#4: The Build-Up Weekly

Dear friends and colleagues,

Welcome to the 4th edition of the Build-Up Weekly, where we deliver weekly insights and inspiration for dentists on every stage of the private practice journey.

I was in Texas this week for work (more on that to come!), but I’m thrilled to be getting out another newsletter for y’all.

Here’s what we’ve got lined up for this week:

• 🚀 The Acquisition: Dental Loans #3: History of Production

• 🪴 Growth Stage: FDIC, Banks, Emergency Funds, A/R, oh my!

• 🤝 The Transition: Should I Purchase Equipment Before Selling?

• 💡Weekly Inspiration: The Brooklyn Bridge and Human Emotions

But before we begin, yesterday was National Puppy Day, so here’s the photo of my 7-month-old puppy George that I know you’ve all been waiting for:

If you feel inclined, please use the link at the bottom of this email to share the newsletter. It would mean a lot to me (and George)!

And with that, let’s get started!

A History of Production

As part of our ongoing series on obtaining dental practice loans, this week's topic is production history.

Two weeks ago we discussed how lenders want to see a credit score of 700+ and last week we looked at how much money you need to have in the bank (liquidity) in order to qualify for a practice loan.

This week we’re focused on the third thing that lenders want to see in a potential borrower: the ability to actually do dentistry at a reasonable speed, day in and day out. 

Each bank has different criteria, but there are always two major factors: the dollar amount of production and the amount of time you’ve been maintaining that production.

💵 Dollar Amount of Production 💵

The importance of the dollar amount is directly related to the level of production in the practice that you’re looking to acquire. In other words, the more production in the practice, the more important it’s going to be to show that you can produce.

You don’t have to be practicing dentistry at 100 MPH, but the lenders want to see that you’re capable of keeping a schedule.

And it doesn’t have to be 1-to-1. If the owner dentist in your target practice is producing $600k, lenders will probably be fine offering you a loan with an associate production figure of $400k. They understand that you’re not in control of your production, not necessarily provided the opportunity for big cases, and are not always scheduled efficiently.

But they want to see that you’re capable of working.

Note: If you’re practicing at a low-fee office and have access to production reports, it’s great to show how many procedures you actually completed, rather than comparing dollar amounts of production. The seller might be doing the same number of crowns that you do but getting twice the fee and therefore twice the "production".

What if the practice I want to buy has a doctor producing over $1M?

The larger the production in the practice, the more you’re going to have to show. Whether this means that they’re doing bigger cases or working longer hours or just super fast and well-scheduled, the bank will want to see that you can step into the seller’s shoes.

If you can show that you’re capable of producing at a high level, then you should be fine. Another option here is to add an associate (at least in your financial modeling). If the practice still cashflows (i.e. provides you as the owner with enough income to cover your expenses and still have money left over) with the associate, then you are probably in the clear.

What if I’m an associate and don’t have access to a production report?

This is a fairly common scenario. If you can’t get a report, the lender can use your salary and work backward (so long as you have a standard contract that pays you a % of production).

But this is also something you can negotiate for when you apply for a job, so keep that in mind if you’re considering an acquisition.

⏱️ Time as an Associate ⏱️

Time is the other important factor. Showing one month of solid production is probably not going to do the trick.

Generally, if you’ve been practicing consistently as an associate for over a year, you’re in the clear. Some lenders are ok with 4 months, others want to see over a year - that captures the general range. At the end of the day, lenders want to see that you can consistently keep a schedule over time.

And let’s quickly break down how the production goals I talked about above break down by month.

If you need $400k/year of production, that’s $33,333/month. If you’re being paid 30% of your production and taking home $10,000/month, then you’re in the ballpark and ready (from a production history standpoint at least) to qualify for most practices listed for under $1,000,000 purchase price.

So get excited! You’ve got this - ownership could be right around the corner.

And if you haven’t already registered as a buyer with us, please do below!

Register as a Buyer

We have 60+ listings for sale at Integrity Practice Sales, with new listings coming on the market every week.

Click the button below to set your individual criteria and receive personalized updates when new listings hit the market.

FDIC, Banks, Emergency Funds, A/R, oh my!

Over the last few weeks, we’ve had the chance to digest troubling news from the banking sector, and I thought it would be worth sharing a few thoughts for those of you who own businesses and are concerned about the safety of your own money in the bank.

Now I’m not an expert on the topic, and there has already been a lot of digital ink spilled on the matter. But I did learn a few things that I thought were worth sharing.

What happened?

This is the old news part, but Silicon Valley Bank (the institution that initiated this banking earthquake) was subject to a bank run when some influential Venture Capitalists suggested that the startups they were backing pull their money from SVB.

It was like It’s a Wonderful Life, but without the small town, community spirit infused with the magic of love and Christmas.

Banking stocks quickly fell while regulators scrambled to prevent additional tremors. For better or worse (I can’t imagine any administration not doing this, but that’s another discussion), the bank failed but the FDIC made all the individual depositors whole. Interestingly, only 4% of SVG depositors carried balances under the FDIC limit of $250,000. And also interestingly, its customers were far more homogeneous than your standard bank - they were all Silicon Valley tech folks who shopped, worked out, lived, and ate at many of the same places.

In that way, it wasn’t quite so different from the scene in It’s a Wonderful Life.

So what does this mean for me as a dentist?

Ok, so you can read elsewhere about all the nitty gritty details. What does this mean for us?

First, in the grand scheme of things, SVG and Siganture bank represent a very small slice of the US banking sector. The big banks are all on very solid footing. And the American public is in considerably less debt than they were before the 2008 crisis.

So I don’t think it’s all going to come crashing down around us, but I also don’t make predictions anymore, so do with all of this info what you will.

Protect Your Current Accounts

You’re probably familiar with the FDIC guarantee of balances up to $250,000.

How does this work in practice?

The FDIC insures up to $250k 1) per bank and 2) per ownership type.

You as an individual cannot have three separate checking accounts at WellsFargo of $200k each and expect each account to carry the $250k insurance. Your totals are added up per institution, so this individual exceeds the insurance coverage by $600k - $250k = $350k.

One option would be to spread this money out across banks. And if you don’t want to do this yourself, you can actually speak to your banker about letting them handle this process through a process known as deposit swapping.

Another option is to have different ownership types.

If you add your spouse or a beneficiary to one of these accounts, you double your FDIC insurance to $500k.

And if you open a business banking account with your corporation, then that qualifies as an additional ownership type with $250k coverage of its own.

That’s $750k worth of coverage with just a few small changes.

Does the fact that they exceeded the $250k limit in this instance mean that the $250k cap is useless? Don’t count on it. Congress is divided on the issue, and - at least in my mind - it’s better to be safe than sorry. If the winds shift, you don’t want to be caught on the wrong side of the storm.

So how much cash should I keep on hand?

The general rule of thumb is that you want three months of runway for your business for unexpected expenses in the bank. It’s similar to how you want three months of personal expenses in an emergency fund.

Some of you go even more conservative and keep 6 or 12 months of expenses in cash. If that makes you comfortable, go for it!

Some of you are thinking, “How in the world does anybody keep even two months’ worth of expenses in an account?” If this is you, start small. No need to set huge, ambitious goals upfront. Set small, achievable ones. Just start putting some money away for a rainy day. You can do it! (Think of it as a gift to future-you.)

What about my Accounts Receivable? 

Many doctors I know use their AR as a sort of savings account. On the one hand, this makes sense. Especially now, why would you put all your money in the bank when you can keep it with a bunch of patients?

That being said, if something happens to the banks, do you really think your patients are going to be sending you checks?

I’ve argued for years that doctors should work to keep their AR low (half of one month’s average collections is a good benchmark). Many of our clients have negative AR because they are collecting pre-payments. But even being strict about collecting money at the time of service will keep that AR low.

Another tip here is to set aside a few minutes to send statements out daily, not weekly or monthly. Don’t send all your patients’ statements out on the same day each month.

This is not only better for the patient (they are more likely to pay when the service they received is top of mind), but it also keeps ‘sending statements’ from being some big, challenging task. Plus, it prevents the phone from ringing off the hook the week after "statements are sent".

If you have to send a statement, send it immediately.

I hope this is helpful as you think about your money and your business. While there are no guarantees in life (death and taxes?), I am very confident that business ownership will continue to be the major vehicle for wealth generation in America, and it’s been a privilege to help dentists on their private practice journeys.

Should I make a large purchase before selling my practice?

Probably not.

There is a time to make large investments in equipment, technology, and tenant improvements. That time is not in the three years leading up to a sale.

The major factor to consider when thinking about a large investment (such as a CEREC machine or 3D Cone Beam) is the time horizon for return on investment. How long will it take for this large investment to start actually making you money? If you’re not sure it will pay for itself before you’re ready to sell, it’s probably not the right time to buy.

Practice values are primarily based on cash flow, not on equipment (unless there isn’t much cash flow to begin with). The idea is that a good equipment purchase will positively affect the profitability of the practice. In other words, an expensive piece of equipment should already be factored into the valuation because it adds to the bottom line.

Therefore, what you purchase should depend on how far you are from a sale.

If you’re 3+ years out and the math makes sense (speak to your advisor), then go ahead and purchase that CEREC and remodel the office.

At 2+ years out you may consider upgrading your dental software to one of the top systems and doing a simple office remodel.

At 1 year out, if you don’t have digital radiography, now is the time. Most of our young buyers have never used old-school x-rays and will negotiate a discount to bring the office up to the contemporary standard of care. (Or just be aware that the buyer will likely be asking about a credit.)

Fresh paint and new carpets can help the practice show well for a minimal investment at any time.

And if you’d like to talk about your transition options, one of our professional brokers would be happy to sit down with you for a confidential, no-obligation consultation.

Get connected with your local Integrity Practice Sales broker here.

It’s worth having a conversation no matter your current transition plans. You never know what you’ll discover together.

In 1883, 12 people were killed and 7 injured when a woman falling down stairs sparked a panic on the Brooklyn Bridge. As the longest suspension bridge in the world, there was widespread apprehension about its stability. That woman’s fall sparked panic that the bridge was collapsing, and the rest is history.

But the bridge itself was always solid.

As human beings, we are susceptible to panic. But we are also susceptible to joy and laughter.

Emotions are contagious.

I took this story from the most recent blog by Morgan Housel, and he finishes the post with this:

And with that, I hope you enjoyed our fourth edition of The Build-Up Weekly!

Please consider using the link below to share our newsletter. 🙂 

With best wishes to you and your families,

Trevor Kimball, PhD

p.s. feel free to respond to this email! I’d love your feedback and suggestions.