Embrace Progress: Start with the End in Mind by Daniel Grob, DDS, MS, Editorial Director

In last month's column I mentioned a comment from Scott Frey, a leading dental educator and lecturer I've met at recent meetings, who said that not every orthodontist should be, or needs to be, a sole practitioner.

Frey and I agree that the changing economic landscape has resulted in several different practice methods becoming available to new graduates: All orthodontists aren't going to own their own practices—and they shouldn't, because not everyone wants that!

I work in a setting, part-time, within earshot of an endodontist who's employed by a large group. This well-educated professional makes no apologies about being content to work for a six-figure salary based on production, and to spend his free time investing with his family and personal assets.

Why not own your practice?
Dentists—particularly specialists—are paid handsomely, so many of them believe that they can earn a better return elsewhere. It's difficult to start, grow, maintain and ultimately transition or sell a business, and the prize or reward doesn't come until the end. And for many clinicians, that prize will be less than what was dreamed about in the beginning—largely from a lack of energy, time and/or money.

Here's what separates corporate orthodontics from a solo or group practice: In the typical corporate model, an outside party invests money into the purchase or development of a business, and to earn a return on that investment he or she will make decisions about the practice's marketing, mechanics and management, based on a dollars-and-cents point of view. This keeps the business poised to continually grow, skipping the transition phase. Often the corporate entity will outlast the originally participating orthodontists, while the investment lives on like a legacy.

This point can be lost or minimized when the business's professional practices are established by a single owner, and then passed on, or transitioned, to new buyers. Those purchasers are forced to somewhat start over in the “build, grow and sell” cycle. Running the numbers

Orthotown founder Dr. Howard Farran will tell anyone who asks that he pays associates in his practice 25 percent of what is collected from production. Mention this to many young orthodontists and they'll gasp and accuse him of being as greedy as a Wall Street banker.

However, if you're aware of the concepts of business valuation, such as the need to employ personnel and other overhead costs, this is actually quite generous. If a business operates at 60 percent overhead and pays 25 percent to an associate, that leaves only 15 percent for the owners.

How is the business owner justified in earning a percentage of the production? Well, he or she does what my friend the endodontist does not wish to do—namely:

• Build
• Employ
• Grow
• Manage
• Reinvest

After last year's AAO meeting, I mentioned that the landscape of large practices is changing. Those truly interested in owning need to take a new look at the business value of professional practices.

As an owner, you need to build in a way that assures the business's continued growth and expansion well beyond your tenure as the operator. As a potential purchaser, you may need to purchase only a portion of one of the established practices. For instance, when new CEOs are hired at IBM, they're given—or has the option to purchase—stock. They don't get the entire company!

Who's your potential buyer?
If, after all of this discussion about the possible pitfalls of opening an orthodontic practice, you still decide that's what you want to do, here's my one piece of advice: Build with the end in mind and have continued plans for growth. In Orthotown we've published numerous articles and interviews with consultants to steer you in the right direction, because overall, the reason to build the business is to sell the business.

Who's your potential buyer? Chances are it's a recent graduate, who has a new license to practice but also one other thing: a bunch of debt. Which leaves you in a predicament—where does the money come from? Probably a bank, which will want collateral before handing over the money—and that means a valuation of the business side of the practice.

There are three standard methods of appraising a small business:

• The asset approach takes into account all tangible and intangible practice assets and, utilizing various metrics of the industry, applies a value.
• The market approach compares those metrics with similar practices that have sold during a recent time period, and compares the practice in question to those completed sales.
• The income approach is probably the most important in orthodontics. It evaluates the free cash flow available to the owners. This free cash flow is utilized to pay the owner a reasonable salary, but also would be needed to reduce the debt for the practice sale.

Really, a true valuation of your practice combines all three methods. Maximizing your practice's value requires you to be aware of each, so you're constantly growing the value toward your end goal, rather than bleeding the practice dry.

As my first dental school patient so aptly reminded me as he took delivery of his new set of dentures (some six months after starting to build them, I might add), it's all about the buck!