Running the Numbers by Ali Oromchian, JD, LLM

Header: Running the Numbers
by Ali Oromchian, JD, LLM

Office build-out and equipment costs
One of the largest costs of opening a new office is building out tenant improvements and purchasing equipment. The build-out expense of a new practice can range from $175 to $275 per square foot, including the cost of equipment, leasehold improvements, architects, building permits and other related fees. These numbers vary significantly depending on where you live.

As patients become more selective about where they get their dental treatment, pressure has increased to create comfortable and relaxing environments. At the same time, as technology improves, the ability to create beautiful smiles in a single visit is becoming almost mandatory for practice owners who want to cater to patients who are educated about leading-edge treatment options. It can be difficult to decide how to allocate funds between technology and lavish office upgrades.

The most strategic dentists invest in technology with proven ROIs—such as intraoral cameras and CAD/CAM—and avoid overspending on plumbing fixtures, innovative glass, flooring options or high-end architects.

Lease negotiations
The old real estate adage is "location, location, location." This remains true, but equally important is negotiating rental rates and deciding how much space is actually necessary. Being locked into an overly burdensome rental obligation is difficult to overcome when you're trying to reach profitability quickly.

We recommend using a tenant-specific dental commercial brokerage that can negotiate favorable terms, including the monthly rental rate, reduced common-areas charges and other potential up-front incentives (such as extended "rent-free" periods). Find a brokerage that performs a lease occupancy cost analysis, which pinpoints the true cost of a lease by assessing:
  • the base rental rate
  • common-area expenses
  • maximums on annual operating expense escalators
  • free rent
  • tenant improvement contributions by the landlord
  • electrical capacity
  • the cost of any improvements required by the federal Americans with Disabilities Act, or zoning restrictions
  • additional costs associated with rentable (vs. usable) square feet.
Negotiating with landlords is an art, and your lease and location can be long-term commitments. Understanding lease costs and terms are key elements of your financial analysis, and getting the deal right is critical to building a successful practice.

Investing in employees
A big step in building a new practice is hiring and training your team. You should view this crucial undertaking as an investment, not merely a cost. With this mindset, after finding the right team members, retention becomes a key priority. While it's natural to focus heavily on compensation levels, there are hidden costs associated with excessive employee turnover and HR lawsuits.

Run a practice that is well above average in profitability, so you can pay for the right team. To find talent, there are several excellent dental-specific job sites such as Dentaltown.com and Dentalpost.net. Hire employees at market-competitive rates, but allow them to earn above-market pay after a reasonable period of demonstrated reliability and excellent performance.

Why offer above-market compensation opportunities? In a study by the nonpartisan, nonprofit Center for American Progress,1 the median cost of turnover was 21 percent of an employee's annual salary. With median total compensation of $68,551 (salary and benefits) for a dental hygienist, the cost of turnover is $14,396, not to mention potential lost production.2 Avoid unwanted employee turnover, which is an enormous drain on profits and the new practice owner's time.

Building the right team is a big investment. Therefore, it's critical to manage for peak performance and avoid the costs and distractions of legal employment complaints where the average cost settlements and legal fees range from one to two times the employee's annual salary. Implementing a human resources management system to maximize team performance and ensure compliance with employment laws is cheap insurance when building a practice that will provide a healthy lifelong income and ultimately be worth seven figures or more.

Make sure that your legal compliance foundation is strong with an updated employee manual, new-hire documents, and a time and attendance system that manages benefits and limits overtime. You also need to create an onboarding process during which the new employee becomes educated about your mission and practice goals—the "Why" of your practice.

Choosing a lender
One hundred percent financing options available from dental lenders are the new practice lifeline. The good news is that interest rates are at historical lows. That being said, dental banks are still careful about granting loans, so it's important to be aware of their criteria for lending decisions.

Keep personal expenses as low as possible as you prepare to finance a practice purchase. Banks analyze personal expenses in addition to evaluating the practice financial projections to determine whether sufficient revenue will be generated to cover both operating expenses and the practice owner's personal obligations.

Try to reduce the amount of your monthly student loan payments, perhaps by extending the term. (You can always pay it off sooner.) Don't buy a new car or incur a lot of credit card debt while seeking practice loans. In fact, we encourage most of our young clients to purchase their practice before buying a house, under the assumption that the mortgage will be higher than rent payments for a residence.

Don't fixate on the interest rate alone. Also consider the repayment terms—a shorter term will have lower interest rates while a longer term provides lower monthly payments that translate into greater financial flexibility. Another important decision is whether to select a fixed- or variable-interest rate loan. Although most of us intuitively lean toward the certainty of a fixed rate, many practice owners save tens of thousands of dollars by choosing variable-rate loans.

Finally, select a lender that will build a program that fits the needs of a startup practice in terms of both the initial project build-out and ongoing operational funding needs. With the "all-in" national average cost of a build-out being $175 to $275 per square foot, it's important to do a cash-flow analysis as part of your business plan to make sure that you have the financial stability to endure the first year of a startup with cash reserves to invest in marketing and community outreach.

Hygienist Salaries Graph

Facing the leap without fear
I've worked with countless practice owners in my law firm, and my wife owns a dental practice, so I've seen firsthand that dental students don't necessarily graduate with the fundamental business skill sets for dental entrepreneurship. One of them is analyzing your financial needs and approaching the economic elements of starting your practice strategically. Realizing the incredible dream of practice ownership is an opportunity that should not be left to chance.

References
  1. Heather Boushey and Sarah Jane Glynn (2012, November 16). There Are Significant Business Costs to Replacing Employees; Center for American Progress [Blog Post]. Retrieved from americanprogress.org/issues/labor/report/2012/11/16/44464/there-are-significant-business-costs-to-replacing-employees/
  2. Dental Hygienist Salaries. Retrieved from 1.salary.com/Dental-Hygienist-Salary.html


Ali Oromchian Ali Oromchian, JD, LLM, is the founding attorney of the Dental & Medical Counsel, PC law firm. He is also co-founder of HR for Health, which provides a cloud-based human resource management solution for dental practices. Oromchian has served as a key opinion leader and legal authority in the dental industry with dental CPAs, consultants, banks, insurance brokers and dental supplies and equipment companies. He serves as a legal consultant for numerous dental practice management firms who rely on his expertise for their clients' businesses. He's also the author of The Strategic Dentist, a book for recent graduates. For more information, visit strategicdentists.com.




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