices and you're saying, "Well, they're equal. Both made $800,000 in revenue, kept 50%, and went home with $400,000 in profit." Buy either one. They're both the same, right? Maybe. Maybe they're the same. Maybe they're very different. This is not enough information for us to determine which practice is worth buying. So, so let's figure that out. Let's look at number of uh active recall patients. Practice number one, 400 recall patients. Practice number two, 2,000 recall patients. So, practice number one, the seller's revenue per patient equals

32:18 $2,000 per patient per year. Okay. Practice number two, which has 2,000 patients, $400 per patient per year. I want you to look at that again. Practice number one, same profit of $400,000. Practice number two, same profit of $400,000, but the seller at practice number one had to produce $2,000 per patient every year. Practice number two, it was only $400 per patient per year. Just doing two cleanings and exams with X-rays on a patient is going to get you close to that $400 per patient per year. The dentist at practice number two is basically not doing any dentistry on patients. They're just letting patients come in for their hygiene checks and

33:04 maybe doing a few fillings and a few crowns in the patients that like absolutely need one. Seller number two, $2,000 per patient. That means each patient that comes in, you're going to have to do at least, you know, two crowns on, maybe one crown, some fillings, maybe do Invisalign on at least one out of every 10 patients. You have to produce so much per patient in order to meet this 2,000 per patient number. And it's super easy to produce this $400 per patient number. But the thing is, you as a buyer, you are going to come in and you're probably going to be producing about the same number per active patient regardless of which practice you buy because you are not buying the sellers methodologies when you take over this practice. So, let's look at buyers revenue per patient.

33:49 Let's say you calculated it out and you were able to do about $1,000 per patient. For the sake of this form, we're not going to spend time figuring out active patients and multiplying by the 08 and and adding in the comp exams, all that. Like, you need to do that for an actual practice. This is just a quick estimate. But let's say that you are able to produce $1,000 per patient. So, total revenue for the buyer is going to be $1,000 per patient per year times number of patients per year is going to give you $400,000 in revenue. Let's do that same calculation but at the practice number two where there were 2,000 active patients, $2 million. You need to understand this. A practice where the accountant, banker, the seller, the

34:36 broker, everyone was saying these two practices, they're the same. They're both producing $800,000 per year and they're both keeping $400,000 in profit. They're both equal. Practice number one, your revenue the first year is likely to be about $400,000. But for practice number two, your revenue is likely to be $2 million. The practice that you buy matters. The number of active patients at the practice you buy matters. The amount that you can personally produce matters. All that other stuff doesn't matter. Now, I know I told you in order to estimate your profit, we're going to times that by point4. And for this estimate, we will quickly do that. So profit for per buyer at uh 40% profit,

35:24 it's going to be 160 800,000. And remember, you have to subtract your practice loan. And that was 120K per year. All right. And so practice number one, you're going to walk away with $40,000 your first year. Whoa. You should have stayed at your associate job where you're making 200,000. Why would you buy a practice when you're making 200,000 as an associate to go and make $40,000 a year? like that is just it's dumb. Don't do that. But practice number two, you're making $680,000 your first year of ownership. This is not made up. I have seen multiple multiple multiple dentists hit this number their first year after buying a practice. If you buy the right practice, only if you buy the right

36:10 practice. If you buy practice number one where there are only 400 patients, you are not going to make $680,000 your first year, it's just not going to happen. The number of new patients you would have to find to bring into the practice in order to grow it to a number where you could produce $680,000 per patient is just not going to happen. It's not realistic. But if you buy practice number two, even if you do a terrible job at retaining patients and you're just not that good of a dentist and you're not producing that much per patient, you are basically guaranteed to be successful. And if you do better than this $1,000 per patient, if you're doing implants, if you're doing Invisalign, if you're comprehensively treatment planning, and you're convincing at actually converting customers into sales, you could

36:56 potentially make even more than the $680,000. I know five dentists within 10-minute driving distance of my house that are making more than a million dollars a year. And only about half of them have associates. Some of them are making that million dollars a year in profit, not revenue. We're talking profit by themselves. If you can find a practice where you have 2,000 active patients and you are able to produce $2,000 per patient, let's just do that math just so we have it here. If you have 2,000 active patients and you're producing $2,000 per patient and you are able to keep your overhead at 60% with a 40% profit margin and your practice loan is $120,000 a year, you could be making

37:43 $1.5 million in profit each year that you are at your dental practice. If you're maybe you're still in dental school, maybe you haven't been working for that long, maybe you don't know that many experienced dentists and to you this number seems like it's way too high, like that's not realistic. I'm telling you, this number is realistic. You say, "Well, I looked at the Bureau of Labor Statistics and it said dentists only make on average $180,000 a year. There's no way this is right, Dr. Marshall. That that doesn't make sense. Dentists hire accountants." Now, I've been being kind of negative about accountants this entire this entire video, this audio, whether you're listening to it on podcast or video, accountants are great when you use them for accountant things. If you have a good accountant that is able to help you

38:28 find ways to put some of this money into investment accounts, trusts, etc., there are ways that you can get away with reporting your income as a lot lower than it actually is. So, absolutely, you need an accountant. Accountants are great. find. Honestly, I would hire the most expensive accountant you can find. Hiring an accountant is not an area that you want to save money on. You want to find a good accountant because especially when you're making this kind of money as a dentist. If you have the right accountant, that accountant could pay for him or herself 10 20x what you're paying them, the kind of value that they can bring you by the amount of money they can save you in taxes. Just don't use an accountant to have you decide if you should buy a practice. use an accountant to help you save money on taxes. So, I hope this has been helpful

39:15 that you can see if you buy the wrong practice, you could be making significantly less money than you're making at your associate job. But if you buy the right practice, you could be making the kind of money that people who aren't dentists and people who haven't actually owned a practice just doesn't even think is possible. Before I became a practice owner, I heard of a dentist who was making $350,000 a year. And I thought that was a lot of money. After being a practice owner myself and after making friends with a bunch of other practice owners and figuring out how much money they're making and actually understanding this stuff, I look at a dentist making 350,000 and I'm like, "That dentist isn't making that much." You can make so much money as a dentist. And the way you do it is by buying a practice with a buttload of active

40:01 patients. It's that simple. Common mistakes dentists make using sellers numbers without making adjustments. This is what practice buyers do. They look at the seller was producing this much. This was their profit. Oh, this is an awesome practice. I'm going to buy it. Don't do that. Don't do that. Watch this video again. Watch it three, four, five times. Go through and make sure you understand these numbers because if you understand these numbers, you are going to be making so much money. Ignoring recall attrition or patient churn. That's why we're multiplying by 08 in order to take into account that some patients are going to be leaving. Overestimating your ability to produce at the seller's level. I get calls from dentists all the time who bring me these practices where the seller was producing 2,000 3,000. I've seen as much as $5,000 per active

40:47 patient. And this this buyer who's a year out of school, they think they're going to be able to replicate what that seller was doing. I almost guarantee you you're not going to be able to. you are not going to be able to produce that much per patient for so many reasons. Number one, oftentimes these practices are out of network. Maybe they're fee for service, only taking cash. They're going to be able to make a lot more per patient. But when you buy a practice that's fee for service, you're probably not going to keep those patients. That's you just can't look at it that way. As you grow and develop relationships with patients, you might be able to get to a level where they trust you and they value you enough that they're willing to come see you out of network. But when you are a new dentist, you are probably not going to have that type of goodwill with the patients and you are not going to be able to charge that kind of expense per patient. So you need to be

41:33 realistic with this number. Also keep in mind the rich patients, the ones that are going to be willing to do 20 crowns in an afternoon because they want to do a full arch remake, you know, those types of patients that are getting all on fours, all on X, whatever. those types of super profitable patients. Oftent times you have to build a relationship with them first before they're going to trust you in order to pay you $60,000 in an afternoon. Also, you have to keep in mind referral networks. The other day, I was looking at a practice with a client who brought me a practice where the seller was doing crazy numbers. Like, I'm talking4 to $500,000 per patient. But when you really looked at what the seller was doing, they were doing a lot of these huge cases where they were making $50,000 in an afternoon and a lot of

42:19 those patients were patients that were referred from other dentists. Dentists that didn't feel com comfortable clinically actually doing this work and they were referring that work over. If you as new dentist one to two years out of school come in and try to take over a practice from someone who had this crazy high production number, you're probably not going to be able to replicate that. And the people who were referring patients to that dentist who was 40 years out of school and had all this experience. They're not going to be referring patients to you. It's just not going to happen. It's going to take you years in order to get to the point that other dentists are referring you patients. Underestimating loan payment impact on monthly cash flow. You got to be careful when you buy a big practice. Sometimes that loan number that you have to pay back can be really high. And yes, yes, paying back a loan is not

43:05 necessarily an expense. I understand that. And it's I would much rather be paying back a loan because you're building equity in something than putting that money towards just some random expense that you're not never going to get that money back. But you need to also look at cash flow. You need to make sure you're making enough money in order to cover your expenses, or else you're going to have to go find an associate job to work while you're also at this practice. That is not the way you want to be spending your weekends is working at an Aspen or H Heartland or some emergency clinic on the weekends in order to pay the bills so that you can go and lose money at your practice. Be very careful and make sure you understand because dental practice loans can be a lot of money. You need to take that into account. If you buy the practice that's doing $600,000 a year, $700,000 in profit, buyer's profit, not

43:50 sellers profit, then you know, paying paying $120 a year for your practice loan is not a big deal. Yeah. I mean, if you make $700,000 in profit, you pay 120 580 580 is still really good. But if you're only making 200 120 payment and you're walking away with $80,000, you're probably going to have a hard time living any decent kind of life, especially if you're in a city off of $80,000 a year, unless you're just independently wealthy and your spouse is bringing in the rest of that money to cover your expenses. And I just got a few questions and answers here. So, how is this number different from what my accountant shows me? And we've gone over this, but I'm going to recover it. The accountant is going to look at what the seller was producing and they're going to multiply that out and they're going

44:37 to assume that you as the buyer are going to replicate what the seller was doing. If you buy a practice where the seller was producing less than a,000, ideally less than $500 per patient per year, it's going to be super easy for you to replicate that. If you buy a practice where the seller was producing 2,000, 3,000, $4,000, $500,000, not $500,000, but $500 $5,000 per active patient. Well, then you're going to be in trouble because you're not going to be able to replicate that and you're not going to be able to match what the seller was doing. Why do you multiply recall patients by 1.8? Remember, when you take over practice, some patients are going to leave. You're going to have patient attrition. That 80% number gives you a realistic estimate for how many patients are going to be staying on your recall

45:23 system after you take over the practice. What if I plan to grow the practice? Should I still use this model? Yes, of course you should. But remember, when we're doing these estimates, we are trying to be conservative because if you when you buy anything, you're looking at risk, you're looking at reward. Any type of investment, risk and reward. At this stage, we are looking at what's the worst case scenario. If you buy the practice and you only have 400 patients, you might only make $40,000 your first year. Can you live off of that? Probably not. So, don't buy that practice. If you do better than this, great. Remember, we put our our uh overhead number at 60%, 40% profit margin. You might be able to get that to 50. I was able to get it to 50. That means you're keeping an extra

46:09 10%. That's awesome. Of course, you want to try to do better than this estimate, but this estimate is taking averages and you might not do as well as you think your first year. It happens. It might take a few years for you to get up to speed. You want to be a little bit conservative with these numbers, with these estimates. So, that worst case scenario, you're not sitting out laying out on the streets at night because you're homeless because you can't afford, you know, anything because you're a dentist. Obviously, that's not actually going to happen. But what could happen is you could be making a low number to where you have to get a second associate job and you don't have money to go on any nice vacations and you don't get to live the kind of lifestyle that you want to live. What should I use as my revenue per patient? Remember, you're calculating that based upon what you are able to do at your current associate job. That's the easiest way to

46:56 do it. How do I estimate my loan payments? Remember, go on the site, find a loan payment calculator. Interest rates are probably going to be 5 to 6%. terms typically going to be about 10 years. If you're not sure about this, reach out to a banker. The bankers are happy to give you an idea of what the rates are right now, help you understand what you're going to be able to afford. What overhead is included in the 40% profit number payment for staff. Payroll. Payroll is your biggest expense. It's usually about 30%. The second biggest expense, usually either supplies or rent. Ideally, you keep both rent and supplies each respectively under about 5%. So 5% for rent, 5% for supplies, 30% for staff. You're already at 40% there. And so then that gives you another 10% that you can use for all

47:41 your other stuff, lab expenses, renovation type stuff, equipment upgrades, etc. Does this model work for startups? No, absolutely not. Because I mean, actually, it kind of does because you just have to use zero for the number of patients and but don't don't do a startup if you want to make money as a dentist. It doesn't make sense. You can buy a practice with 2,000 active patients, make $700,000 your first cure. Why are you going to start a practice where you have zero active patients and likely lose money your first year? Just doesn't make sense. But I mean, I guess, yeah, you could use this formula for a startup, but it's super easy. Just plug in zero for the number of active patients. Can this model be used for comparing multiple practice? Yes, that's what I have designed it for. That's why I'm giving it to you. Every practice you look at, you need to be doing this

48:27 calculation and figuring out how much money am I going to be making if I buy this practice. And you want to buy the practice where you're going to be making the most money. It's that simple. Now, you also want to take into account your lifestyle, you want to buy a practice that's in an area of the country, maybe a city that you want to live in. If you have a specific city you want to live in, and you know, in another state, you find one that's more profitable, but you don't want to live there, it's not worth it. Don't don't don't make a bad decision just in order to chase after money. As long as you're making $300 to $400,000 a year in profit, that's enough money. You do you really need more than that? No. Like you can be perfectly happy on $300 to $400,000 a year. If you can make more, should you? That's up to you. Me personally, if I'm at a point where I'm making3 to $400,000 a year,

49:12 I'm finding ways I can cut back on my schedule. I'm finding ways I can, you know, come in later, leave earlier, maybe take more vacation time off. I'm finding other ways to enhance my life and trying to hang around that $300 to $400,000 a year number. Like I said, lots of dentists are able to make more than a million a year. But to be fair, if you are making more than a million dollars a year, you're probably still working pretty hard. If you love seeing patients and you love making money, do it. I mean, whatever makes you happy. You know, I know some dentists who have some really fancy cars, some really fancy houses, just really, really nice stuff and that makes them happy. Great. Me, I am honestly happy with more basic stuff. I'd rather have more time, more energy, more freedom. But this is the

49:58 awesome thing. When you're a business owner, you get to make those decisions. You get to make those trade-offs. Should I still look at IBIDA, sellers profit, seller cash flow, etc.? Yeah, you should. You should look at it. It's useful to give you some context. It gives you, you know, an idea, a place to start. When when I first look at a practice, usually one of the first numbers I look at is what was the seller's revenue. I'm not going to buy a practice based upon that revenue, but looking at the seller's revenue is the quickest way to get a decent idea just with one number of how big this practice is. What's a good target for buyer profitability? Minimum $250,000 a year. If you're buying a practice, you want to make sure that you're at least going to make $250,000 a year. Because if not, why are you doing it? You can go get a job at any old DSO and make $250,000 a

50:47 year. If you want to just make $180,000 a year, just go get an associate job. Take life easy. Like, why go through this hassle? But if you want to make more than $250,000 a year, if you want to make 300, 400, 500, 600, 800, a million plus, then you're going to want to be an owner. So first year buyer profitability, the highest realistically you're going to be aiming for in your first year is probably $800,000. Those dentists that are making more than a million a year, they've probably been doing it for a while. There's probably some examples of dentists who have bought practices and made more than $800,000 their first year. It's probably happened. I personally have not seen anyone make that much their first year out. I've heard some rumors of it happening. I

51:32 don't know. You never know what to believe when you hear rumors. But I can say without a without a shadow of a doubt making5 to $600,000 your first year out and owning your own practice. That's an actual realistic number to aim for. So minimum 250. Realistically, shoot for about 500, maybe as much as 7 or 800. All right. So, if you have enjoyed this video, I actually prepared a practice evaluation checklist where we go through a lot of these numbers plus additional numbers to really kind of help you understand what are you looking for when you buy a practice. The link for that is going to be in the description. It's a free PDF download. It's I think it's like 30 40 something pages. It's optimized to view on your phone. Check it out. You can learn a lot

52:18 more about this kind of stuff. I don't really know why I release that other than I'm trying to get some emails for my email list because I like to send out some emails talking about cool things I've learned about practices and things to share. So, if you're interested in downloading that document as well as getting an email with some interesting information about practices that I've been looking at recently, that's down in the description, the practice evaluation checklist. If you are looking for someone to help you evaluate practices, someone who is not just an accountant, but also a dentist who's actually own practices, that's what I do. I help dentist evaluate practices. This is what I love doing. I currently am doing this full-time. I really, really enjoy doing it. I was a practicing dentist up until fairly recently, but I started doing this part-time, and the demand for this

53:04 has been crazy. There are so many dentists right now that are wanting to buy a practice and they're just not entirely sure about how much they should spend. They're not entirely sure which practices they should buy. And there's a huge complex of practice brokers, bankers, accountants, lawyers that have kind of cornered this market. And with and a lot of dentists, they decide they're going to buy a practice and they start talking to these representatives and they refer you to all these other representatives and before long you're like way over your head and you have some practice that you're not even sure if you should actually be buying it. But the way that the system works is they just keep moving you along and moving you along and it's like before you know it, you you're about to take out a loan for a million dollars to buy this practice that you're not even sure that you should buy. You're not even sure if it's going to be profitable. If you're

53:50 in that situation, which I'm telling you, there are a lot of people in this situation, reach out and I would absolutely love to look at that practice with you. That is why I offer this service. I charge a fixed fee unlike brokers and other people who charge you a percentage. I'm just a fixed fee. That way, I'm able to give you good advice. If a practice is smaller, but it looks like based on these numbers that we've looked at today that you are going to be able to produce a lot during your first year, those are the types of practices that I want to be able to recommend you buy. Whereas, if you talk to someone like a banker who's getting a percentage of the sale price, they're going to be incentivized to have you buy the most expensive practice possible. My goal on the other hand is to have you spend the

54:37 lowest number possible in order to buy a practice where you are going to be making the most money possible. That is what I do. That is how I help dentists. If you're interested, you can find my information in the contact form below. Visit my website, practiceone.com. Reach out and I'd love to get started working with you. Have a great day and good luck on buying a practice.