Acquiring an Existing Practice versus Starting a New Practice
By: Doug Copple
Chief Financial Officer, CPA, CVA
Many of our readers will soon be ending their residency or are already working as an employee for an orthodontic practice. Most residents we talk with want eventually to own their own practice. As a result, we often get asked the question, "Is it better to start my own practice from scratch or purchase an existing practice?"
Generally, the best answer is to buy an existing practice. Many respond that with the current school debts they have amassed, they cannot afford to take on additional debt, especially the significant amount of debt from purchasing a practice. However, if the purchase price properly reflects the value of the practice, the cash flow generated from the existing practice should provide the purchasing doctor with sufficient income for living expenses and debt repayments on the purchase.
As one would assume, income from an orthodontic practice comes from patient fees. An established practice has existing patients and monies to be collected under existing fee contracts. A start-up practice has no existing patients. When purchasing an existing practice, you are immediately stepping into a practice with an existing patient base and cash flow. Therefore, you are nearly guaranteed to make more money during the initial years by purchasing a practice instead of starting your own.
Let’s look at some of the primary advantages and disadvantages of both starting your own practice
and buying an existing one:
Starting your own practice:
- You generally still have to go into debt to purchase the assets and equipment, hire and pay staff,
and cover operating expenses during the first several months or years while generating enough income
to cover these costs.
- You must assemble and train your own staff, as well as develop operational and financial procedures
rather than inheriting them from a senior doctor.
- You do not make as much money during the initial years (There is more information on this later
in this article.
- Advantages include creating your own office and establishing everything exactly how you
want (rather than inheriting senior doctor’s facility).
Buying into an existing practice:
- You purchase an active patient base, with the possibility of maintaining the seller’s referral
base, while also establishing your own.
- You immediately have a facility and operating equipment, assuming it is in decent operating shape.
- You will acquire an existing experienced staff, with established processes and procedures.
- The senior doctor can act as a mentor during the transition.
- You have immediate cash flow. If the purchase price is fair, the financial rewards are greater,
even after repaying the purchase obligation.
Although there are a lot of issues to consider, the primary point we are focusing on is the financial aspect.
To illustrate the financial outcome of both scenarios, assume Dr. A starts his own practice while Dr.
B purchases an existing practice.
Doctor A – Start-up:
Dr. A borrows $150,000 (5 year repayment at 8.0%) to purchase equipment and cover operating
costs during the initial years. The overhead rate is assumed to be 50% of collections, although
overhead in the first several years will most likely exceed this level. This doctor is extremely
successful and the practice grows to $800,000 in collections by the end of the 7th year under
very optimistic projections. The practice’s financial projections and Dr. A’s assumed net cash
flow, after taxes and repayment of the start-up debt, would be illustrated as follows:
Doctor B – Acquire Existing Practice:
Dr. B acquires a practice with gross income (collections) of $750,000 and overhead rate of 50% at a
purchase price of $562,500. The purchase debt is repaid over 5 years at 8.0%, the same rate as the
scenario for Dr. A. The practice grows at a modest 5% per year. The practice’s financial projections
and Dr. B’s assumed net cash flow, after taxes and repayment of the start-up debt, would be illustrated
as follows:
A year-by-year comparison of each scenario illustrates the following:
Over the six year period noted, Dr. A’s cumulative cash flow, net of taxes and debt, totals $722,600,
whereas Dr. B’s cash flow totals $1,016,300 – a difference of nearly $295,000!! This difference in cash
flow in the initial years of Dr. A’s career is significant and may never be recaptured.
As we illustrated above, the financial reward of acquiring an existing practice is much greater than
starting your own practice from scratch, particularly in the first few years of your career. As always,
there are many items to consider, but it is hard to deny that the financial reward of acquiring an existing
practice outweighs that of starting a new practice. As previously stated, the difference in the amount of
money you make during the initial years of your career could be significant and may never be recaptured.
We often ask young doctors, "If you think you are going to be successful in growing a brand new practice,
why wouldn’t you be equally or even more successful at growing an existing practice that is already established?"
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