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AUDIO - HSP #246 - Haden Werhan
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VIDEO - HSP #246 - Haden Werhan
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Learn:
• The most important tax concerns for dentists
• What Haden Werhan loves most about his work
• What a Dental CPA is, and why a dentist would need one
• The biggest concertn Haden Werhan's clients are facing
I have been working with dentists since 1980. My background includes helping dentists through practice transitions as a consultant, broker, and now, as a CPA. I have about 150 dentist clients and my eight partners have another 600 combined. As a Dental CPA Financial Adviser, I help my clients determine their financial goals, whether or not they are on target to achieve them, and, if not, how to harness the power of their practices to create the income they need to achieve those goals.
J. Haden Werhan, CPA/PFS
haden@twdadvisors.com
Thomas Wirig Doll
165 Lennon Lane, Suite 200
Walnut Creek, CA 94598
925.280.5741 direct line
925.367.5741 mobile
877.939.2500 toll free
925.939.2500 office
925.953.6141 direct fax
Website: www.twdadvisors.com
Blog: www.wealthextractions.com
Howard: It is a huge, huge, huge honor today to be interviewing Haden Werhan who’s been in dentistry since 1980 and is a dental CPA. Now you have 150 dentist clients, but your eight partners combined have 600, so this is just going to be an amazing smorgasbord hour of … The dentists always want to know everything about root canals, fillings, and crowns and I’m always riding them hard that you got to watch the numbers, you got to watch the numbers. Let’s just start off with just the basics. I had a lady email me last night and she’s having all these financial problems and everything in her mind. She’s doing 1.4 million and I started talking to her. You’re like three dentists … Where’s the problem and she’s like oh, I should be doing two, at least two. I can’t believe I can’t get to two.
Let’s start off with … You’re talking to thousands of dentists right now, almost all of them are all alone, driving to work, podcast is killing radio. Instead of listening to your local guy’s corny jokes they’re going deep with podcasts, they’ve got an hour commute, that’s why we do an hour. First, just tell them what the average person is, so they can know if they’re below average or if they’re right on the average or if they’re above average.
Haden: The average general dentist and this would be a nationwide number is producing a little over $1 million, Howard, and of that taking home through salary or net income if they’re a sole proprietor, perks, et cetera, somewhere in the 36 to 38% range and that’s just average.
Howard: Now is this average of your 600 combined dentist population who you’re treating or are these American Dental Association numbers for a statistical random sampling of the pool?
Haden: Most of our general dentists are in this pool, but the data comes from the Academy of Dental CPAs which is a group of 26 CPA firms that we belong to.
Howard: Academy of dental CPAs?
Haden: Right.
Howard: What’s the website on that?
Haden: Www.A-d-c-p-a.
Howard: A-d-c-p-a.
Haden: .Org.
Howard: .Org. Okay, but I’m still going to argue the numbers. When you’re classically trained as an MBA from Arizona State University, I say never trust numbers. I’m still going with the American Dental Association says it’s a half million and they’re taking home 150, but you guys deal with elite dentists. The dentist’s smart enough to be dealing with a CPA who only does dentists as clients. That’s why I think you guys think the average is a million because I think you guys are dealing with the elites. Do you agree or disagree?
Haden: I agree to an extent. What I’ve learned over the years is that if dentists are being coached they do better. The million dollar plus averages comes from the Academy of Dental CPAs. Collectively we handle about 8,000 dentists. That’s not ADA numbers by any stretch, but it’s a lot of docs and of them the general dentists probably mirror the population at large of general dentists to specialists. Maybe out of 8,000 there’s 5,500 or 6,000 or so general dentists. We compile every year in conjunction with the National Association of Healthcare Business Consultants the overhead numbers, the income and overhead numbers for all the specialties, general dentistry, and including all the medical specialties and those are the numbers, about $1 million in revenue, 360, 380 in profit.
Howard: Yeah, so yeah, the numbers are going up, so I’m looking at the ADAs number from June 11 and they’re saying average gross billings per owner dentist is 798, so 800,000 and their net income is 219. Your group is a little higher than that, your group’s 200,000 higher, it’s a million and you’re saying they’re netting 360,000 to 380,000 which makes my point. My big strong point is this. The dentist who … If you’re listening to this podcast and the only thing … If you just stop right now and switch from a CPA who just does 100 different clients and a 100 different businesses and you switch to a firm that only does dentists, you’re basically going to go up 200,000 in revenue and double your net income because these guys are so value-added. I have been seeing this in my own backyard for about 20 years. When did the ADCPA start?
Haden: The ADCPA actually started in Scottsdale in a meeting in 2001.
Howard: Yeah, and I was there. Was I at the first one or was I at the second or third or do you always meet in Scottsdale?
Haden: No, we don’t always meet in Scottsdale. It was in conjunction with another group. You’ve spoken to the ADCPA and I want to say it was about 10 years ago.
Howard: Yeah, which was amazing because 10 years ago … Yeah, it’s just [inaudible 00:05:56]. What I want to do with my clients, the fans of my show, I was just want to get her done. I called you, you didn’t call me, so this isn’t a sales pitch, you don’t give me any money. Give your best pitch of why a dentist should switch from a CPA that has 300 clients and only one or two dentists to a firm like you that’s only done dentists for decades.
Haden: It’s really quite simple. The bottom-line is we don’t do gas stations, we don’t do yogurt shops. All we do are dentists, so if I have 150 dentist clients, my partners have another 3, 400, I’ve got colleagues across the country with 5, 6, 7,000 dentists, it’s all we do. We know you guys and we know your numbers and we know how to help you do better. It’s just that simple. With the profit and loss figures I’m quoting you I’m able to benchmark my clients with other practices and we understand the nuances. We don’t do dentistry, but we understand it pretty well. An example of a nuance would be a practice with a higher than average dental supply bill and a lower than average lab bill.
CEREC doctors flock to Scottsdale all the time and have conferences and so forth and if you’re using a CEREC machine your lab fees are going to be a little bit lower and your supplies will be a little higher. It’s just that simple. We know what salaries are, we understand hygiene and how that impacts a practice and what those numbers should look like. If you’re generating $1 million, 350 to 400 of that ought to be coming from hygiene, of that a third ought to be Perio related. We know what the hygiene salaries should be. We know what the assistant salaries should be.
Howard: Okay, let’s just take her from the top, so I want to take us to the top. Let’s do a line item P&L.
Haden: All right.
Howard: We have the revenue and again your docs are averaging 1 million and the ADA’s docs are averaging 800,000, so there’s about 200,000 difference in gross which is only 20%, but there’s a double in net because the ADA’s saying they’re taking home – what was that number again? The ADA was showing – their net was 219 and you’re showing 36 to 38% of 1 million, so that’s 360,000, 380,000, so the stakes are high. I want you to do this. Let’s go do the P&L. Let’s start with the biggest expense to the lowest and any nuances on that expense between say a new client that signs up for you and this number’s out of whack, why you think that’s out of whack, and what you’re advising to get them back into where he can get more in line with the big dogs.
Haden: Sure, so if we start out with 1.1 million or so in production there’s going to be fee adjustments right off the top. Those are going to be insurance-related, other discounts like senior citizens, professional courtesies and you have collections. From your collections, if you’re doing a good job collecting over the counter you’re going to have some patient refunds. From production down to what we call net revenue which is the collections after refunds there might be 100, $150,000 there especially in California where there’s a lot of insurances and Delta Dental has their fee schedule and everybody seems to get in line with them for the most part. After net revenue we break our expenses into categories or groups.
Howard: Back to that million dollar number, when you said your average doctor’s a
million bucks, was that net revenue or was that production?
Haden: The million is going to be net revenue, 90 would be 1 million. The 1.1 million or so would be the gross charges.
Howard: Okay, so a million would be net revenue, so it’ll be 1.1 million net charge out.
Haden: Right.
Howard: Then after insurance adjusted production and write-offs and refunds, so we’re going to start with $1 million of actual monies collected.
Haden: Right.
Howard: Okay.
Haden: Then you have your … We go in these groups, other of our partner firms categorize things in a different order, but we like to look at the compensation, the staff compensation. We break that into front office, back office, and hygiene. Overall employee compensation with payroll taxes and medical, retirement, it’s going to be somewhere in the 30 to 34% range of that million bucks. From there we drop down to occupancy costs. Rent is an average of about five percent and there’s various taxes.
More and more folks, especially here in California, are getting hammered with used tax. They’re buying stuff out of state and the State Board of Equalization is being overaggressive in collecting. People are complying more online sales and so forth, but city business tax, property taxes on equipment that docs have to pay, all of the equipment, leasehold improvements and so forth. The occupancy costs will also include interest, depreciation, which is writing off equipment, amortization which is writing off goodwill. That’s going to be generally in the 10, 11, 12% range.
Then we like to look at supplies in lab which are the variable costs, dental supplies, 5, 6%. Lab really varies a lot depending on the practice, 8 to 11 or 12%. Office supplies which is postage and that sort of thing runs to the big box supply store, Costco and so forth, but that category is going to be in the 15% range when you add it all up, supplies, lab, and office. Then below that are more general expenses like insurances, legal and accounting, merchant fees, people are using credit cards a lot, marketing, continuing ed for staff and things like that. That’s going to be in the … I’m just going off the top of my head, but 15, 20% range. By the time you boil it down the net income before a doctor’s salary or before their pension plan contribution and their perks is going to be in that 36 to 38% range.
Howard: Okay, so then reverse that, the overhead is going to be 62 to 66%.
Haden: Yes.
Howard: Okay, so when you get a new client why are they switching to a dental CPA firm? How do they get that gift, was that a referral from a dental colleague or were they having a problem? How do they end up on your client list?
Haden: We have new clients and we have new clients. Most of our new clients are younger dentists. We have two dental schools here in San Francisco, so my partners and I are over there regularly. We’re actually part of the practice management curriculum which is formal at UOP Dugoni, so we see a lot of new dentists. We also get referrals from other clients and practice brokers and so forth. The most common reason an early to middle to middle late career dentist would switch CPAs and come to us is that they haven’t had any planning along the way and they get a big surprise tax bill. They don’t meet with their accountant.
One of the things that is absolutely critical for me, Howard, is that I can’t sleep at night if my clients don’t know what their tax bill’s going to be. We give them a quarterly financial statement and every summer we look at the June profit and loss, figure out what the rest of the year’s going to look like income-wise and then we calculate their taxes and by Labour Day all my clients know that they’re going to owe ‘x’ dollars on April 15th. Then I can rest easy knowing that people can stick some number on their refrigerator with a magnet and focus on I’ve got to save up 625 by next April to cover my taxes.
Howard: That’s why I sleep good at night by paying my associate dentist as an employee. I think the … The list of how many young dentists that got out of school and were paid as an independent contractor and didn’t understand the tax complications and all of a sudden the CPA says oh, you owe the IRS $40,000, they’re like I don’t even have $4,000, how the hell did that happen? I also don’t believe that when an older dentist hires a young kid out of school that it even qualifies as an independent contractor. Do you agree or disagree with those two statements?
Haden: I completely agree with that and here in California we have an onerous worker misclassification law that goes deeper than the federal laws about misclassifying employees. It’s almost impossible for a general dentist working in a general practice to be an independent contractor and we really advise our clients to make them employees.
Howard: I believe that the human condition is such that 90% of people start with what they want to believe and then they fill in the blanks. Just so many general dentists they just defy gravity. They’re not independent contractors. They’re coming into your office, your hours, your equipment, your everything. An independent contractor would be if I want to have … I’m building a house and I call you as a plumber. I don’t have the plumbing tools, I don’t have the plumbing equipment, I don’t know anything about plumbing, so you’re truly an independent contractor. When you come into somebody’s dental office with his staff and his hours and his equipment and his operatories, it’s an employee.
Haden: Clearly.
Howard: The only reason they don’t want to do it is money is the answer to what’s the question. They don’t want to pay it. It just comes down to FICA matching. They don’t want to pay FICA matching, right?
Haden: That’s exactly right and, of course …
Howard: Explain that. There’s a whole lot of kids listening to this podcast. I think the majority … I know there’s a thousand kids listening to this right now that are in dental school. Explain what independent contractor and FICA matching is and why the person trying to hire them doesn’t want to pay them as an employee.
Haden: Sure, so FICA is social security. Social security is a tax that employees are … That everybody who works pays. In addition to social security there’s Medicare tax. Social security is 12.4% of what we earn, Medicare is 2.9% of what we earn. Social security has a ceiling. Every year the ceiling goes up with inflation, but once you hit $120,000 or so in 2015 you’ve reached that social security limit, you don’t pay that tax any longer. The 2.9% Medicare tax goes forever, whatever your earned income is it goes forever.
As an aside when folks get above $250,000 the high-end hospital insurance tax or the Medicare tax that is part of Obama Care kicks in, that’s an additional .9 of a percent that gets added to the Medicare. We all pay this tax. If I’m a young dentist and I go to work in Dr. Smith’s practice and he’s paying me as an independent contractor, I work five days I get $4,000 in compensation, he writes me a check for $4,000, I go to the bank, boom, I’m done. That’s an independent contractor.
If I’m an employee I work my days, I get my $4,000, but the check runs through the payroll service and all these taxes are taken out. The tax for social security of 12.4 gets split 50/50 between the employer and the employee, same with the Medicare tax, so 6.2 and 1.5, whatever it is, 1.45 comes out of the doctor’s employer’s pocket and the dentist associate’s pocket. Then there’s other dudad taxes per state for state disability and worker’s comp, employee training and so forth. Employers have to pay all of these taxes and it adds up.
The other concern that employer dentists have is employees, if they have a retirement plan, the employees are eligible to participate in this retirement plan after they meet certain criteria. So does an employer want to have a highly compensated dentist on the payroll participating in the retirement plan where they have to make a 7, 8, 10% contribution of their wages into the retirement plan? It blows the whole plan right out of the water. There’s a lot of costs in having an employee and, unfortunately, a lot of practices try and avoid those costs and short circuit the system.
Howard: Isn’t it ironic that the same dentists that I know that do that and the same consultants I know that do that they’re always against any political, social safety net. It’s like they’re against any type of Obama Care, social security, higher taxes, whatever, and then they cheat their employees.
Haden: Right.
Howard: I find that extremely ironic.
Haden: It is ironic and what’ll happen over time is that employers who are using independent contractors they’ll pop up on somebody’s radar screen and get caught and get audited. They’ll face some pretty significant fines and penalties. It’s also important that if the independent contractor doesn’t pay their taxes …
Howard: You’re liable.
Haden: … the lawyer can be held liable for those.
Howard: Yeah, I know a couple of dentists who had independent contractor associates for five years who weren’t even doing the tax thing and then when the IRS caught onto it they had no money, so they went back after the dentist and they had to sit back and take out a huge loan to pay back taxes for someone that worked for him for five years. Yeah, but I think if you don’t want politically the government to provide safety nets then according to your logic then free-enterprise should. You can’t sit there and say free-enterprise shouldn’t and government shouldn’t, just no one should. Okay, so I want to go back to labor because most … Do you agree or disagree that when overhead is not at 62, 66% overhead, when they’re not taking home 36 to 38% of collected revenue and their overhead is 70 to 80%, would you agree or disagree that usually the violation is in labor?
Haden: I would agree that that’s largely the problem.
Howard: Go into more detail about labor. In fact, repeat the numbers of what labor should be, any nuances, how you want to break it down. I know you already did, but it’s so important I want you to just revisit that.
Haden: Sure thing, so hygiene salaries generally are in the 12, 13% range of the net revenue. Office and assistant salaries each in about the seven to eight percent range.
Howard: Seven to eight each?
Haden: Correct, and then you have payroll taxes which is 10, 11% of the total of the payroll and then worker’s compensation insurance and if there’s health insurance and retirement plan contributions, that adds up as well. If the hygienists are in this typical practice I’m describing, paid about 12% they should be producing 2.5 to 3 times their compensation. Now that’s an average. The ideal, of course, would be 3 times their compensation just so that the doctor can make some money on the deal.
That’s the breakdown, 12, 13 on hygiene, 7, 8% assistants, 7, 8% on office. What people fail to do is control over time and have specific job duties for people, job descriptions. I tell people when I lecture at the dental schools the biggest issue that will nag at dentists throughout their careers is HR, complying with labor laws, managing staff, hiring and firing. It’s the biggest struggle that general dentists, other dentists, will have over time. It’s challenging. Managing people is tough.
Howard: We put up 350 courses online on Dentaltown and they’ve been viewed over half a million times. If you’re lecturing at UOP you already got a PowerPoint, right?
Haden: Yep.
Howard: God, I wish you so much would put that on Dentaltown.
Haden: I’d be happy to do that.
Howard: Do you only take … You’re in Walnut Creek, California. Do you only take clients in California or if someone’s from another state do you treat them or do you refer them to one of your ADCPA.org colleagues?
Haden: It depends on where the client came from. I have a client in Windsor, Connecticut referred by a practice management consultant and we work well together across the country. I have family on Cape Cod, so when I go back east we generally get together and we do other meetings like this one on Skype and it works really well. Most of our clients are in Northern California, just the way it works out. I had a client in Flagstaff for a number of years and we’ve got a few clients in Southern California and I have a couple of clients up in Oregon. For the most part it’s around here and generally as a rule if someone called up from Kentucky I’d refer them to my good friend in Lexington and send them on their way.
Howard: Three of my four boys went to college in Flagstaff at NAU.
Haden: Okay.
Howard: I think they all chose it because it was at the base of a ski resort.
Haden: Yeah.
Howard: That’s the only thing that kept them in school is having a free ski pass all season. When a new client comes to you is it … You were saying the typical client is just a young freshman right out of school from lecturing at UOP and USCF?
Haden: UCSF, yeah, pretty much. Those calls come in regularly and they’ll have questions. Our hope when we go to the dental schools is that they’ll just remember there’s somebody out there to call when they’re done that can answer all the basic questions that they’ll have about employee versus an independent contractor and saving for taxes and things like that. We don’t expect them to learn things that we teach them while they’re in dental school especially as they get towards their final year. They’re just working so hard and it’s not reasonable to think they’re going to just remember things.
We tell them here’s a PowerPoint, here’s a packet of information. Send it home and when you go home after your dental school you’ll find it and you can give us a call. We get these calls all the time, young docs they want to know about employee versus an independent contractor. They want to know how do I save for my taxes, should I pay off my student loans or put an IRA. That’s probably the biggest issue with younger docs now is the debt.
Howard: I want to ask you … The obvious question to ask you is these students, what are their challenges facing, what is their average student loan debt, do they have access to financing to buy a new practice, we’ll go into that. Before we go into that, that’ll be the next question. Before we go into that I find a crazy reoccurring theme where some dentists will get out of school and they’ll get a job as an employee and they’re taking home 250 to 300, but their walnut brain, no offense to you, I know you live in Walnut Creek. Their walnut brain just keeps saying I got to own, I got to own, I got to own my own [inaudible 00:28:08]. I’m not going to be somebody’s employee. I didn’t go to school eight years to be your employee and they’re making 250 to 300 and then they quit, they go buy a practice for 600 and 10 years later they’re not up to what they were earning in that million dollar practice.
Then I can say that about a couple of my ex-associates over the last 20 years. I’ve got dentists that worked for me that never, ever came close to earning what they earned when they were working for me. What do you think about that? Is that a hormonal, emotional decision? Why would people walk away from a quarter million dollars a year with no business headaches or anything to go own a piece of the rock and then make 150 a year for the next decade?
Haden: First, I haven’t seen that too much. I actually have a periodontist client I was talking to a couple of weeks ago and he is [inaudible 00:29:10] and he goes around to different offices and makes ‘x’ dollars and he had the opportunity to buy a practice. We looked at the numbers and I said you’re going to be working a lot harder and potentially earning less. The only difference even if you earned the same, the only difference is that over time you’ll have an asset that you can sell.
I think that’s a big question mark about the future because with changes in dentistry … We tell people they shouldn’t count on their practice as their retirement plan. That they should save and plan and if the practice sells for a nice chunk of dough and it can be added to the equation that’s great, but I haven’t seen that too much. Somebody making 250, 300,000 I wouldn’t advise them to buy a practice unless they were going to make that or more.
Howard: Can you share any advice … I’m trying to mix this up between young kids and old listeners. My audience is pretty spread out. Can you think of any stories or advice that you’ve given your dentist clients when reading their numbers, showing them the tea leaves and nudging them to make decisions towards this way versus that way or how you’ve gotten people to nudge down their overhead and nudge up their net income?
Haden: When clients go to the extent of hiring us or hiring a consultant or hiring someone that’s going to coach them generally they pay attention. They’re invested in the process and so we don’t really have to sell them on too many concepts if you will. New dentists generally we’re talking to them about how to repay their debt. Are they going to be able to afford a home, afford a practice, and so forth.
Mid-career people that are at a crossroads financially, maybe they’ve developed a big lifestyle and haven’t saved a lot, we can help them make some hard choices and correct their course if you will and get them on track with saving. It takes discipline and it takes coaching on our part. We push pretty hard to show people … Are you going to be able to achieve financial independence at some point or are you going to be working till you’re 75? I don’t know if that answers your question, but we’re really pushing people hard to get where they need to be depending on obviously where they are in life.
Howard: What would you say of your clients and through the ADCPA.org clients, what would you think the biggest concerns that your 8,000 clients nationally are facing these days?
Haden: I think a large concern is the group practice model, corporate dentistry. Howard, when I started working with dentists back in the early ‘80s we had this huge fear of shopping center dentists and corporate dental practices and PPOs. PPOs were going to end private dentistry and the sky was falling. We’re all still here. Dentists have adjusted over time, some have PPOs, some don’t. We roll with the punches. I think it’s the same now especially with changes in demographics.
There’s a lot of old guys like you and me about to retire. They need to be ready to do that. They need to plan and be able to save. It’s just a matter of helping people understand that if your fear of corporate dentistry is you’re going to not have a practice in five years, well, maybe that’s not such a big worry. Let’s make some adjustments in your overhead, let’s make sure you’re on top of your game with continuing education and reading everything you can read and keeping your practice viable and so forth. I think the biggest concern is the group practice, corporate dentistry model. I’m not sure it ought to be the biggest concern.
Howard: You’re out there, California has the most dentists of any state by a mile. You guys have 32,000 dentists. It’s just crazy how many dentists are out there and you got what, five dental schools or is it six now?
Haden: I think it’s six.
Howard: You’ve got six dental schools, over 32,000 dentists. Has corporate made a change in environment in just the State of California where you’re around? Has that really changed anything in your career time with your clients?
Haden: It really hasn’t changed much up here in Northern California. I think in Southern California it’s a bigger concern. It’s a much larger population base there and I know my pals in the Academy of Dental CPAs that are in San Diego and in Orange County, they have clients really concerned about group practices and corporate practices much more so than we have up here. We have Western Dental, we have Smile Care and various other offices, Pacific Dental and so forth, but people aren’t running around with fear in their eyes that private practice is going to be dead. I think it’s more other places than around here.
Howard: What do you personally love the most about being a dental CPA?
Haden: You talked about describe a situation with a client where you help them or what have you. The best part of my job is really helping people, helping them make good decisions, helping them see that there’s still opportunity in dentistry and that it’s a good profession. To get it down to the nitty-gritty I’ll talk about an orthodontist client that I have and we met three or four months ago. We had helped this guy buy his practice about 15 years ago, coached him along the way to make sure he’s complying with the labor laws. He’s a techno guy, so we didn’t have to talk to him about keeping his practice viable and modern. He’s doing that on his own. We’ve helped him manage this large income that he finds himself earning.
By that I mean we’re paying down debt, we’re putting money into retirement. We’ve set up what’s called a cash balance retirement plan which just lets you put away a ton of money beyond the typical 401K profiteering plan. We’ll sit down and have a meeting for two hours and we’ll look at the clock and it seems like 10 minutes have gone by, but we got so much accomplished. This guy, we’re ready to leave the office and we get up and shake hands, and he goes around in my office to everyone that supports him in my firm and literally walks out to the area where we have cubicles with bookkeepers and tax people and so forth and he shakes their hand and gives them a hug and so forth. That is just the best thing, to be able to help people and to have them appreciate it so much. That’s just the best part of my work.
Howard: Let’s talk about the kids come out of school. What are their big concerns? What are their big challenges? Where do you see them coming? What usually happens to a graduating class from UOP in San Fran, University of the Pacific Dugoni and University of California and San Francisco. What usually happens to a graduating class? Where are 100 kids a year after they graduate? Are they all employees, what’s going on with them?
Haden: That’s a good question. We always ask that when we first meet with them, who’s going to specialty school, who’s going home, where do they come from and so forth. For the most part I would say 70 to 80% of the dentists, the senior dental students, are sticking around California. Lots of them come here from somewhere else and they like it a lot. Some go to specialty school, some go back home. The biggest concern they have is, especially out of Dugoni, how do I handle $450,000 in student loans? It’s staggering, it’s absolutely staggering. It’s not all that different with UCSF because that’s a four-year program, UOP is three. The debt is just unbelievable and it’s not just unique to California schools, it’s …
Howard: Let’s put that in perspective. You say 450,000 is staggering, but of your 8,000 dentist clients with the Academy of Dental CPAs, what do you think the average dentist home cost?
Haden: The average dentist what?
Howard: Home, the home they live in?
Haden: Oh, wow. I think the average home price … I can tell you the average home price in California is probably around $300,000. That’s across the board. I don’t know if it’s all that much different around the country. Obviously, certain areas …
Howard: Yeah, but the average dentist wouldn’t be living in the average home. What would you think the average dentist home costs, not the average home.
Haden: Okay, yeah.
Howard: There’s 330 million Americans living in 100 million homes, the average, combined average household income’s just under 50,000. These guys are making three times that, but what do you think their average home costs?
Haden: A million bucks.
Howard: Yeah, exactly, so if the average dentist home is a million, but now the new kids come out of the half million dollar … They already bought half a home, they just need to lower their standard of living and live in a half million dollar home. In fact, they should shoot for the average home, 300,000. Then I’ll ask you another thing, not being facetious, but in all the dentists you’ve worked with since 1980 what do you think their average divorce costs?
Haden: Oh, my goodness. I’ve seen just a rash of divorces in the last five or seven years. I’ve seen them go through mediation and not being very expensive and then I’ve seen them be $300,000.
Howard: Three hundred thousand?
Haden: Yeah.
Howard: That’s it?
Haden: For a divorce. I’m talking legal fees. Is that the question?
Howard: Oh, you’re talking legal fees. Oh, okay, yeah, legal fees 300,000, but how much money did doc have to pay? What was the settlement with an average divorce? You’re saying 300,000 in legal fees which is the home, the average home price.
Haden: Yeah, so I think typically what you’ll see is the dentist owner of the practice has to make a settlement for the value of the practice and more often than not … I’m just thinking back over the last five or seven divorce cases I’ve seen, the dentist will keep the practice and the spouse will keep the home. They average things out over those two primary assets and then they split the retirement plan 50/50, so half the house, half the practice, half of what’s been put away in retirement. It can be a couple of million bucks.
Howard: Right, so that’s what I’m telling these kids. That $450,000 in student loans, that won’t even be 20% of your first divorce. Instead of living in a million home live in a half million home. You know what I like the most, you know what statistic I love the most about dental students? Do you know when dentists marry dentists in their school or physicians marry physicians or any post-graduate, whenever a couple in a post-graduate program get married that’s the lowest divorce rate in the United States of nine percent.
Haden: Wow.
Howard: They have so much in common, they have so many things to talk about. I have so many friends that are husband and wife that work in the same office and they’re rich, double income, both doctors. There’s so much less stress because you’re not making money all day while some spouse is blowing 10,000 a month on Gucci purses. They can talk about their practice. I just say if you’re worried about your student loan just marry a classmate and save on the divorce and lower your standard of living. Do you personally think a lot of dentists are under financial stress because they’re living beyond their means?
Haden: Oh, absolutely.
Howard: What percent of the dentists do you think are living beyond their means?
Haden: I have to say 70 or 80.
Howard: Yeah, I don’t get it. How come I have a 2004 car with 116,000 miles on it and I know dentists that don’t have a dime that are leasing three cars like a Mercedes, a Jag, a Porsche. I’m just like dude, do you think you’re the base player for the Rolling Stone? Why are you leasing three fancy cars?
Haden: It’s very, very sad and you’re absolutely right, it does happen. I’m thinking out loud, Howard, that with this huge student debt people are maybe getting it. That lifestyle is something they really need to control. I think the folks that came into practice in the late ‘80s, early ‘90s, they’re in their 40s and in their 50s. They bought practices at a time when prices weren’t super high. They got really good value for their practices and they’ve been able to sustain throughout recessions and so forth, many including the Great Recession and it’s just because their practice is so strong and they’ve kept their lifestyle under control.
I have a couple of clients, I worry about them. I worry that I’m going to read about them in the paper because they were under so much financial stress that they’re going to have a stroke or something. I’ve got a client I lose sleep about every night and it’s exactly what you said, way, way excessive lifestyle and it can lead a horse to water, but not everybody pays attention.
Howard: That is so sweet that you lose sleep over it every night. I love your passion. I actually lost a little sleep last night about the wisdom teeth I pulled yesterday. It was so on top of the [inaudible 00:45:47] of a nerve, I just like [inaudible 00:45:48] oh, my god. I called her the first thing this morning, I was hoping she didn’t have a paresthesia because god it was [inaudible 00:45:55], but I love your passion.
I want to ask a very, very specific question to dental school graduates. I get this a lot. They’re so young and they just say … There’s nine specialties recognized by the ADA and they always say do any of them make more or less money? If they just became a general dentist, they want to know like 10 years down the road if I became instead of a general dentist, I became an endodontist or a periodontist or a pedidontist or an oral surgeon, do they make in net different amounts of money on average than the general dentist? How would you answer that question?
Haden: I’d say absolutely yes and depending on the specialty in varying degrees and you’re asking this question at a very interesting time after we’ve made it through the Great Recession because different specialties were impacted by the recession differently. Here’s my rundown. Oral surgeons make the most money. They will net easily 50 to 60% of their revenue. Pediatric dentists come in a close second. People take care of their kids. They’re going to net 50 to 60%, maybe even more. Ortho numbers are still down somewhat, but a strong ortho practice will net 40 to50%, some will do better. Endo used to …
Howard: Ortho you say net right at 50%?
Haden: Forty to fifty.
Howard: Oh, they net 40 to 50, okay.
Haden: Endo is interesting because there’s a huge diversity in endodontics financially that I’ve seen among at least my clients. I’ve got folks that are perfectly happy generating 5, 6, $700,000 a year in their endo practice and they take home 70% of that. I’ve got some other folks that do $2 million a year and they take home 50, 60% of that. It’s an interesting specialty from the standpoint of benchmarking because there’s just different personalities. I haven’t quite been able to figure that out. Perio does quite well and it just depends on how hard they work and the extent of implant surgery that they do compared to just periodontal surgery. Those guys ought to be in the 50 to 60% range also.
Howard: [Inaudible 00:48:53] oral surgeon, pediatric, ortho, endo, perio, prosth, what about prosthodontists, public health dentists?
Haden: Public health is another story. Public health will be on a modest salary, but they’ll have this wonderful debt forgiveness over time, so [inaudible 00:49:12] you want to factor that in.
Howard: What terms are you seeing in the public health? Is it mainly public health? In your mind does that include the Army, Navy, Air Force, Marines, Indian health service? What is your definition of public health?
Haden: Public health would be not so much the military. It falls in the same category with regard to debt, but the Indian reserves, the out of the way places, the free clinics, things like that, anything government-sponsored or state-sponsored. They’ll have a really good debt forgiveness program. I actually need to spend some time looking into those options because I haven’t and the debt is staggering, so I need to say hmm, is it worthwhile to earn less, but have
$400,000 of debt forgiven over a period of five or seven years.
Howard: You know what, I really, really wish you would look into that and write that up because I think how we could help so many of these dentists is they always claim I’m in a small town, I’m an hour from Atlanta, no one’s going to come work for me. If they realize that the military, Indian public health service, all these debt forgiveness plans, they get boys to go sit in the middle of an aircraft carrier for six months of the year or on the DMZ in North Korea. If they realized this was benchmarking and then they could go out on the field and say yeah, I’m going to hire an associate and if you work for me for this many years I’ll do this much debt forgiveness just like your good old government public health would do.
I think that would be an amazing benchmark and we also see … Like Delta Dental of Ohio got involved because they had so many small towns that don’t have any dentists, so they said if you come to these small towns and you set up there they got … Delta Dental got the local city to match them dollar for dollar and I think they both were up to $100,000 in the pot and they’re getting kids to go to towns of 4,000 people in the middle of nowhere and starting a practice where the cost is completely low.
Usually those downtowns will find them a free abandoned building that’s been boarded up for 10 years. Everybody in those small towns, a high paying job is just Walmart for $10 an hour. They got a free [inaudible 00:51:41] building, they got low cost labor and they got a couple of hundred thousand dollars kicked in the skin for debt relief and everybody wins. That would be an amazing article. In fact, you should get the ADA, the American Association of Dental CPAs, what is it, ADCPA.org to try to benchmark what those public health benefits are and then docs could start matching that.
Haden: We could survey that pretty easily. Obviously, we have 80 CPA members all around the country and they’ll have circumstances like you’ve described that haven’t occurred to me frankly. I have had a conversation with a client recently who’s looking to acquire another practice or two or three. Not to become a dental tycoon, but just expand his financial base if you will. We’ve had that conversation. We can attract top talent and help people retire debt over time and hospitals have done it for decades with physicians when they buy their practices. I think it’d be an interesting model. I’ll propose that we take a look at that.
Howard: Yeah, I think when you can’t find an associate you’re not even trying. Like say the military makes you leave your wife and kids at home and they take you on the other side of the planet. I know dentists who were trying to pay off their student loans and work for the military and end up losing a life, an appendage, an arm, a leg, a landmine and you’re telling me you can’t get one because you’re in a small town in Montana. Are you kidding me?
Haden: Right.
Howard: You’re not even trying. I also want to ask you another question. Boys and their toys. When you guys are looking at your $8,000 person data, the first thing you started with was that if you have CAD/CAM your lab bills are lower and the supplies are higher. Now what I do is I charge out my block cost for my CEREC CAD/CAM emax blocks and I put those on my lab bill. My supply lady, Valerie, when we’re talking about supplies, she goes, “No, we’re not putting these emax blocks on the supplies because then you’re going to come back and ding me and say your supplies are going up.” If you take a rubber impression and send it to the lab the porcelain is the lab bill, so I break that out. I want to ask you just in general, your gut, you’ve seen numbers for 8,000. If a dentist buys a $150,000 CAD/CAM machine like a CERAC, do you think at the end of the day they net more money or is it awash or is their overhead higher?
Haden: I think they …
Howard: Is it worth the return on investment?
Haden: Yeah, no, I think they do.
Howard: You think they do what?
Haden: I’ve had conversations with clients about should I put the blocks through lab fees or what have you. That’s an interesting approach. There’s no reason not to do that, but I do think that folks that use CAD/ CAM for the most part are going to have more profitable practices. I was on the phone with a client yesterday, a really strong CEREC user and he’s a general practitioner. I want to say his charges were through September in the 1.1 million. Actually, they were, they were at 1.1 million. I told him you’ve already gotten through September to what the average dentist does in a year. His net was over 40% and he does a lot of CEREC.
I think part of the reason is and I’m not going to try to get clinical. I think part of the reason is that CEREC lets you do restorations that you otherwise might not do, just things that are particularly expensive at the lab and so forth. Maybe a more time-consuming filling that might get done as opposed to inlays and onlays, but as a marketing tool as well which is more of an intangible aspect. People, I think, are understanding the idea of CAD/CAM and one visit appointments. They’re able to go in, maybe they spend a little more time in the office, but they go out with the restoration that they would otherwise have to wait two weeks for or three weeks for. Now, Howard, I’ve had folks buy CEREC machines and they sit and collect dust which is very sad, but …
Howard: What percent of the time is that?
Haden: Sorry?
Howard: What percent of the time do you think that is?
Haden: Less than five. I probably have 40 CEREC users in my practice and two or three people that have let them sit and collect dust or try to sell them.
Howard: Do you know the classified ads on Dentaltown are free and people unload … It’s the highest liquid market for used dental equipment.
Haden: Really?
Howard: Yeah, you can place an ad for free, there are about 1,000 dentists every day go to the classified ads on Dentaltown. There’s so much … At Dentaltown they’re not using a laser or a CAD/CAM or whatever the heck or they upgraded this to that. Just unload it for free on the classifieds. It’s a hell of a …
Haden: Absolutely.
Howard: It’s a hell of a procedure. I want you to end on this. Here’s my close. When I hear dentists use the word debt it’s always negative emotion that debt is bad. I think that it’s because they’re mixing personal debt with consumption for houses, cars, boats, planes, trains, and trips to Disneyland with business debt which is other people’s money for a leverage to go and build their business. Obviously, you wouldn’t go work at McDonalds for 10 years to save up for dental school when you can borrow other people’s money and go to dental school on student loans and pay it back while you’re a doctor making 50 to $100 an hour. A lot of the kids say this. They say I just bought my practice and I want to add an extra operatory or buy a CAD/CAM, but I’m going to pay off my student loan debt first. I want that debt paid off first. Do you think that’s a good business decision or do you think that’s an emotional decision?
Haden: I think it’s emotional because like you said there’s good debt and bad debt. It’s easy for us to show a client here’s what paying down your student loan does. Yeah, it gets you out of debt, the interest is not deductible, et cetera, but here’s what adding an operatory does. You’re going to increase your revenue by a large percentage with some additional debt or you’re going to pay down student loans and make a modest change to your cash flow over a very long period of time. Absolutely, expand the office.
Howard: What do you think … I’ve been yelling this for 25 years that every hospital has an emergency room and dentists get emergencies and they don’t have an extra arm around. I’ve been yelling to get an extra operatory. What do you think the average math is to a practice when they add an extra operatory?
Haden: I think on average it’s whatever that new operatory represents as a percentage
of the total number of operatories. You ought to be able to do the same or more dentistry because of that extra operatory as opposed to not having it. I have clients with three chairs, Howard, and if they had five they could properly accommodate their recall practice and all of the good things that come out of hygiene including your treatment. I can show them the math, but it’s staggering, absolutely.
Howard: You would go on the record to say that if you’re a three operatory dentist and you added a fourth op that that operatory would increase the production a third or what the average of the first three ops were or would you say that then each op would be a quarter? How would you say that?
Haden: Yeah, I’d say you’re going to take your revenue, divide it by three and you’re going to add another operatory, so instead of a third, a third, a third, it’s 25, 25, 25 and …
Howard: You’d say if you’re a three operatory dentist and you add a fourth operatory that your revenue would go up 25%?
Haden: Absolutely.
Howard: When you see this nationally done is it usually a dentist at a two operatory going to a three, is it three going to a four, is it a four going to a five, is a five going to six? What are you normally seeing?
Haden: Three to four, three going to four.
Howard: Three operatories going to four and is that three operatories that the hygienist was using, too, or just three operatories that the doc was using?
Haden: Three total in the practice, so the hygienist is in there and the doctor’s in there and you have to be extremely creative with your scheduling to accommodate all of your patients in re-care if the dentist is using two chairs and the hygienist has one. You have to be really creative with your schedule to better that, longer hours and days where all that’s happening is hygiene and you’re doing exams left and right. It’s so hard to accommodate that million, million plus practice and three operatories. That fourth room is going to make a huge difference.
Howard: All right, that was the fastest hour of the day. In fact, we went over by two minutes, we’re at an hour and two minutes. If someone wants to contact you, do you [inaudible 01:02:17] questions? How can someone talk to you?
Haden: Folks can call me any time or email me. I’m happy to talk. I really enjoy it.
Howard: What’s your phone number?
Haden: Area code 925-939-2500.
Howard: How about if they want to email you?
Haden: Haden, H-a-d-e-n@TWD, Thomas Wirig Doll. TWDadvisors, a-d-v-i-s-o-r-s.com.
Howard: How much would it cost for a dentist to call you up and talk to you?
Haden: I have an hour for everybody, Howard. I don’t charge for an initial appointment. We need to get acquainted and make sure we like each other and we’re going to work together, so I don’t charge for an initial consultation.
Howard: I think one of the greatest gifts you could do in dentistry, if you’re going into those two dental schools and you got a presentation digitize it, put it online for Dentaltown. They’ll be watching it from Kansas to Katmandu. The views on online [inaudible 01:03:20] have exploded. They just had the last ADA meeting. These big major conventions attendance is trending downward because dentists want online. Why not take the course while you’re laying in your big chair instead of driving or flying or staying at a hotel. Plus I think dentist like little increments. I think they’d much rather listen to something for an hour or two hours or three hours than go sit all day long in a convention center, do you know what I mean?
Haden: Yeah, no, I agree. I was online last night and a dentist was hosting from the House of Delegates meeting at the ADA and I zoomed in the picture and picked out about four of my clients sitting in there. All the travel and sitting in CE, walking around the conference floor, it’s a lot of work, it’s hard, so if they can do it online that’s great. Howard, I have a blog also called Wealth Extractions, Wealth Extractions and I try and keep that light and fun.
Howard: That’s another section at Dentaltown. We started the blog section. We have, I think, 500 dentists posting blogs on there and the views are amazing. If you’re already creating a blog all you have to do is cut and paste it and post it on Dentaltown in the blog section because we’re up to 205,000 members. A lot of dentists once they read the blog they even tell me, then they just go to your website and sign up for you to email it to their house. The same thing with the podcasters. I can’t believe that some people put them on iTunes for free and on Dentaltown for free because a dozen that have put their podcasts on Dentaltown most of the people just listen to it or just see it and then go to their iPhone and go to podcasts and download it to their iPhone from iTunes, so it’s just great marketing.
I really have a vested interest for the ADC CPA to get out because I’ve just seen it just take so many dentists to a different level. Like I said the ADA’s saying the average, the 798, 800, you guys saying your average client is doing a million. That’s a $200,000 gross revenue difference and the ADA says their dentists are netting 220 and yours are doing 360. That’s $140,000 difference. Dentists are smart people. They know algebra, trig, chemistry, the Krebs Cycle. If you can just get smart people like you to show them the math in a way they can understand it they’ll just make better decisions and make more money. We’re completely out of time. Haden, thank you so much for spending an hour with me today.
Haden: Thank you, Howard. I appreciate the chance to do that. Thank you.
Howard: All right, have a good day, buddy.
Haden: Bye.