You asked, we're answering! Today we're introducing Real Talk to answer your questions about career planning, finance, practice management during transitions, and more. First up is this More Than Meets the Eye post, designed to answer one of our most-asked questions: "How do I compare two practices?"
Quick, what’s the #1 thing you should look at when evaluating a practice?
If you said, “Collections!” you’re thinking like many potential buyers.
But like so many things, there’s often more than meets the eye when it comes to evaluating practices.
For example, you also want to consider:
- How long it will take you to pay off that practice loan
- What your salary might be in year four, not just year one
- Whether there’s opportunity to grow the schedule, add procedures, or expand the physical space
My colleague Dr. Ebert wrote a great post on less-obvious things to ask about when you’re talking to a doctor about their practice, such as insurance participation and retreatment. What should you do when you’re looking at an ADAPT profile, though? Or when you’re trying to make an apples-to-apples comparison between two practices?
In this new series, More than Meets the Eye, we’ll compare two practices side by side.
For our first one, let’s look at two very different practices. Assume the buyer finances a 10-year loan with a 5% APR, with no down payment. Also assume that the buyer maintains production at the same level for the next ten years.
| Practice A | Practice B | |
Annual collections |
$500,000 |
$1,000,000 |
Practice price |
$320,000 |
$710,000 |
Annual salary |
$150,000 |
$200,000 |
Overhead |
45% |
65% |
Estimated loan payoff |
2.6 years |
4.7 years |
Focus |
General dentistry |
Cosmetic procedures |
Nearby competition |
Few dentists, no specialists |
Several general dentists and specialists |
Type of location |
Standalone building in a small town |
Leased space in a large urban center |
Dentist works… |
3 days per week |
4.5 days per week |
Total profit and salary over 10 years (after loan repayment) |
~ $2.5 million |
~ $2.5 million |
Average daily profit and salary over 10 years |
~ $1,600 per working day |
~ $1,200per working day |
Looking at the first few lines, many would choose Practice B. After all, collections and salary are higher, and cosmetic procedures can be lucrative. We hear from many dentists who say they want to live in a busy urban area, too.
However, if you look closer, Practice A might be the better choice. Yes, the annual salary will be lower at first. However, you’ll pay back the practice loan a full two years earlier than with Practice B, so it’s worth doing the math to determine what your Year 3 and Year 4 salary might be. Plus, Practice A has much less competition, which means lower overhead and higher take home. Over ten years, the profits will be roughly the same, but a buyer who buys Practice A will work significantly fewer days than one who buys Practice B.
Think about what type of dentistry you want to practice, too. If you prefer more variety in-house rather than referring out to specialists, Practice A is a better fit. On the other hand, if you crave the more complex, intricate cosmetic procedures, Practice B will be more attractive.
And don’t overlook the schedules. Anyone who seeks true work-life balance should seriously consider a place like Practice A. That 3-day-a-week schedule is mighty attractive, especially if you have or plan to have children. Plus, if the practice is profitable on that schedule, you’ll have room to expand as demand (and your desire) dictate. If you consider Practice B, make sure that the owner doesn’t work 4.5 days a week simply to cover the higher overhead and loan servicing costs.
Finally, consider any difference in cost of living. Look at real estate listings to compare what you might be able to afford in each place, as well as costs for entertainment, education, and so on. (See also: Want a Lucrative Practice with Great Work-Life Balance? Go Rural!)
Remember, there’s no “perfect” answer when evaluating a practice. Only you can decide what’s most important and appealing to your needs, goals, and interests. But before you make a snap judgment, make sure to look beyond the top line numbers. (And as an ADA Advisor with ADA Practice Transitions, part of my job is to help you think through these types of comparisons!)
Which practice would you choose?
See also:
I Bought a Million-Dollar Practice — and Wound Up with Million-Dollar Problems
More Than Meets the Eye: How Associate Pay Can Vary