Buy vs. Starting A Dental Practice

I've got a question for you. Is it better to buy a practice or is it better to start a practice? I hear that all the time. Literally those words, every single time I lecture. And I have an answer for that, but my answer has been changing over the last five years, and I think it's time for me to kind of sit down in front of this camera, in front of this microphone, and walk you through the thinking and the updates of where we're at today in our profession when it comes to acquisitions and startups. I hope that this is something you're ready to hear. I hope that when you hear it, you're ready to do the next best thing for your career. And I hope you are going to love listening to this next episode on the Dental CEO Podcast.

So should we buy or should we start? I think decades ago, you'd ask an accountant that question and they say, "Oh my Lord, for sure, you should buy a practice. It has existing patients. It had existing cashflow." And I don't blame the accountant for saying that. Their answer was right with the information they had because decades ago, the average startup would only collect like 330,000 in year one and the dentist would lose money and they'd collect a little more in year two and the dentist would break even and they'd collect a little more in year three. And finally, the dentist made a little money. And when you step back, what did the startup do financially? Well, let me walk you through it. It took a year and a half to even build and then it took a year to run and we lost money and it took another year to run and we didn't really make much.

And not until the third year open or four and a half years after we made the decision to start, did we finally make money and how much money did the average dentist make at that point? About the same amount they were making as an associate all along. And so when you ask yourself, "Well, was that worth it? " I mean, the answer is no. The answer is definitely no. 20 years ago, it's way better to buy a practice than to build the average startup. Well, I said two things just now that have changed. I said 20 years ago, we're not 20 years ago anymore. We're today. Things have changed today. And I said, "The average startup." Well, look, the average anything is unacceptable. We're not going to build an average startup today. We are going to build a better than average startup and there's a formula to do that.

Defining a "Good Startup" Today

And so I really want to talk about, is it better to buy a practice or is it better to build a good startup today? That's what I want to compare. And I'm going to start with the good startup. What does that even mean, good startup? In the market today, with all the variables we see with startups, a good startup is one that has saved money for the dentist in building it. It has been built in a way that it's lower cost, which means it is likely a smaller footprint, so we have less construction costs. It does not have a bunch of Ferrari level dental equipment in it, so we've saved some money on that. And it's also a practice that has negotiated properly with the landlord so that the landlord put a bunch of money into helping build it. And when we have those three main factors, a small footprint, a thoughtful equipment selection and great landlord terms, we end up building this startup for hundreds of thousands of dollars less than a typical dentist would do.

So that's one aspect of a good startup is we built it for less money. But then the second aspect is it's a beautiful experience for the patient and for the team. It's a beautiful practice. It's not a compromised practice. In other words, we didn't save money because we built a shitty looking practice. No, we saved money because we were smart and we didn't compromise the way it looks, so it's beautiful. A good startup is a beautiful startup. And then third, a good startup is a startup that has everything we need, meaning it has enough storage, it has enough ops, it has the right design for the front office. It has the right design for the supplies and the sterilization. It has the right design for the owner to have everything they need to do great dentistry in a great environment. That good startup where we saved money, where we built something beautiful and has everything we need, that good startup needs to be located in a good long-term location and it's really easy to find that location.

Startup Advantages

Today, we're in the golden age of startups today. Those good long-term locations are everywhere. So if we have the good startup in a good long-term location, I classify that as an acceptable startup to talk about on this podcast episode. So we're making those assumptions. And if you don't know how to do those things, if you've never been to one of my courses, I teach like one to two days straight, depending on the course you go to, exactly how to design practices, exactly how to make them lower costs, to make them beautiful, exactly how to make them have everything you need, and exactly how to find the good long-term locations. That is a simple investment in your time and money to get completely trained up on exactly how to do that, where you walk away with all the formulas you need. So if you don't know those things yet, you should probably learn those things.

And I know I have a conflict of interest obviously telling you, "Go to my course, but I'm right." So you ask anyone else that's been, I guess you don't have to listen to me. Ask someone you know that's been one of those courses and you'll see that it is something you need to go to. Okay, so let's get back to the topic now. Should we buy or should we start? I want to first describe what it's currently like to build a good startup. The location of a good startup is going to be a good long-term location. And I'm going to get to what's it like to buy a practice and we're going to talk about, well, what are those locations like? I want to do a compare and contrast here. So a startup has a good long-term location. There's a lot of value in that.

There's a lot of safety in that, a lot of stability in the patient flow when we pick a good long-term location. That's what a startup has. A startup has advanced software, the newest, the most advanced that we picked. We get an opportunity to do it right from the beginning and get the very best software, whether that's practice management software on the cloud or open imaging software that's on the cloud or AI software on the x-rays, AI software on the phones, the phone system, all kinds of these kind of different software moments or choices is an opportunity to get the very best, easiest, most effective software, which you may not have when you buy a practice, right? So software wise, a good startup has the most advanced software that you got to pick. When it comes to the equipment, a startup has all new equipment that you got to pick.

The color scheme you want, the size you want, the things that you value, things like sterilization autoclave to the dental chair, to the doctor chair you picked for your back, the delivery equipment you prefer, even things like the 3D printer, the scanner, the miller, the laser, the handpiece that felt best for you. That's a really cool way of doing dentistry when we can customize all of the equipment around what makes sense for you. What about the people? Oh my Lord. When you do a startup, you got to pick all the people. You got to choose the exact people that you felt were aligned with the way you want to do dentistry, the way you want to treat patients, the way you want to run a practice. Have you ever worked with people that weren't aligned? That can be a nightmare, but in a startup, you get to pick those people.

And if you pick one that doesn't work out, you get to decide when they are fired and you get to decide who you replace them with. You have control over the kind of people that you have to spend all day with, the kind of people that are going to treat and serve your patients and represent your brand and ultimately impact your money. You get to pick those people in a startup. That patient experience I mentioned, that's also something you get to craft. You get to create it. You get to choreograph from the moment the patient touches your practice to the moment they got everything done and paid. All of those little steps, those little moments, those little touch points of how they're greeted and what they see and feel in the lobby. And do they get little amenities in the operatory? And what are all the things that are done to elevate the patient's experience and therefore indirectly elevate your case acceptance, elevate your reputation, elevate how happy people are when you see them.

When you can control that, you are now starting to build a practice that's going to give you some passion, going to give you positivity, it's going to give you more success and you get to pick that in a startup. You get to build it and it's very fun to do. Now, what about your ability to lead, your ability to influence the team? In a startup, you picked the team and that team is aligned with you. They don't know anything else. They haven't been told to do it any other way in this practice. You get to set from the beginning, from the first day, you get to set the rules, you get to build the boundaries, you get to be the leader, and you are seen and respected as a leader so that you can influence how people do things, how they implement new things, how we run every day.

Startup Challenges: Financial Considerations

You are the leader without some sort of past dentist poisoning the situation. You get to be the leader from this clean startup practice done right with the people you picked. Now, a startup isn't all perfect, right? So what are the challenges? Well, one challenge obviously is right when you open the startup practice, you've got some short term financial challenges. Startup practices don't have any patience yet. So in the beginning, they're really slow and they can lose money. Now, slow is also a good thing when you think about, I'm building a new patient experience with this team, with this software, and let's start out slow so we can perfect it and not get super stressed, not break anything. Slow is also not necessarily bad in all ways. It helps you slowly build this thing right. But financially speaking, the profit, it's slow. You lose money in the beginning and then you break even for a while and then you make a little money and then you make a lot of money, right?

And that is not immediate. It slowly happens. How do we solve for that? With working capital. With managing the budget and getting enough loan money so that when we open this startup, we've got a huge pile of cash and that gives us the confidence and the safety to have this conservative growth to slowly build this the right way. That's what the working capital is for. It's to bridge the gap of how much is the startup making early on and how much do I want to make? The difference is paid for with the working capital. So if we can have a responsible amount of working capital, then this slow growth from the startup is actually not a problem. But of course, we have to understand that there is slow growth and we need to have a strategy to have enough working capital. Now, long-term wise, let me talk about the other side of the coin here.

Long-term wise, financially speaking, a startup can make a ton of money. It has a very high ceiling. It is in an ideal location with an ideal patient experience, with ideal technology and software, and the ideal team, everything has been set up to be ideal and therefore the amount of money it can make is ideal. And you can keep the overhead down because you didn't buy someone else's bad decision. You've built this practice ideally. So while the short-term money is depressed because it's a startup, the long-term money is maximized. The return on investment of a startup is typically much higher long-term than the return on investment when you buy a practice, and in part because the ceiling of a startup is so high, you can make so much money with a startup. I mean, typically, our average startup is surpassing two million in collections, it's third year open.

And we've got startups that are surpassing two million in collections this first year open. And that is a significant amount of money early on, and it's only going to get bigger as that practice matures. So long-term financials are very strong for a startup. They can be. Now, what about the debt? Is that good? Is it bad? The amount of money it takes to build a startup, is that a weakness of a startup, a strength of the model? You could expect to have a loan of at least $750,000 for a startup, even up to 900, 950,000. That's what it's going to take in today's world with where construction costs are today and equipment costs, it's going to take that much money, which will include your working capital to get that startup built and launched and stable, healthy.

I think that amount of money is not crazy high when you look at what it costs to buy a practice. Although, of course, there's practices to buy that are less than that, less than 750, and there's a whole lot of products to buy that are more than that. So I would almost say that we're probably kind of on an equal playing field here when it comes to the debt level. A startup is going to have debts of 750 to 900, 950, something like that. All right. So to sum up startup, we get a normal amount of debt with a ton of long-term potential, really good potential. We have some short-term growth challenges that working capital fixes, and we end up in an ideal location with ideal technology, ideal software, ideal equipment, the people we picked, the patient experience we got to build, and we're doing it as the leader.

We have a clean way to do this right, and we are the leader from day one. We have influence over our team. That is what it's like to build a startup. Super exciting. It is busy. It is challenging, but man, that's pretty ideal. All right. So what about buying a practice? Buying a practice has weaknesses and it has strengths. And what we need to decide is, are the strengths worth the weaknesses to make an acquisition better than a startup? So when we buy a practice, we typically have a compromised location. It is not the very best location we could have if we're picking a location today. It's a location someone picked 10, 20, 30, 40 years ago, and it's not ideal. So we've got a compromised location. We've lost the best location. We've got a compromised location. Is that going to work for us long-term?

I don't know. Is it going to work at the highest financial level? Probably not. But that's what it's like to buy a practice. It's going to have a compromised location. When it comes to software, oh, it's usually a problem. You buy a practice, it's got outdated software or missing software, and the software is not clean. It's decades of doing things the wrong way with countless employees, and it's a mess. It is not ideal at all. Definitely not something we picked that we wanted for ourselves, for our future. It was something someone else screwed up and now it's our software. Definitely compromised. What about the equipment?

Obviously, when we buy a practice, a lot of them have some dated equipment. Usually they're missing a bunch of high tech stuff. They don't even have a bunch of equipment we want. And the equipment they do have, some of it's going to be okay and some of it is not going to be okay. A huge difference than having everything perfect and super high tech from day one. We lose all that when we buy a practice. We end up with compromised equipment. What about the people, the employees? Well, a benefit of buying a practice is that the employees know how to do things, but a huge drawback of buying a practice is that those employees are doing it their way, someone else's way, and they don't want to change, and they definitely don't see you as the leader that they passionately want to follow and do what you say.

So they're kind of stuck in their ways with bad habits and good habits, but there's a lot of compromise there. And now when we talk about being a leader, the employees from an acquired practice, commonly, you will lose almost all of them within the first two years you own this practice. They will push back very heavily on the things you want to change. They will complain. There will be drama. It will be exhausting. It will be upsetting. You will want to scream. You will want to cry. You will feel trapped because you don't think you can afford to fire them because you're worried about losing patients. You're worried about getting through the day. You're worried if you fire Mary, who's pushing back on everything, she'll convince other people to quit. And it is a mess. It's a mess. You will be a victim of the fact that the existing employees can push against you and almost kind of force your hand.

And that will add this kind of poisonous ingredient to how you live every day in this practice you just bought that will always be kind of silently there. This threat will be there. I'm just trying to be real about this. Not all practices you buy and all people that work there are like this, but what I am describing is very common. And so you are going to go through a bit of a turmoil or crisis with the employees. If you intend on becoming a strong leader, they will push back, fight, quit, have to get fired, and that creates turmoil. What about the patient experience when you buy a practice or even the staff experience with the facility when you buy a practice? Usually the practices you buy are not optimized from the patient experience. The facility itself is dated, the systems are dated, the software is dated, there's no amenities.

I mean, you're going to have to do a major upgrade if you intend on having a modern patient experience with most practices that are for sale. And likewise, the staff experience is not ideal either. Let's talk about the financials. Here's where an acquired practice beats a startup. Short term, when you buy a practice, you typically don't lose money. Like in a startup, you typically break even or make some money. So in a startup, you're going to lose some money in the short term that has to be funded with working capital, but in an acquisition, you are going to make money in the short term. That is definitely clearly the one aspect of an acquisition that beats a startup in a very clear way, short term financials. But on the other side of that coin, we have long term financials and long term financials highly unpredictable with an acquisition.

I feel like it's much more predictable with the startup of where you'll end up long term than with an acquisition because sometimes acquisitions, you buy them and they're stunted in growth and you cannot grow them at a high rate because they're just in the wrong location and the wrong facility and you can't change it. And so the seller was doing whatever, 700 grand in collections a year for the last 10 years, and you can't do very much more. That can be one thing that could happen. You could have the opposite happen. You could come in and be better at diagnosing, better case acceptance, add procedures the seller never did, market in a better way the seller never marketed and clean things up and that practice could go from 700 grand to two million. That could happen as well. Or you can have obviously something in between, but the ceiling is probably going to be lower on an acquisition than on a startup because the acquisition does not have everything ideal and a startup does.

So long term, that startup on average is likely going to collect more per year than the acquisition will when you fast forward to the future. So that is, I would say, a weakness of the acquisition. The long-term financial opportunity is a weakness. Sometimes we get blinded though by the fact that we see opportunity to grow the practice. We buy a compromised practice and we feel like we can fix it. Of course, of course we can fix something if it's broken, but that's not what I'm talking about. Once you fix up that practice, how fast can it drive? Just because you fixed up a Kia doesn't mean it's driving like a Ferrari. A startup can be a Ferrari. An acquisition could be a Kia we got on the cheap and we fixed it up and now it's pretty and we're proud of it, but it's never going to be a Ferrari.

So the ceiling's higher on a startup. What about the debt levels? Well, a startup we said is going to be 750 to 900 or so in debt. An acquisition, there's plenty of acquisitions that are cheaper than that, 500,000 in debt. There's also plenty of acquisitions that are a million in debt or more. And so I think if we're talking generally, an acquisition is going to have a similar debt level as a startup. However, when you buy a practice, you have to pay twice. You have to pay once to buy it. And then for years, you're going to have to pay again to upgrade the equipment, upgrade the software, upgrade the patient experience. It's going to be hundreds of thousands of dollars. So you're either going to get a refinance loan or a second loan for the upgrades, or unfortunately, you're going to have to suck away your profits and reinvest them into upgrades.

And so long-term, I believe that most acquisitions are more expensive than a good startup. All right, so now let's step back. And obviously you know what I'm going to say, but I want you to hear me say it in this way. If we buy a practice, the only really thing we get that's better than a startup, in my opinion at least, is stability with the short-term financials. Everything else after that, we've lost something. It's compromised. Compromise location, compromise software, compromise equipment, compromise people, compromise experience, compromise leadership, right? Compromise long-term growth chances or ceiling, compromised debt. Everything else is compromised. Well, then why the hell do so many people try to buy a practice? Because of fear. Because they don't know how predictable a startup can be. And so a startup becomes a moment of fear subconsciously for them, and they feel that the more conservative thing to do, the more stable thing to do would be to buy a compromised practice.

That's why so many people do it. When you look at that startup now, the price we have is we're going to have a short-term financial loss that can feel scary, but to take away the risk, to take away that scary feeling, we're going to have a huge pile of working capital that makes us whole, makes us healthy. And after that, everything else is better than an acquisition. We have the best long-term location where we want it, the software we picked that's the most advanced with the equipment we wanted built for our desires, our needs, and we've got in that practice, the people we picked who see us as the leader, and we've got them and the patient in an experience that we crafted to be ideal. And with that, we have long-term ceiling that's really high, and we've got an appropriate amount of debt to own this gorgeous practice that's been idealized.

That is a very exciting to build, and that is a very good decision long term. We just need to get over the fear of the unknown. And one way to do that, and I'm going to say it again, I apologize, but if I train you how to build a startup over 400 pages of content, you will now know what to expect. You'll know what to do. The fear goes away. Now it becomes a rational decision because there's not this irrational fear of the unknown. So you got to get trained on how to do a startup. But when you compare them, it's really hard for me to suggest buying a practice for the typical dentist. Yes. Another thing we didn't even talk about, but it is an issue with buying a practice is there's just not a lot of practices available. The DSOs, big and small, are just grabbing them.

And it's a seller's market, so the prices are going up. And the ones that are left to buy are these kind of dumpy little practice situations or these risky situations, practices that aren't making a lot of money, these monstrosities that are hard to manage. It's not a buyer's market where you can just go find an ideal acquisition. So when I compare startup to acquisition, what's out there to buy is usually worse than what I even described. That should actually be scary. So I would love for you to kind of take away from this episode the current state of startups and what it really does feel like and look like. What does it mean to have an ideal practice? What does it mean for your every day? What does it mean for your ability to get patients to say yes, to get new patients in the door?

What does it mean for you long-term financially when you build a practice right from day one? It's a very powerful thing. All right? So that was the episode today on buying versus starting. And as you can see, in the world we're at today, I feel very strongly in this golden age of startups that there's a long list of reasons why you should do a startup. I hope that helps you and I will see you next time on the Dental CEO Podcast.