The “3-Day-a-Week” Owner

This article was originally published in “The Profitable Dentist”, Winter 2017 edition

During our travels all over the country, and conversations with students, we have noticed one common theme when it comes to post-graduation goals. The dream of maintaining a healthy work life balance by working a three-day-work week.

Sounds nice of course, but how can they make that dream a reality?

Most students we run into approach graduation with the game plan to work for so many years, then decide if ownership or associateship is right for them. But, with student debt looming, personal work-life balance goals and corporate dentistry knocking – most students come to the conclusion that ownership just isn’t for them.

But that isn’t necessarily the case. Economically, working three days a week as a single owner of a practice makes no sense. But, what if you co-owned a practice with another doctor that also worked three days a week, therefore, keeping the practice productive for a full five business days every week? Consider these three situations:

Scenario 1: Be an Associate

The most obvious answer to the desire to only work three days a week is to simply be an associate.

For example:

The average student walks out of school with over $400,000 in dental school debt. If a new doctor works an average of 150 days annually, produces $3,000 of clinical dentistry daily, checks hygiene, and earns associate compensation of 30% of collections, they will earn a salary of around $135,000 annually.

Sure, this situation partially accomplishes the work/life balance goals and gets the job done. But with lower pay, it can take even longer to pay down dental school debt, which can impede on the ability to save for big milestones, like retirement.

Scenario 2: Become an Single Doctor Owner

A second solution is to purchase a practice and be the sole doctor.

For example:

Let’s take a practice that produces $600,000—which is equivalent to the $450,000 of clinical and approximate $150,000 of hygiene.

Let’s also assume the price for the practice is $470,000 and with a 10 year loan at 4.25%, the debt service would be approximately $61,000 annually. If the practice has 68% overhead, then after servicing the practice loan, the doctor would yield approximately $131,000 annually.

So why buy a practice, take on debt as well as the risk and responsibility of ownership to make equal to or less than the associate in Scenario 1?

While there are many benefits to ownership that we could argue to still make this the better long-term decision, like tax benefits and pension opportunities to name a few, many new doctors struggle with whether ownership is better.

This is where the larger picture has to be considered. It’s easy to assume owning a practice can conflict with your long-term personal work-life balance goals, like working three days a week.

Is it possible to have the best of both worlds?

Scenario 3: Find a Partner and a Bigger Practice

It is hard for new doctors to entertain the thought of owning a larger practice, most likely because it’s easy to assume it would require working four to five days a week, as well as added pressure that comes with management.

If a single doctor tried to run a high-production practice, then those assumptions are likely true. But what if this doctor found a colleague that practiced similarly and wanted the same work life balance in their life? What are the economics if, together, they purchase a $1,300,000 practice ($900,000 clinical and $400,000 hygiene)?

Let’s look at these two providers that are doing the same $450,000 of clinical production and checking slightly more in hygiene than in the smaller practice highlighted in Scenario 2. With a larger practice and a partner, they have the flexibility and increased profitability to do that.

For example:

Both doctors could work three days a week, but operate a full five-day-a-week practice with a full overlap day or perhaps a partial overlap day that runs 7 a.m. to 7 p.m. Having a partner also allows for coverage during vacations, life events and ultimately the sharing of the overall practice responsibilities that could seem overwhelming to do alone.

Direct costs, which increase when production increases—such as supplies, lab, etc., would be higher. On the other hand, fixed costs, which stay the same regardless of production—such as rent, internet, phone, etc., would see efficiencies gained by the increased collections.

If we compare the practice in Scenario 2 versus the practice in Scenario 3, presuming both practices operate out of a 2,000 square foot, 4-5 operatory practice, we can take a closer look at how these efficiencies are gained. Take a look at the expenses in the table below:

 

 

Expense

 

Annual Amount

% of Collections:

Scenario 2: $600K Collections

% of Collections:

Scenario 3: $1.3M Collections

Rent Expense

$55,000

9.2%

4.3%

Repairs & Maintenance Expense

$15,000

2.5%

1.2%

Advertising Expense

$20,000

3.3%

1.5%

Computer Expense

$2,000

.3%

.2%

Legal & Accounting Expense

$8,000

1.3%

.6%

Contribution of Selected Expenses to Overhead:

16.6%

7.8%

 

As you see, the selected expenses contribute 16.6% to the practice’s overhead in Scenario 2. The same expenses only contribute 7.8% to the practice’s overhead in Scenario 3, equating to a potential increase in profitability (assuming all else is equal) of 8.8% for roughly the same individual doctor production.

Fixed costs can also become more efficient, as we often see larger practices experience a decrease in their direct costs as it relates to staff costs.

For example in Scenario 2, if the practice ran two front desk employees then it would certainly not need to double that to run the $1,300,000 practice in Scenario 3. Get more information on cost efficiencies in multi doctor practices by downloading the Cain Watters and Associates How Does Your Dental Practice Compare? Report at cainwatters.com/hdypc.

But it doesn’t stop there. Let’s say the price of the practice is $1,000,000 and the doctor needed an additional $80,000 for working capital, then the total loan for the two partners would be $1,080,000. Assuming the same terms as noted in Scenario 2, your debt service would be approximately $132,000 annually ($66,000 per partner).

If the practice now has an overhead 55% because of the efficiencies noted above, the practice would yield approximately $585,000 in profit per year. If each doctor is producing the same amount, each partner would have cash flow of $227,000 annually, after debt service.

In Scenario 3, both doctors are still working three days a week and after debt service are still making approximately 68% more than they would as an associate or as a single owner of a smaller (more inefficient) practice.

Best of both worlds, achieved.

I am passionate about practice ownership. I believe that the tax planning advantages, retirement planning opportunities and the non-financial aspects of having more career control make ownership the right decision for most dentists.

Even if you are passionate as well, there may be other hurdles in life stopping you from jumping into ownership. We believe that ownership is possible for everyone—if you can think outside of the box, we believe you can own your own practice and have the work life balance you desire.  

 

Charles Loretto is the founder and managing partner of NDP and a partner of CWA.  Charles speaks to private practice owners, residents and dental students across the country on the importance of ownership and making the right financial decisions.