It’s interesting to look a little closer at the methodology they use to assemble the list. They take into account things like expected earnings and future job growth, but what is just as interesting are some of the things they don’t take into account. For example, they don’t take student debt or opportunity cost into account. If they did, I think the PAs would vault right up to the top spot. They also don’t evaluate intangible aspects of these professions such as job satisfaction, prestige or longevity. If these kinds of factors weighed more heavily into the equation, then I think physicians would rate much higher. I also noticed the salary information they use is not all that accurate.
So why do dentist fare so well in this particular survey? I think its due to the combination of factors that truly does make dentistry one of the great professions in the world. Along with salary and current as well as future employment prospects, the system also takes into account stress and work-life balance. When it comes to stress, I’m not so sure they have it right with respect to dentistry. Being a dentist can be exceedingly stressful. However, there is flexibility in dentistry that does allow for a fantastic work-life balance so I can understand why we would score well there. In addition, the flexibility factor also can help alleviate the stress to some degree. In a survey of graduating dental students (classes of 2015 and 2016), the top five reasons cited for deciding on career in dentistry were (in descending order): (1) control of work schedule (2) service to others (3) opportunity for self-employment (4) enjoy working with hands and (5) salary expectations. Interestingly, this survey seems to indicate prospective dentists do have a good handle on what a career in dentistry has to offer and that they might not be as focused on potential income per se, as they are on these other factors. What these same students might not fully comprehend when they decide to pursue dentistry is the impact of indebtedness is having on new dentists.
Student debt is increasingly becoming the achilles heel for dentistry. Unfortunately, we lead the way in this category with higher debt than even our physician colleagues. This problem is compounded by the barriers to ownership that only become more difficult when your financial health is compromised by massive student debt.
I hate to say it, but if debt and opportunity costs were taken into account then I don’t think we could reasonably expect to maintain our position at the top of lists like this. Perhaps in a future post I will delve deeper into what the financial situation really looks like for a DDS who is deep in debt compared to a physician with significant debt as well as another profession such as a PA. My initial impression is that the PA would be ahead financially for quite some time before the dentists could catch up. I think because physicians start out at higher overall incomes than dentists that they might, as a group, catch up faster. Debt management is a skill that will be as essential as wielding a high speed handpiece for future dentists.
I haven’t yet heard of a seller who thought her practice was worth less than it actually was. I’m sure there is somebody out there, but this is not normally how the seller looks at it. For the seller, this practice doesn’t just represent a certain amount of cash flow or active patients or an office location. For the seller the practice represents the blood, sweat and tears they but into building the practice and for many sellers this may lead to an unrealistic idea of what the value truly is. The fact that the seller is interested in buying the practice only reinforces to the seller how wonderful this practice must be. In short, the practice is the seller’s baby, and they aren’t just going to let it go without what they feel is “fair” compensation.
The buyer, on the other hand, has an entirely different point of view. They are normally willing to pay a fair price, but they want that price to be grounded in reality. The problem is that if the buyer is a recent graduate, then they lack not only the experience to make judgements about what is fair, but they lack the resources to make sure their side is represented with equal force. If the recent graduate has a couple thousand dollars in the bank and a mountain of student loans staring them in the face, then they might not be too excited about going out and hiring an attorney, accountant, or other professional practice transition specialist. This difference in terms of experience and resources creates an imbalance that can become an issue during the negotiating process.
One item to note here is that most practice transition specialists cater primarily to sellers. Why? Simply because the seller is the one with the money. Often the fees practice transition specialists charge can run into the $20,000 to $40,000 range. It’s also normally the seller who takes the first steps to get the practice evaluated and put on the market, so to speak, so it falls to them to seek out a professional to appraise and, perhaps, to market the practice.
As I discussed in section #1, the selling dentist and the buying dentist come at things from different points of view and with different experiences and goals. These differences will may present some challenges to a successful transition, but they can be overcome with mutual respect and a real effort to understand one another.
Does the buyer understand that the seller has a lot of emotional and psychological capital invested in the practice? Does the buyer understand that acknowledging this fact, and giving the seller his due deference as the one who started and built the practice will go a long way toward putting the seller in a more open and cooperative mindset?
Does the seller understand the inherent disadvantage of the buyer in terms of the unequal position of the two parties in terms of financial resources as well as experience? If the seller can try to put himself in the shoes of the buyer to understand the anxiety that comes with taking on the risk (both financial and professional) of buying a practice then he or she can begin to build a bridge of understanding that will help make the buyer much more comfortable and secure.
It’s never easy to look at something from another person’s point of view. It becomes even more challenging when money is involved. On the one hand the seller sees the practice as the product of his life’s work and wants to not only be compensated for that, but often times wants to be given credit and acknowledgement for that. The buyer has just completed many years of education and training and is looking to begin a new life and journey, both professionally and personally. The buyer doesn’t want to make a mistake in buying a practice that will haunt him for the rest of his career. He also has limited resources to help him make decisions and analyze practice data and at the same time likely has a large debt burden which only adds to the stress and anxiety.
Stephen Covey would admonish both parties involved in a practice transition to “seek first to understand, then to be understood,” and that is excellent advice!
There are many dental practice transition experts out there who will be happy to tell a seller what his/her practice is worth. Is it 2X net? Is it a certain percentage of production? Should a CAP rate method be used? How about a discounted present value of perpetuity formula (Say what?)? What about receivables? What about the equipment and tangible assets? The methodologies employed vary significantly and the resulting conclusions about fair price vary accordingly. So what is a seller or buyer to do?
The two most important factors that will determine fair market value are: (1) Net cash flow to the buyer after expenses and (2) The likelihood the buyer will be able to keep the cash flowing through the course of the practice transition. A good rule of thumb (even though I hate to use an “rules of thumb”) is that the price is fair if the buyer is able to pay off the practice within about 5 years while having adequate cash flow to cover the debt payment on the practice as well as to live a reasonable, modest lifestyle. To figure this out, you need a competent accountant or someone who is qualified to determine actual net cash flow. This professional should be able to take gross income, overhead information and debt service information for the practice purchase and put it all together in a cash flow table (for example, using excel). Both the buyer and the seller should be able to look at the pro-forma cash flow table and see that the seller is going to get his money and that the buyer is going to reasonably be able to pay off the debt to buy the practice. If it doesn’t cash flow then something is wrong.
In addition, there are more subtle things to consider that affect the ability of the buyer to keep up cash flow. For example, what if the current lease agreement on the office space expires in two years. How will this affect the ability of the practice to stay in the current space and at what cost? Economic factors in the area, to the degree they can be evaluated are also important. For example, if a major employer in town is being bought out in a hostile takeover will that impact the employment and insurance situation for patients and their families? If equipment and office decor are outdated and will need to be upgraded soon, this will lead to a significant expense for the buyer which could adversely affect cash flow. Is this factored into the agreement?
There are many things to consider, but net cash flow to the buyer and the buyer’s ability to meet the debt obligations incurred while maintaining a reasonable lifestyle are critical factors to a successful transition.
Sometimes we just want something to work out so badly that we think we can “will” it to happen. I think this is not a good idea when making a big decision about buying or selling a practice. This is particularly important when it comes to a practice transition that involves a period of time when both buyer and seller will be working together in the practice, and of course it is absolutely critical in cases where we are talking about a buy in to partnership situation.
It’s not always easy to pinpoint exactly why a situation or opportunity just isn’t the right fit. Sometimes everything looks perfect on paper, but your gut might be telling you otherwise. Personally, I am a believer in following your gut instincts. On the other hand, I think in most cases there are red flags that will appear and sometimes we have to overcome our tendency to overlook these problems.
For example, there might be a significant personality difference that could doom a potential partnership to failure. There might be a practice in a location you are in love with, but the projected cash flow just doesn’t add up. In these types of situations you have to discipline yourself to take the long view and to make the best overall decision for you and for your family if you have one.
Be honest with yourself and do your best to look at things in a dispassionate, logical and systematic way…then follow your gut if it doesn’t feel right.
If you become informed well enough about financial markets and investing then I believe you can be your own financial advisor. This is important because nobody cares as much about your financial well being as you do. Why entrust something so important to the care of others when, with some basic education, you can do it yourself? Even if you decide to employ a financial advisor, having some knowledge about investing and personal finance will help you tremendously in choosing the right advisor and discerning good advice from bad.
The same concept applies to practice transitions. Some (definitely not all) practice transition specialists, like certain financial advisors, thrive on the ignorance of their clients. I hate to put it so bluntly, but I have seen with my own eyes cases where this was clearly the dynamic at play. At times they can also play on your fears. “This is a transaction with huge financial implications,” they will remind you. “You can’t afford to get it wrong,” they say. Maybe that’s true, but to the extent that it is, you need to educate yourself. You need to know enough to hold any professional advisors you might employ accountable.
There are a number of published articles out there that will at least give you a flavor for how these practice transitions can be structured, and how practice valuations are often done. Keep in mind, most of the published articles you will find are written by the practice transition professionals I am referencing. I am not saying they are bad people or that they don’t serve a real purpose, but you do have to be careful. Often their goal is more in the vein of promoting themselves than trying to arm you with useful information. You also need to know enough to make sure you are getting your money’s worth. If you are going to spend tens of thousands of dollars on professionals to help you in a practice transition then it better be worthwhile.
Take some time to explore the different methods of computing net income. Learn about things like capitalized earnings, discounted cash flow and net asset valuations. As I described earlier, the methods that focus on real cash flow and realistic cash flow projections are the ones that work in the real world. If it doesn’t cash flow, then the buyer should look at alternative options such as a different practice or starting from scratch.
Let’s talk about just one of these options to illustrate the power of tax-favored status and compound interest in growing wealth: the Roth IRA. The Roth IRA was born in 1997 and was named after the chief legislative sponsor, Senator William Roth of Delaware. (The next time someone talks about how Delaware has never contributed anything to the country you can bring up this factoid.) The Roth IRA is wonderful because money contributed grows tax-free and if money withdrawn meets certain criteria then it comes out tax-free as well. Contributions are not tax deductible, so versus a traditional IRA your marginal tax rate plays a significant role in determining which might be the better tax shelter–but that’s a discussion for another day. Currently an individual may contribute up to $5,500 per year (or $6,500 per year if you are at least 50 years old), but the amount may not be greater than total taxable income for that particular year.
Imagine your 12 year-old earned $3,000 working odd jobs last year (2017). Now imagine he puts that money away into a Roth IRA in a Vanguard total stock market fund and doesn’t touch it again until he turns 70 (conservative guess as to future retirement age). Assuming a rate of return of 8% (and ignoring the ravages of inflation) that paltry 3,000 dollars will have grown into the handsome sum of $305,886.47.
Now imagine he adds another 5,000 dollars per year until age 70. This is not that outlandish of a thought. You could help reimburse him for the money he contributes to the Roth IRA until he is old enough to support himself financially and his own earnings allow him to contribute 5,000 per year. How much will he have if he does this? $6,616,021 dollars. That’s right. He will have contributed only 293,000 dollars over that time frame, but the the miracle of compound interest will have added another 6,323,021 dollars. Incredible. Keep in mind he will have paid very little tax on that money as it went in (depending on his marginal tax bracket) and he will pay no tax when he takes it out in retirement. Retirement planning solved! Of course inflation will eat away at that nearly 7M figure and in today’s dollars it will be worth significantly less. Still, that’s not bad considering we are talking only about funding a basic Roth IRA. Hopefully through his employment in the future he will have access to other tax-favored retirement vehicles such as a 401k, profit sharing plans, cash balance plans and the like. If his income rises such that he no longer qualifies for a direct Roth IRA contribution (income limit is $135,000 for single filers and $199,000 for joint filers) then he can simply do a traditional IRA contribution and convert it to a Roth–the so-called “backdoor” Roth. Also note that $5,500 is the maximum up to age 50 so in our hypothetical example he could have put a little more away from the beginning. Once he hits 50 he can contribute $6,500. These contribution limits should continue to rise over time so again, the hypothetical I described is not unrealistic by any means. Making the effort to actually get going and keep it going is the key. The opportunity is there. How many people make the (relatively small) effort to do it?
As a dentist and business owner, you can provide gainful employment to your kids. Does your office need a part-time janitor? Can your teenager do landscaping work around the building? In order for a minor to contribute to a Roth IRA they only need to have earned income equal or greater than the amount of money they contribute to the Roth IRA (up to the $5,500 limit). This money can come in the form of babysitting (for other families, not your own), doing odd jobs around town or in the form of W2 wages. If income from non-W2 sources is used to support the contributions then this should be documented. Ideally, this documentation would show the service provided and amount paid along with a date and a signature or initials by the “employer.” Not only is this a wonderful way to give your kids a huge head start on their retirement, but it’s also a fantastic way to teach your kids about the way investing works and the power of time and compounding interest.
As the owner of a small business you are responsible for a lot of different things in terms of running the business day to day. This can lead to some real headaches and stress. The positive side to this, however, is that as the owner of the business you can pick and choose how you want to set up your retirement plan through the office. There are various types of plans (solo 401k, SEP, 401k, Roth 401k, 401k/profit sharing, cash balance plans etc) and each has its pros and cons, depending on your particular situation. If you are an employee then you are stuck with whatever your employer offers. Early on in your career you might want something simple like an SEP IRA or SIMPLE IRA, but later as your income grows and the number of staff in your office increases you might go with a 401k with profit sharing. Toward the end of your career you might look at doing a cash-balance plan to turbo-charge your retirement savings.
They key to investing is to actually do it! As a dentist and business owner you can streamline this process to match your needs better than so many other professionals who are employees of companies, hospitals or government institutions. Maximizing your contributions to tax-favored accounts is one of the key ways you can be financially successful in dentistry.
Have you reviewed your current situation? Are there any acronyms from the list at the beginning of this post that aren’t familiar to you? I’ll cover more of the nitty gritty details in future posts, but I would be happy to help anyone who is getting started with these tax-advantaged entities. Are you maximizing your ability to make the most of these opportunities the government (for the time being) provides? What are you plans to utilize tax-favored vehicles in the next 5 years? 10 years? For retirement?
Not only are there obvious costs such as dental school tuition, but during dental school there are many other fees, living expenses, loan interest costs as well as opportunity costs that have to be acknowledged. When choosing a dental school, don’t just look at tuition. You need to look at the total cost of attendance over the four years you will be there. Even tuition is a moving target as it may not be locked in for the duration of your time in dental school. It’s likely you will end up paying 4% or so more each year compared to what is listed on the school’s web site. The school web site generally shows current tuition levels, not an exact projection of what costs will be for you. It’s more expensive to go to school in a high cost of living area compared to a low cost of living area. Some schools might offer scholarships. If you have a spouse then maybe one location offers a better job opportunity than another. All of these details need to be considered. So step one is to compute the TOTAL cost of attendance.
Besides the actual dollar amounts required to pay for four years of dental school, there are opportunity costs to consider. If you like the idea of being a dentist, then you probably considered alternative careers as well such as being a physician, physician assistant or other healthcare professional. You may have had other interests such as business or finance. If dentistry is the only career you can ever picture yourself in, then this exercise is moot. However, if you might consider being a physician, for example, then you should consider what that career has to offer and compare it to what dentistry will provide. If you got into dental school then its highly likely you could have gained acceptance into an MD or DO program as well.
How much does an average dentist earn? It’s really difficult to say, but the ADA compensation report for 2016 data shows average income for a general dentist to be $188,580 and $333,540 for dental specialists. For recent graduates, the median income was $130,000 and half earned between $96,000 and $175,000 annually. Oral surgeons and their $518,520 per year average stand out as outliers compared to the rest of dentistry.
The alternate career paths I mentioned earlier might offer similar or perhaps even greater compensation. In the case of PA school, the training is also significantly shorter. PAs earn an average of around $110,000 to $120,000 (depending on who you ask). PAs in certain fields such as dermatology or surgery can earn $130,000 to $150,000 or more.
Starting salaries for physicians are generally higher across the board compared to dentists. For example, family medicine physicians start out at around $200,000 while radiologists, anesthesiologists and surgeons start out earning $300,000 to $400,000. Experienced physicians can earn significantly more.
When a dentist graduates from dental school there is yet another hurdle to achieve the greatest level of success: owning a practice. Becoming an owner means another potentially huge debt obligation–possibly greater than all of your student loan debt combined. Alternatively, you can plan to work as an associate or employee dentist indefinitely, but you are likely capping your potential earnings relative to what you could do as an owner.
There are many out there who have done the calculations to figure out the exact cost–including both actual costs in terms of tuition, fees, living expenses etc, but also opportunity costs. I think starting out it’s most helpful to get a baseline feel for what this might look like using some basic parameters. There are debt repayment programs including things like PAYE/REPAYE/IBR etc. That’s another topic for another day.
To keep it simple, let’s suppose you graduate with 500k of student debt. You get a job as a general dentist associate earning $120,000. If you were able to consolidate this debt at 6% and you were to pay it back over a period of ten years then your monthly debt payments would be $5,551. Using a good tax estimator, your 120k income would yield an after-tax monthly income of about $7,200. There is of course variation depending on your marital status, home ownership status, charitable contributions, state tax rates etc. Still, this is a good rough estimate which basically subtracts federal income tax, payroll taxes and I subtracted a little for state income tax.
As you can see, 7,200 minus 5,551 equals 1,649 dollars. All you have to do is pay your rent, food, transportation, phone and all your other living expenses out of this amount. The picture looks very grim indeed for someone with 500k in debt and a job that pays $120,000.
If you extend the payments over 20 years, then the monthly debt payment would be about $3,600 per month. That’s still half of your monthly income, and your total payments over that period of time would add up to 860k! If you kept your debt to 300k then your monthly payments would be $3,331. If you extended that out to 20 years then you would be at $2,150. However, extending the payments means you would end up paying 515k in principal and interest.
At 250k of debt with a 10 year term with a 6% interest rate the monthly payment would be about $2,800 per month. That seems doable, especially if you can grow your income over that period of time.
Speaking of growing your income…practice ownership is the way to most effectively achieve this goal over time. But do you think a bank would want to loan money to a dentist who has 500k of debt already and who has monthly debt payments that already eat up half of his/her monthly earnings? This is of course the catch-22 situation facing many new graduates. In order to grow their income so they can repay their loans they need to become an owner. However, their debt may prevent them from becoming a practice owner.
I think based on my conversations with dentists and doing some basic calculations that if you can keep your debt to less than about 300k then you can make it. It might not be easy, but it’s doable. Your income should hopefully increase from 120k to closer to 200k over the first ten years of practice.
On the other hand, if you have greater than 300k of student debt as you graduate from dental school then I believe you need to have a really well thought out plan and strategy to repay the loan and increase your earnings. Is a DDS/DMD generally worth a 500k price tag? I honestly think the answer is “no.” Of course there are exceptions. A successful OMFS can pay back that 500k and still do fine. But can a general dentist who is stuck in associate or employee type jobs making less than 200k make it? Not without some serious discomfort. In that case I think from a financial perspective that dentist would likely have been better off making a different career choice.