Congratulations!! You’re graduating in June, preparing for the boards, and on the horizon thinking about how you are going to put all of that education and training into practice in order to generate a return on your four year investment?
Whether you are going to work in a fee for service practice or a clinic, in a private one or two dentist office or a large group, the following are serious issues that should be taken into consideration before making a commitment:
Employment. For those of you looking to find a job it is an excellent way to get your speed and skills up. You will most likely be asked to sign an employment or independent contractor agreement. The terms and conditions of those contracts should be carefully reviewed and evaluated by someone who understands contract law and what is and is not acceptable legally and under the Florida Dental Act.
If you are asked to sign an independent contractor agreement it is because the employer does not want to pay his/her share of the employers taxes. The IRS is very specific about independent contractor status and very few situations actually qualify under the IRS rules as independent contractors. If audited, you may be responsible for taxes and penalties that you should not and will not want pay.
Most employment agreements have a restrictive covenant or non-compete clause.
Restrictive covenants are jurisdictional. That is to say that every legal jurisdiction sets guidelines that regulate what is reasonable as far restricting an employee from working in his/her profession.
There are two parameters that govern a restrictive covenant:
- The distance from the practice that is protected. When I say jurisdictional, it may be in densely populated areas such as Orlando or Miami, it is reasonable to protect an area from 5 to 10 miles from the practice where in Ocala or Naples it may be 15 to 20 miles and in some very sparsely populated areas it may be one or more counties. Each legal jurisdiction decides and sets precedents as to what is reasonable for that jurisdiction.
- The time during which the restriction is in effect. In Florida the legislature has passed laws that govern the reasonable duration of a restrictive covenant. There are two sets of rules, one for employees and one for owners or transferors of a business. For employees a 6 month restrictive covenant is considered to be reasonable. Any restrictive covenant longer than 2 years is presumed to be unreasonable. The restrictive covenant rules for sellers and buyers are more restrictive and provide for between 1 year and 7 years enforceability. Remember! Don’t plan on buying a practice or starting up in the same neighborhood in which you accept employment.
The pay you receive will usually be defined as a percentage of collections or a percentage of production. If you have no control over the collection policies of a practice, you have no control over your income unless you are paid on production. Furthermore, if there is reduced fee dentistry in the office and you are paid on collection, you will be paid less money for more work and if there is capitation in the office, you may get paid nothing on procedures that are included as a non-charged procedure by the insurance company. It should also be clearly spelled out who pays the lab fees and what options are available to select a laboratory that you are comfortable with. Lab fees run, on average, 10% of gross production in a general dental office. If you are paid 30% and have to pay your own lab, you income just went down significantly.
You will have expenses such as malpractice insurance, professional dues, continuing education requirements, etc. Does your employment agreement address who is responsible for these expenses?
Buying a Practice. Yes, right out of school you can buy a practice and be your own boss immediately. What are you looking for?
When buying a practice, like any other business you are buying Cash Flow. Therefore you need to be able to determine what the legitimate cash flow of a practice is. Cash flow is made up of three components. The ability to pay for: 1. the legitimate operating expenses, 2. the coverage of the debt service (the money borrowed to buy the practice), and 3. a reasonable salary to YOU. These are requirements that must be met in order to qualify for the loan to buy the practice.
Most practices that collect less that $300,000 do not fall into that category, therefore buying a cheap practice is very difficult and very risky. Buying a practice that is collecting more than $800,000 cash flows very nicely, but right out of school you probably will not be able to do the practice. The attractive range for a recent graduate is from between $400,000 and $600,000 of collections. Yes, you will have to work more hours and longer days than the previous owner, but you can do it. You have most of the skills, you just need the speed and that comes with experience.
You must do your due diligence! This includes a professional assessment of the equipment, a chart audit, review of accounts receivables, verification of income and expenses, review of leases and contracts, evaluation of staff, patient count including number of new patients, recall system, computers and software. The financing is available to purchase a practice at the best interest rates and terms we have ever seen. However, you must have good credit. The amount of student loans you have is not a factor. The important issue of good credit is payments made on time and not having all of your credit cards maxed out.
Starting From Scratch. You can start a practice from scratch in many areas today more easily than in years past. It is still a much riskier undertaking than buying cash flow in an existing practice. The risk of failure is more than two times that of buying a good existing practice. Financing is available for start-ups and for the working capital needed to sustain you until you start to make a profit. You will need a comprehensive business plan and pro-forma or projection of income and expenses as well as demographics that support the start-up and your plan on entering the community and capturing a market share.
The Bottom Line. The future is the best it has ever been for dentistry. Your options are unlimited and it is just going to get better. Welcome to the dental community!