Opening a Practice vs. Buying an Existing Practice: Static vs. Kinetic Energy
Welcome to the second conversation in this series with David Chong Yen and Eugene Chu, Chartered Accountants from DCY Professional Corporation in Toronto. David and Eugene have kindly agreed to record a series of videos that offer advice to new graduates and practicing dentists on the most common accounting and tax questions they are likely to face early in their career.
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Practice values have increased significantly and many new dentists are asking whether it’s even worth it to buy a practice when they can just build a practice from scratch for a fraction of the price. Can you share your thoughts on this with us?
There’s a concept in physics called static vs. kinetic energy that I think many dentist will understand. It takes a lot of gas to get a car from a 0 to 100 km/h. It takes very little gas for a car to maintain 100 km/h. That example resonates with opening vs. buying a practice.
A busy dental clinic has about 1600 patients. So to go from 0 patients to 1600 patients would require much time, energy and money. To maintain 1600 patients, it takes much less energy. Therefore, when you are buying goodwill, you are essentially buying patient charts which reduces the time and energy it would take for you to build the practice.
Wouldn’t it be riskier to borrow $2 million dollars to buy a practice than to borrow $500K to start a practice?
This is going to be counter intuitive coming from an accountant: sometimes you need to ignore the costs. I don’t make business and investment decisions based on costs, I make them based on the value I receive and cash flow. Business decisions come down to cash flow. From a risk perspective, in most cases, it is less riskier to borrow 2 million dollars to buy a practice-with a large number of patients that consistently has generated $400,000/year in cash over the last 10 years-than to borrow $500K having with no idea whether or not it will turn a profit and generate a positive cash flow.
You also need to consider the opportunity cost: if you open a practice and have very few patients, it reduces your ability to earn associate income outside the practice, because you need to be at the clinic a few days a week.
Would you ever recommend opening a practice?
To be clear, I’m not saying you cannot succeed opening a dental practice. There are many examples of dentists opening new clinics with great success. What we want dentists to be aware of is that they are swimming against the current.
For many dentists, by the time they graduate and have a few years of clinical experience under their belts, they are well into their 30s. They want to start families, buy a house and so on; and so taking on the risks of opening a new practice may not be compatible at their life stage. This is especially true for foreign-trained graduates who often have decades of experience outside of Canada. They should be looking to hit the ground running as they may have families to support.
In general, opening is better suited for those with a bigger appetite for risk or those with a cash cushion. This could be a younger dentist with no family or financial obligations and a long-time horizon. An older dentist who already has a steady practice that can support negative cash flows may also be a candidate.
Full Interview (10.24″)