Practical Practice Solutions: Building Your Successful Future

CHAPTER 1

KEY STRATEGIES TO A SUCCESSFUL DENTAL PRACTICE

Allen M. Schiff, Dental CPA

INTRODUCTION

Congratulations! Why? You have chosen an awesome profession that is both self-rewarding and financially rewarding. You also have the professional ability to change another person’s life. Chapter 1 of Practical Practice Solutions in Dentistry: Building Your Successful Future will attempt to help you with your professional decisions, which range from writing a business plan, selecting a taxing entity, identifying marketing strategies, accumulating wealth and related wealth-management strategies and everything in between. Remember what your parents told you as a child, If you don’t know, then ask? Please be sure to reach out to the many talented authors of this book for their individual level of expertise, especially if you have read something that you simply do not understand. It’s OK to ask for clarification!

PLANNING—BEGINNING

If you take the time to look at some of the world’s most successful entrepreneurs, such as Bill Gates (Microsoft), Kevin Plank (Under Armor), and the late Steve Jobs (Apple), the one thing they all have in common is "planning." A dental practice is no different, since a dental practice is also a business. From day one, you need to treat your dental practice as a business. You need to plan, which takes time. Planning begins in the very early stages of your entrepreneurship, and continues to evolve as your practice evolves. As you grow your practice, you will have some success and, unfortunately, some failures. You try to limit your failures. As you conquer both success and failures, your planning will have to change. You should also be flexible to change. Do not worry or give yourself an ulcer; the changes that will evolve from this planning are good and will lead you on your way to a very successful dental practice.

RESIDENCY/SPECIALTY, ASSOCIATESHIP, ENTREPRENEURSHIP, ACADEMICS, MILITARY

Your planning process should begin while you are attending dental school. You have a lot of choices after dental school, which could range from a residency/specialty program, an associateship, entrepreneurship, academics, or the military. Planning is a must! Please consider both the positives and the negatives of each of the choices available to you. Through your planning process, the choices that are available to you will be apparent, and you will narrow down your choices that will be best suited for you to succeed. There are advantages and disadvantages of each of your choices, but with good planning, the choice that you select will give you the most opportunity to be successful, both spiritually as well as financially.

EMPLOYEE VS. INDEPENDENT CONTRACTOR

Many of you will be faced with a very important decision as soon as you graduate dental school. You will be offered an associateship position. Congratulations! But it doesn’t stop there! Some of the questions you will be faced with are as follows: Am I an employee or an independent contractor?, What rate of pay should I be compensated?, Am I entitled to any employee fringe benefits?, How are new patients divided between the senior doctor and me?, How are procedures assigned? . . . and the list goes on and on. Of all these questions, the most important one from an income-tax viewpoint is: Are you an employee or an independent contractor?.

So, let’s take a look at the difference between the two—employee or independent contractor. As an employee of the dental practice, the employer will be responsible for paying all of your payroll taxes, to include your Social Security and federal and state income taxes. On the other hand, if you are treated as an independent contractor, you will be responsible for all these taxes and (not to make matters worse) your portion of the Social Security taxes as well. That’s correct; you are responsible for paying the Social Security tax not once, but twice!

The IRS (Internal Revenue Service) has a lot of information on its website (www.irs.gov) to determine whether you are an employee or an independent contractor, to include a 20-factor test. Depending on how you answer all 20 questions, the test will help you determine your employment status.

HOW SOON OUT OF DENTAL SCHOOL?

While lecturing in dental schools, I am often asked, How soon after I graduate should I buy a practice? Depending on the circumstances, I will often implore the students to please consider waiting up to 18 months after dental school to purchase their practice. During this period of time, please bone up on your skill sets, learn how to communicate to patients, and learn how to motivate your team. Please allow the senior doctor to mentor you.

STUDENT LOANS—WHEN AND HOW SHOULD I REPAY THEM?

Probably the number one question asked by all US dental school students is: When and how do I repay my student loans?

There is no set answer; many of you have different circumstances that could affect how true seasoned professionals will respond to this question.

Once you have landed your first series of jobs (preferably as an associate), you should sit down with a dental CPA, with hopes of mapping a strategy to reduce your student loans that would suit your current as well as future financial needs.

If possible, try to rid yourself of the student loan debt in your earlier years of practice. Many of you have student debts that could range from $150,000 to as high as $250,000 (if not more). If these debts are not forgiven, you will need a game plan put in place that will help you relieve yourself of these debts over the period of time. Depending on the length and terms of your student loans, this could be as much as 10 years, if not more.

STUDENT LOANS—PART OF YOUR GAME PLAN WOULD BE TO EXTINGUISH THOSE STUDENT LOANS WITH THE HIGHEST INTEREST RATES

Please be sure to meet with your dental CPA so that you can determine strategies for repaying your student loans. Your dental CPA can greatly assist you in creating a game plan for the retirement of your student debt. The initial plan should be retiring the debt with the highest interest rates first, where possible. By doing so, the accrual of the interest will tend to slow down, because you will be making greater inroads on the principal portion of your loans.

Please discuss with your dental CPA the advantages of retiring your student debt and retiring your practice business loan, while funding your retirement plan, all at the same time! The advantage of this plan will be the power of compounding.

Another part of your strategy should be living within your means financially after you graduate from dental school. There is no need to rush to purchase a fancy car, a boat, or other expensive toys until you have established yourself either as an associate or as an entrepreneur.

One last consideration with respect to student loans: if you think (or if you have been told) that the interest portion of your student loan is tax deductible, please disregard this. Under current Federal tax regulations, your earnings will most likely far exceed the threshold whereby student loan interest is deductible.

PRACTICE ACQUISITION VS. START-UP

When should you consider a dental practice acquisition? When should you consider a start-up? There are many pros and cons to both opportunities. As I mentioned earlier in this chapter, my suggestion is to wait at least 18 months post dental school before even considering either of these two opportunities.

Let’s examine some of the pros and cons.

With a practice acquisition, you will receive the benefit of having immediate cash flow from the existing practice. This is because the practice has existing patients, and those patients will pay for your services. Whereas, with a start-up, you will have to market your services to the general public to attract new patients to your practice, with hopes of providing professional services and then collecting on them.

The facility and the environment will be of importance to you as well. With a practice acquisition, you inherit the seller’s facility and the related décor. Whereby with a start-up, you have the opportunity from the very beginning to design and outfit your facility to your liking.

The cost of each opportunity could be similar, once again depending on the circumstances. The practice acquisition could be in the neighborhood of $450,000 to $500,000—whereas the start-up opportunity could be as high as $450,000. There are many lenders nationwide who will consider either of the two opportunities, so please meet with your dental CPA to gain access to these resources.

BUSINESS PLAN

Depending on which of the two choices you choose from above (a practice acquisition or a start-up), you will need to write a business plan so that you can plan accordingly. Some lenders may require a business plan. Even if they do not require one, it is a good tool to have within your tool box to refer to as you build your business.

Here is an outline for you to consider in developing your business plan:

Executive summary—This introduction should give the reader of the business plan an introduction of your business, where you are currently in the process, and where you are headed.

I.Financing required:

(a)Purpose of loan (practice acquisition or start-up)

(b)How much money is needed and the allocation of the loan proceeds?

(c)What are the collaterals and their respective values?

(d)Repayment plan (include an amortization schedule)

(e)Copy of the purchase/sales agreement along with a letter of intent (LOI)

II.Business history (If purchasing an existing practice):

(a)History and nature of current business

(b)Current ownership

(c)Legal structure (proprietorship, partnership, corporation, LLC, etc.)

III.Dentists, their staff, and their advisors:

(a)Names and responsibilities of doctors and staff along with an organization chart

(b)List of professional advisors (dental CPA, attorney, banker, dental consultant, etc.)

(c)Doctor’s curriculum vitae

IV.Demographic information:

(a)Fee schedule by procedures

(b)Capitation relationships, if any

(c)Patient statistics

(d)Market area (map)

(e)Marketing plan—external and internal

(f)Competition (within 1 mile, within 5 miles)

(g)Advertising and marketing programs

(h)Major suppliers and their selling terms

(i)Descriptions of office facility

V.Plan of action:

(a)Improvements and installation of machinery and equipment (new technology)

(b)Hiring of additional staff (assistants, hygienists, front desk)

(c)What are the risks, rewards, and costs associated therewith?

(d)Future debt—is it needed and when?

VI.Financial information needed:

(a)Financial statements for the current business

(b)Analysis of cash flow for at least six years

(c)Individual tax returns for the past 2 years

(d)Personal financial statements (formal listing of your personal assets and liabilities)

(e)Prior business tax returns for the past 3 years

(f)Current aging of the patient accounts receivable

(g)Copy of your credit report (www.freecreditreport.com)

(h)Copy of the proposed lease

MENTORSHIP

When you first begin, you may want to consider seeking out an opportunity as an associate. Upon doing so, you will be placed in a position where your new employer will be able to mentor you. The mentorship could be anything from another set of eyes while you are performing a challenging dental task—How to schedule with efficiency, How to motivate your team members, to How to communicate with patients.

How do you know if you will be mentored? Just ask! Please ask the prospective employer what policies and procedures do they have in place that will allow the doctor to mentor you.

LOCATION

They say in the restaurant business that in order to be successful, you need an excellent location! Well, the same could be said for a dental practice.

Prior to selecting your new location, you may want to perform some internet research of the said location, engage demographic specialists who specialize in the dental profession, or inquire of dental consultants.

This is a major decision within your professional career. You want to make sure that with all the facts and circumstances you have at such time, your decision is firm.

TECHNOLOGY

Technology is a must in dental practice. Having the right technology in place will bolster case acceptance. I can’t tell you how many times I walk into an office inquiring about the use of the intraoral cam, and I am told it is broken. Really? And no one has taken the time to have the cam fixed? It is amazing that doctors will allow the tail to wag the dog. Doctors, if this is the case within your office, please either spend the funds to get the cam fixed or purchase a new cam. Also please make sure that within your office, your hygiene protocol is that at every patient visit, the hygienist gives the patients a tour of their mouth, through the eyes of the intraoral cam.

If you have the opportunity to purchase technology, please seriously consider making that purchase. It will enhance the delivery of oral healthcare services. Furthermore, please do not purchase the technology because of tax purposes . . . in other words you save on income taxes due to the purchase.

TEAM ACCEPTANCE

In order to have a successful dental practice, hire people who believe in you. Your team must accept your philosophies and values of practicing dentistry. This is a very important factor that will lead to case acceptance.

You may be asking yourself, How do I build these attributes within my dental practice? The more you communicate with your team, the more they will understand you. The more the team understands you, the more they will understand your philosophies and values. This can be accomplished during the morning huddle along with team meetings that can be held on a regular weekly basis during your lunch hours. These meetings should be organized with an agenda along with related content that will afford the attendee the ability to get to know you and support you.

PROFESSIONAL SERVICES

As you build your dental practice, you will have choices. One of your choices will be—how much of your practice will be made up of fee for service patients and how much will be insurance patients? In other words, how much dental insurance will you intend to participate with and how much will you not?

These are difficult decisions. It may make sense to engage a professional practice-management consultant to help you with these decisions.

If you are considering doing a start-up, you may have no choice initially but to participate with various dental insurances. This is due to the fact you will not have any patients at first, and this will afford you the opportunity to gain new patients while building your practice.

On the other hand, if you have an existing practice and your practice is growing, you may want to consider dropping or terminating your dental insurance contracts with dental insurers. Most contracts contain a 90-day out clause. Once again, you may want to engage a professional dental-practice management consultant to assist you with this most difficult decision.

FEE FOR SERVICE VS. INSURANCE BASED PRACTICE—EXAMPLE OF OVERHEAD

Under a fee for service format, let’s assume the following on an annual basis: fee income of $1,000,000, annual overhead at $700,000 and net income of $300,000. Here is what it would look like from a profit and loss format:

The above example assumes practice overhead at 70%, or $700,000, or a 30% net income.

Now let’s further assume the practice will include some participation in dental insurance to the tune of 15%. So now the fee income reduces by the 15% or to $850,000 while the dental overhead continues at $700,000. Here are the financial results:

As a result of participating with dental insurance and having a 15% reduction of the top line, this creates a $150,000 impact on the bottom line, going from a net of $300,000 to $150,000 or a 50% reduction on the bottom line with a top line reduction of 15%.

FORMING YOUR PROFESSIONAL TEAM

From the very beginning, when you start your dental practice, it is very important you surround yourself with the top professionals within various industry segments that serve the dental industry. Here is a list of professionals you should consider engaging after you have had a chance to interview them:

•Dental CPA

•Attorney

•Dental Practice Management Consultant

•Marketing Consultant

•Commercial Banker

•Dental Equipment Specialist

•Leasing Consultant

•Insurance Advisor—Business

•Insurance Advisor—Personal

Please be sure to gain an understanding of the professional fees with respect to the professional disciplines as outlined above.

The dental CPA and attorney will charge their fees based on hourly rates, which will range from $250 an hour to $400 an hour.

The dental practice management consultant and marketing consultant will charge their fees on a project-by-project basis, depending on the nature of the engagement.

The commercial banker and dental equipment specialist get compensated from their employers based on what you borrowed and at what interest rates (banker) or what equipment you have purchased (equipment specialist). In essence, their compensation is included in the goods or services you have purchased.

The leasing consultant normally gets compensated from the landlord where your dental practice is housed. The rate of compensation to the leasing consultant will vary based on the length of the lease you signed and executed.

The insurance advisors will get compensated from the premiums you pay for the types of insurances you purchase.

You will need to purchase business insurance for any or all of the following:

•Malpractice

•General liability

•Workers’ compensation

•Business overhead

•Business umbrella

You will need to purchase personal insurance for any or all of the following. The purpose of these insurances is to give the commercial banker collateral in the loan they will afford you, to do either a start-up or a practice acquisition.

•Life insurance

•Disability insurance

The banker will require collateral in case of loan default. In this case, a loan default could have been created due to an unfortunate and untimely death or an unforeseen disability.

Please keep in mind that personalities of your professionals are very important during the decision process. You need to have the ability to get along with your professionals, being able to ask a dumb question, and at the same time, never feeling inferior and obtaining the results you richly deserve.

SYSTEMS AND PROCEDURES

Once you have had the opportunity to go into practice, it is very important to set up systems and procedures within your office that are congruent to your philosophies and values of practicing. Please consider setting up systems and procedures that deal with a variety of things, from greeting the patients, to how to answer your office telephone in a welcoming manner, as well as treatment presentations and treatment protocol.

In addition to the day-to-day practice procedures, please also consider setting up internal accounting-control procedures within your practice, with the hopes of minimizing fraud and embezzlement within your dental practice. These internal accounting-control procedures evolve from the time the daily mail arrives in your office to discharging a patient at your front desk. Please be sure to speak with your dental CPA for their recommendations and implementation of such measures, to reduce your chances of being a victim of fraud.

MORNING HUDDLE

The morning huddle should be a part of your systems and procedures. At the morning huddle, which should take place at least 15 minutes prior to opening, you should be discussing with your entire team the schedule for the day and any particular issues with each patient. For example, if we know patient Smith is due in today at 10 am, and we have been watching tooth #14 for her last two (2) visits, we may want to take a look at that tooth to be certain there have not been any major changes since her last visit.

SCRIPTS

Also, as part of your systems and procedures, there should be scripts that have been developed within your office. These scripts provide all team members and the doctors the ability to communicate with the patient, with hopes of securing future treatment. Part of the scripting should occur during the hygiene visit, specifically during the exam portion of the visit. Please keep in mind, your hygienist has already built rapport and confidence within your patient base. Proper scripting between the doctor and the hygienist will increase your chances of case acceptance.

MARKETING—EXTERNAL AND INTERNAL

An integral spoke in the wheel of running a successful dental practice is marketing your professional services. You could consider either external or internal marketing, or both.

Let’s examine them.

External marketing is a means whereby the general public gains awareness of your services. Examples of external marketing are advertising in print media, billboard advertising, direct mail, radio and television.

Internal marketing is marketing your dental practice within your practice. It is asking for referrals from existing patients. It could be using your social media to promote your practice. It could be your Internet reputation. It could be just asking your patient to become an ambassador of your