Dentists aren’t usually business or financial gurus, and because of that they can run into a lot of problems when it comes to their finances. One of the main sources of these troubles is poor management of cash flow.

Read the Guide: Financial Planning for Dentists

But if you don’t know what to look for, how can you know what to fix? Here are five common hurdles dentists have to clear to get their cash flow situations in order.

Corporate and income structure

Choosing the right corporate structure and income schedule for yourself and your practice is crucial, and can help solve a lot of other cash problems. Operating as an S-corporation is most ideal, because it allows a dentist to take some income in a W-2, with taxes withheld every paycheck while remaining the business’s owner.

But an accountant might recommend a sole proprietorship to minimize tax responsibilities. This can slow your retirement savings – you can’t match as frequently on income from distributions, which is 100% of your income in a sole proprietorship. You’ll lose a lot of money from failing to look at the big picture.

Debt structuring

Dentists are naturally debt-averse, which sounds a lot better than it is. They’re likely to cut a check for a large purchase rather than financing, and when a piece of equipment costs upwards of $30,000, that could completely deplete your checking account.

It’s absolutely critical to make sure you have a baseline level of cash on hand in your accounts at all times to deal with surprise expenses, and that’s impossible if you pay for equipment and other planned expenses all at once. It may seem stressful to have debt to deal with, but it’s a lot less stressful than having a tax bill you can’t pay because of that shiny new x-ray machine.

Tax payments

The way you pay your taxes is intertwined with how your business is structured. Taxes are automatically pulled from your W-2 earnings in every paycheck, but not from money a dentist takes as a distribution. Practices that are run as sole proprietorships and as S-corps both need to make extra tax payments to cover the amount owed from distribution payments. But if 100% of your income in a sole proprietorship is coming from distributions, then 100% of your taxes need to be paid this way. And those bills can get big.

Since an S-corp allows you to be paid in W-2 income as well, that means that only a fraction of your income tax is your complete responsibility via quarterly tax payments. To an accountant, that may seem more complicated – after all, it’s two tax returns that need to be filed. But for the dentist, it ensures cash flow stability.

Quarterly tax payments fluctuate as your practice does. If you’re growing and the accountant doesn’t take that into consideration, it could mean that at year end, you haven’t paid enough taxes on your distribution income, and you could be hit with a surprise $80-100k payment. With the S-corp, with less of your taxes paid this way, even if there’s a surprise payment it won’t hurt nearly as much.

Overhead issues

An established dentist, one who’s been in charge of a practice for 8-10 years, should be running at around 55-60% overhead. In my time at Four Quadrants I’ve seen practices where the overhead level is closer to 90% or even 95%. That’s just preposterous. If your overhead is that high, something is horribly wrong with the way your practice is being run.

In a million-dollar practice, for every 1% drop in your overhead, that’s around $10,000 in savings that you can take home. Paying less improves your cash flow and puts more of your money where it should be – your bank account.

Decision-making

Think about the decisions you make in your practice. How many involve spending $30,000? Probably around one or two a year. How many involve spending $5,000? That’s probably more like one or two a month. Each one doesn’t seem big, but they add up fast – especially if you make the wrong choice.

When you make decisions about things like smaller equipment purchases, raises to employees, or fee increases, it helps to have someone on the outside to advise you. At Four Quadrants we have a “5K Rule” for our clients – if something’s going to cost you $5,000 or more, whether in your practice or in your personal life, ask us about it. We’ll look at the big picture and help you decide if it’s worth it, if now is the right time, and if there’s a strategy to help pay for it easier.

By Brogan Baxter
Chief Operating Officer, Senior Analyst
Four Quadrants Advisory

Early on, nothing comes easy.

You have to scratch and claw for the first five new patients. Then you bend over backward to earn the next 10. the effort required to get those first 15 customers is enough to crush a person's spirit.

But you keep carrying on because Dental practices grow slowly day by day, month by month. You gain three patients and lose one; then you lose two, gain one. If you look back over a year, however, you may have 50 or even 150 new patients. “That’s no small feat,” you say. “There really is no such thing as an overnight success.”

But during periods of growth the Dentist should ask what’s fueling it - instincts such as “grow or die?” Many Dentists grow their practice just because they want more production. But why? Because you want to make more money?

Here’s a little-known fact: increasing production can actually cause you to make less money. That’s because in a rush to earn more, overhead skyrockets and you can be stuck with slightly more income and a lot more money going out the door.

Here are three ingredients we make sure our clients — brand new and longtime ones— include as part of a “smart growth” instead of “fast growth” strategy:

1. Increase your production and maintain your overhead
2. Maintain production and reduce your overhead
3. Increase your production and reduce overhead

Don't Be Afraid to Ask for Help
To grow your income, you need a good financial team on your side. You need quickly-reported numbers, you need to have a pulse on your finances and you need a quick interpretation of your situation. If a negative trend begins, you need to know so you can act fast to counteract it.

Is overhead popping up five months in a row? Know fast, so you can nip it in the bud. In fact, his applies both to your production and to your overhead. You need solid numbers on both no later than the end of next month, and the numbers need to be reconciled and analyzed by your accountant. To identify trends, compare them to the same month last year and also to the past few months of this year. That way you can see in real time what’s happening in your practice’s financials, and whether it’s a seasonal effect or something new.

Even if you grow intelligently, you can still run into issues. For example, you might get a good news/bad news call from your accountant: “Good news! You made a lot more money this year than we were expecting! The bad news is that means your tax bill ius headed into the five figures.” Without timely and frequent tax estimates, you can end up with a nasty tax surprise at the end of the year. And that will certainly put a damper on your booming business.

When managed poorly, growth will actually hurt your Dental practice and cash flow. But when you do it right, growing your practice will do nothing short of change your life.

Visit our “how we help you” page to view quick stories of how we helped ACTUAL clients. (No actors here, we knew you could tell the difference).

If you think you need a better plan than you have now, and sooner rather than later, contact us today!

By Brogan Baxter
Chief Operating Officer, Senior Analyst
Four Quadrants Advisory

Think of five Dentists or Specialists you know pretty well.

Three of them have been or will be victims of some form of embezzlement at some point in their career. This crime knows no bounds – unsuspecting General Dentists and Specialists, Solo Practitioners, group practices, Dentists in small towns and those practicing in urban areas are all at risk.

That means you’re at risk too. 

Dental Practices are juicy targets for fraudsters because those leading them don’t have a business degree and are so busy seeing patients the can't constantly monitor the situation sufficiently enough.

According to a 2007 study by the American Dental Association, the Dentist’s system of controls (day-end balancing, review of software audit logs, fraud found by the Dentist’s accountant, etc.) lead to the discovery a paltry 19% of the time. So that means someone discovered the remaining 81% by accident.

But the best ways to prevent theft in your dental office may seem counter-intuitive. Instead of implementing new layers of control (and therefore complexity), we recommend tightening the way you manage your office every day.

To start with, remove any opportunity to embezzle.

Simple? Yes. Effective? Absolutely!

Not only will this reduce the risk of fraud, it will also improve other areas of your practice such as cash flow and the reduction of tax surprises, while also making you more aware of your practice's financial stability. Stopping someone hell-bent on stealing from an attempt to do just that may be impossible, but catching them before they damage your livelihood is not.

What if you think someone is already stealing from you? Again, we recommend thinking counter-intuitively. Knee-jerk reactions many times just lead to a sore leg. But to be blunt: DO NOT call the police. DO NOT confront the person your think is the perpetrator.

A bad move has the potential to make your situation far worse, especially if the person you suspect isn’t the thief after all. If you waste time targeting the wrong person, that gives the actual thief time to destroy evidence.

While no one has taken advantage of our clients while we were working for them, some of our clients have come to us as victims of previous embezzlement schemes. While each case was vastly different, there was one thing that rang true in each case: the embezzlement action was always larger, wider and occurred far longer than the Dentist ever thought possible.

If you suspect a theft is taking place, the best thing you can do is preserve evidence, conduct a quiet investigation and NEVER confront the thief without backup.

There are several things that must be done to improve the outcome of a situation that is going to be messy no matter how you look at it. Prosperident, the world’s largest dental embezzlement investigation firm, reccomends taking the following steps if you suspect someone is ripping you off:

1. Continue to act normally and avoid behaving unusually. Conduct your investigation in a way that does not disclose suspicions.
   
   
2. The Dentist must be extremely guarded about discussing suspicions with colleagues, staff members, etc. And what about that one special, most trusted employee? Statistics show that individual is the MOST likely to be the perpetrator.
   
   
3. Don’t fire anyone until you've gathered the evidence. The amount the employee may steal from you in the relatively short time it will take to complete an investigation pales in comparison to the cost of a wrongful termination lawsuit.
   
   
4. Obtain professional advice. Embezzlement investigations are not a “DIY” project! You may not know what to look for and will likely need the quiet assistance of staff who might be friends of the suspect.
   
   
5. Preserve evidence. Your company’s computers contain a cornucopia of information that will be needed to confirm the embezzlement, quantify losses, prepare an insurance claim, proceed with prosecution, etc. However, this information is volatile and can be deliberately erased or overwritten.
   
   
6. Do not dramatically change financial protocols. Looking to make changes without being able to explain the rationale will certainly be seen through by a thief.
   
   
7. Do not report the incident to police until you have gathered all the evidence. It serves no purpose to do this early, and may limit your options in dealing with a thief.
   
   
8. Do not contact insurance companies. If a theft involves obtaining extra funds from insurance companies, the insurance company may have recourse against the dentist for amounts misappropriated.

As I stated earlier, the best defense against fraud is to focus on procedures that improve your practice’s financial stability. Find out what could be wrong, and put yourself on the road to fix it. Download the free Success Kit today and get started.

How does your practice stack up? Click Here to take our quick, comprehensive financial review so we can discuss this with you in more detail.

By Brogan Baxter,
Chief Operating Officer, Four Quadrants Advisory 

The whole reason we regularly share blog posts is to introduce you to concepts that will take your practice to the next level. Virtually every client we’ve brought aboard was not earning enough in the practice or saving enough of their income.

After all, you attended dental school and bought a practice to help people, right? Who knew running a practice would also mean making costly mistakes; some of which you discovered after you could avoid them. 

So while many of the concepts we’ve shared in this space focus on the big picture, there are lots of plaes specific mistakes or bad judgment calls many Dentists and Specialists make when it comes to running a practice.

While we are NOT a practice management firm, we do have a Rolodex full of some great ones we refer our clients to when they need a laser-like approach to fix a specific problem. Occasionally we ask them to write guest blog posts or recommend post ideas. One of those experts is Rachel Wall, owner of Inspired Hygiene, and an expert in getting the most income out of your hygiene team. 

"Having a sharp team is a beautiful thing, but assuming everything is being taken care of is a big mistake," Rachel said. She shared with us five ways you can unlock profits and production from your hygiene team . . . all while lowering overhead at the same time.

1. Perform A Complete Perio Exam
That’s Right! Do this at every hygiene visit AND make sure the data is being recorded. This is a huge area of liability for you and it’s your hygienists' responsibility to collect and analyze this information. One way to find out where you stand is to perform an audit of your charts. Try randomly pulling 20 charts of adults seen in the last 6-12 months. How many have a complete Perio exam recorded in the last year? Chances are very good that if the percentage is low, so is the amount of Perio treatment.

2. Start Treatments Earlier Than You Think
Rachel’s interpretation of the AAP’s Perio Classification system is that Beginning (slight) Periodontal disease is 4mm pockets with bleeding and slight bone loss and 1-2mm CAL. This is a huge distinction for many dental teams. Often, these are the “difficult prophies” or the patients that have three-month prophy intervals. It’s not uncommon for hygiene teams to wait until pockets are 5-6mm deep before beginning treatment while valuable the patient loses valuable bone that could have been saved.

3. Schedule More Time For Hygiene Visits
Oftentimes critical steps are left out of the hygiene exam when time is short. If you move from 40 to 60 minutes for adult recare and Perio maintenance, it’s important to outline exactly what will take place during that time.

4. Expect Enrollment of Restorative in Hygiene
It’s an inefficient use of your time as a Dentist for you to carry all the load for keeping your book full of comprehensive, productive treatment. Empower your team to help you! Set up the expectation and then clearly communicate your treatment philosophy. For instance, your team needs to know when you prefer to recommend a crown versus an onlay. It’s a good idea to schedule time to sit down with your team and outline your specific treatment recommendations regularly, even if the same team has been in place. 

5. Be Sure to Offer Patients Fluoride Therapy
There are very few patients in your practice who would NOT benefit from the application of fluoride varnish and/or a fluoride appliance for home use. Think about it. What percent of your patients have crowns, bridges, onlays, abfraction, recession, interproximal fillings or sensitivity? Educating patients about the value of fluoride therapy and it’s protective benefits will get them on board and more importantly? They’ll pay for it! So for instance. If your practice has 1,500 active re-care patients, skipping adult fluoride therapy is costing you at least $100,000 per year in lost revenue!

If there’s a smart way to increase production we want you to know. And we’re big fans of implementing forward-thinking strategies to improve the profitability of your practice. We also work with practices that seem to be producing plenty but aren’t satisfied with the income that comes from all that work. Once we delve into our clients’ inner-workings, we identify places to make big changes.

That’s why the Dentists and Specialists we work with increase their savings by 50% in the first year and are soon on their way to saving $100,000 or more each year after that.

Maybe we can help you.

Contact our own Brian Wilson at bwilson@4quadrant.com to find out!

The insights practice management firms provide can do a lot of good for your dental practice. But that doesn't mean that it's right for everything, or that it's a perfect fix for your issues. Think of a laser versus a bur. Using the wrong instrument in the wrong situation can lead to disastrous results.

We’ve worked with hundreds of different clients and analyzed the practices of hundreds more. Dental practice problems can be separated into two very broad categories: Procedural (require small adjustments) and Philosophical (require major changes in the approach to one’s practice).

For instance, if your hygiene department is not as efficient as they need to be, that’s a procedural problem that can be corrected and avoided by implementing new policies and procedures. This would be a great assignment for a practice management firm to work their magic.

But if you’re not producing enough, or you have ebbs and flows with your cash flow, sending in a team of practice management experts to do the work of an accountant or someone with an MBA will only lead to frustration. And if they recommend to "just work harder so you can produce more," that will not fix your cashflow issues.

It’s important to note that we are not a practice management firm. In fact, we refer clients to them on a pretty regular basis because they can help in certain procedural circumstances where fixing a very specific problem in a very well-defined area.

If they chart a successful path to Hygiene Department efficiency that’s great! But it doesn’t mean they should help you chart out new paths to profitability by “investing in a CEREC machine" if it doesn't fit your business model. 

Expanding the procedures you offer with a fancy machine may sound like a great idea, but was the Return on Investment figure that won you over calculated generically or with your practice in mind? Did they provide data on how your cash flow will be impacted while your staff undergoes all of the training you will need to run it? Do they even have a handle on your cash flow for the next six months? Do they know? Do you?

What if the recommendation was to retain another Dentist? Have the expenses of adding and retaining another dentist — and the impact on cash flow — been considered? How much do you pay the other dentist, and can you do it without jeopardizing your own income? What happens if you put it off for six months? Do you have anyone intimately familiar enough with your overall financial situation to help you make that call?

Any major decision that you make has to be linked to all the different sectors of your finances. A decision made without at least two to three correlations made between your practice cash flow, your practice debt structure, your personal cash flow, and your retirement can become a misplaced business decision. And too many of those decisions can ruin your retirement or even your practice.

Good practice management firms want to help you fix problems and will be among the first to recommend working with someone else when they see you need a healthier approach to complex tax issues or to reduce your inflates overhead. 

If you feel like you’re on your own island — afraid to take action in any one direction — you’re actually not alone. Practice management might be the first section of the bridge off the island, or it may not be needed at all. You won't know until your overall practice is evaluated honestly.

If you have questions about whether practice management, or something longer term, is right for you, contact us today to discuss your concerns and possible strategies. 

We've also developed a quick, easy (and free), questionnaire designed to give you valuable insights into the current health of your practice. Click here to take it today!

By Brogan Baxter
Chief Operating Officer, Senior Analyst
Four Quadrants Advisory

We’ve shared many eyebrow-raising statistics in this space, but here's one the American Dental Association reported recently that still makes us shake our heads in disbelief: only one in four doctors hired as associates become partners in the dental practice that hired them.

One. In. Four.

That’s especially shocking when you consider part of the reason an associate is hired is because the Dentist sees them as partner potential. For a Dentist especially, your practice is your legacy. With so many swings and misses, how do you go about finding the right partner and eventual successor for your practice? 

Do you sell your practice in parts, or all at once?  Do you even know if you have a choice? How do you make sure you get your money’s worth without gouging your successor? When’s the right time to make the switch? 

In our experience working with dozens of dentists and practice transitions over the years, the Four Quadrants team came up 5 points to consider before you hang a "For Sale" sign over your practice:

1. Stop waiting, start planning: Most dentists wait until it's too late to start planning their practice transition. Don't make that mistake. How much time are you losing? Start planning now, so you don't risk letting your life's work disappear—we suggest starting the process 10 years before you want to retire.  This still leaves all options on the table and allows for you to find the right successor.  Even if you do everything right, what happens to your practice immediately after you sell it and retire is up to you. You can have a custom transition process, and ensure that everything is executed to your liking; this is not a square-peg/round-hole situation. That allows you to find the partner who’s best suited to carry on your legacy, and to protect the parts of your practice that you most value.

2. Make a rigorously honest self-appraisal: Not every practice can handle the requirements of a custom transition. Do you have enough production? A large enough facility? Do you have low enough overhead to be able to take on an associate? If not you may be forced into a walk-away sell – zero to six months of preparation, then you hand over the keys and leave. That may not sound like what you want, so your priority should be to get your finances in order so that you can transition properly.  Again, doing this over 10 years before you plan to retire is ideal. In a way, you’re preparing the nursery for a new bundle of joy, so to speak.

3. Visualize success: If you could write the script, or maybe a time-line, for how the ideal transition comes together for you; how does it play out? What’s most important to you, what do you want to dictate? Don’t try to ask for too much – there will be a lot less interest in joining up with you if you’re perceived as a meddler. Nobody wants to run a practice if they won’t actually be running it.

4. Don’t hide blemishes from your successor: Many Dentists don’t think about how they leave their practice to their successor impacts the rest of their life. But we’ve been worked with dozens of Dentists for decades and let me be the first to tell you - IT DOES! Be up front with your successor, both with your philosophy as a dentist and with what things are important to you. You need to find the perfect successor to your practice, not just the first person who’s willing to come in that’s willing to give you a check.

5. Ahhhh! The Tangled Webs We Weave: Finally you need to evaluate the way in which you want to unwind yourself from the practice. Are you going to quit cold turkey? Are you going to phase yourself out, and gradually sell the practice to your new associate? From our experience, the best for all involved is for you to leave gradually. You get to keep working until you feel totally ready to leave. Your patients get to meet your new partner, and see you work together as a team. And your successor gets the increased goodwill those interactions create. As a result more of your current patients stay and that only creates positive value for your practice.

In the end, a custom transition isn’t just best for you, it’s best for everyone. Keep in mind it’s a transition, not a transaction. If you need help visualizing how your practice will transition successfully call us today at (877)720-6213,  Send us An Email, or fill out the form below. 

By Brogan Baxter
Chief Operating Officer, Senior Analyst
Four Quadrants Advisory

How hard do you work to make your practice a success?

As you prepare to answer this question, what determines your response? Emotional energy? Putting out dozens of “fires” caused by staff or patients? The physical toll patient care takes on your back, limbs and fingers?

We’ve analyzed hundreds of practices over the years; many of them became clients, some did not. Our first impression of so many of them often resembles a hamster on an exercise wheel. Despite all their hard work, they remain in the same spot financially. And despite occasional bursts of energy to free themselves, the Dentists only spin the wheel faster while it contains them in the same corner of the box.

A Dentist who says “I work really hard!” to the question a few paragraphs above often times also says “I need to produce more,” when asked “How can you earn more in your practice?”

“I need to produce more” really means “I need more income," which really means “My cash flow is not good, I have a bunch of poorly structured loans, I spend more than I should, I take too much cash out of the practice, my overhead is high and I’m in the mouth all day so I don’t have time to figure this out.”

Now we’re getting somewhere!

Just before the Great Recession in 2008, the American Dental Association surveyed its members and determined they’re not much different than the average American in terms of financial planning. They found that 96% of Dentists are not saving enough money to maintain their current lifestyle in retirement.

Americans overall don’t save enough, but it’s a bigger problem for the Dentists because a cash-based business such as Dentistry won’t sell for enough to sustain lasting income, and the Dentist’s lifestyle often requires more income at retirement than that average American. We could all learn a lesson from our grandfathers who emerged from the Depression era with a drive to save while at the same time not spending money they don’t have. The Great Recession seems to have created a movement back to this kind of pragmatism today, but time will tell.

When faced with the spinning wheel, our clients work with us to slow it down so they can finally step off and put their energy in a productive direction. Most dentists we work with — those who are producing above $750,000 each year — are already busy enough. They don’t have to produce their way out of their financial doldrums.

Imagine if you could press the pause button and take a hard look at how everything financial in your life and practice is inter-related and then make changes to dramatically increase savings without changing the way you practice. Pure savings. Not returns in the market, not real estate gains, and not promises from hedge funds, options, shorts, swaps, IPO’s, or complicated insurance products.

A Dentist really can save more than they ever thought possible while their lifestyle remains the same. It’s not easy, but it's definitely possible. You can do it with a pragmatic methodology that combines great cash flow, acceptable profit, and a custom financial plan. Are you going to produce your way out of it like the hamster, or are you ready to get serious about saving?

You need a plan and you need a thorough and comprehenisive plan. But how do you build a financial plan without years of training and experience? It’s not as hard as you think – with a little guidance.

We're the only firm in the industry to guarantee that you'll be saving at least 50 percent more after your first year with us. Click Here to find out more about our Financial Plan created with Dentists and Specialists in mind. It will map out what you need to do, and how you can get there. 

By Brogan Baxter,
CFO Four Quadrants Advisory

Today the word “debt” might as well be synonymous with “curious lesion” or “felony.”
And carrying it with you has been demonized by the media and financial gurus for two decades now.

As you have heard it and had it taught to you, getting rid of debt is supposedly the universal key to financial freedom. It may seem obvious that if you’re in debt, you should pay it off as soon as possible.

Dentists especially take on a lot of it because they need expensive equipment and offices to house their practice. Let’s not forget about the 6-figure student loan debt as well.

It's all of these reasons why Dentistry is one of the most capital-intensive businesses to start in the world. But paying down debt as feverishly as possible can get your practice in a lot of trouble. Debt has become more than a pool of money on the wrong side of the balance sheet - it’s an emotional burden you’ve allowed to seep into more of your lives than it deserves. There’s a battle between emotion and logic when facing it down.

But Four Quadrants believes some debt is not only OK, but necessary, to building a healthy practice and retirement. Take that in for a moment . . . debt can be a good thing. We understand putting that mindset in motion is tough and goes against all you’ve been taught previously. Debt is sitting in the seat next to you, while retirement savings seems a long way off.

So what makes some debt "good and some "bad?" We classify the kind of debt on your books as simply “good” if it's a loan to buy a new piece of equipment for your practice, or your mortgage. An example of bad debt is a high-interest credit card.

Therefore, if you have a lot of bad debt, it should be eliminated. The good debt can be managed gradually. In terms of taking on new debt it's important to ask: "Why am I putting the practice into debt?" Is this purchase a need or a want?" So if it’s for something that will help your practice AND can be measured to and proven to make you be more productive, that’s a good move. But if you’re just living outside your means, it’s time to pull back on the financial reins and practice a little more fiscal responsibility.

When deciding whether to invest in something or pay down your debt, think about the “opportunity cost.” If you use the money on one item, think carefully about what you won’t be spending it on. You should strike a balance between debt and savings, but your current situation may require you to lean more toward one or the other. We’ll even go as far as saying that for a dentist to be a multi-millionaire, you must strike a good balance between both.

Despite all the talk about imminent Interest rate hikes -- they still remain the lowest they’ve ever been -- and probably the lowest they will ever be in your lifetime. As a matter of fact, now is actually the best time in the history of financial lending to be in debt. Low rates mean that your practice debt compounds less than it would with higher rates, and the interest is tax deductible anyway.

So if you don’t use cash to pay off debt today, use it as a down-payment for your financial independence when you’re over 65. An intelligent capital preservation strategy is critical as well – that is, to focus on saving more and taking less risk with that money in the market. If you don’t invest in your future now, you’ll have a lot of catching up to do as your retirement age draws closer.

So how do you begin? It's as easy as 1-2-3:

1. Pay off bad debt first.
2. Save money and invest it in your retirement now with a laser-like focus on saving six-figures EACH YEAR for retirement.
3. Once you’re on your way towards a healthy retirement, then you can start building a strategy to pay down your good debt as long as you are also making what you want from the practice.

Make your decisions based on numbers and logic, not on emotion. Debt might not be fun, but it’s a lot more fun than realizing you can’t retire until you’re 80. If this makes sense, contact us directly. If you’re not sure, or need to hear more, download our success kit and we will follow up with your right away.

By Kathy Collins, Four Quadrants CPA

Believe it or not, we’ve hit the middle of 2015! So do you feel like you’re at the high water mark? If you’re like most dental practitioners, it seems like all you’ve done so far this year is pay tax bills for 1st & 2nd quarter 2015 while shoring up any 2014 tax obligations. If you haven’t paid any tax bills yet this year then you definitely need to keep reading to avoid a very unpleasant surprise.

What was that line about taxes and death?

Anyway, chances are your business accounts are tighter on cash than you would like. The last thing you can afford is a large expense that comes out of nowhere. And when a dental practice isn’t prepared to handle its tax obligations properly, your tax bill could end up a lot heftier than you planned for.

Getting smacked again and again with a tax surprise doesn’t have to be a cost of doing business. Just ask our clients. While we will never make paying taxes pleasant, we can make the amount you pay predictable. This, in turn, opens up some new avenues for improving cash flow both in the practice and at home..

Here are three ways you can make the second half of 2015 perform better than the first:

1. Fix your practice structure
If the foundation upon which your practice’s finances are built is shaky, there’s a far greater chance of tax disaster. The corporate and income structures of the practice need to settle properly as the foundation before you build upon them. Establishing an S-corporation — instead of a sole proprietorship — allows you to maximize the amount of money you take in W2s, rather than distributions. Without taking these steps first, anything else you try to do will be a waste of time.

2. Put the proper systems in place
With a rock-solid foundation, you can now build a system to forecast financial expectations for the practice. The forecast should center around historical trends including changes expected on a yearly basis from season to season, and anticipated changes from improvements in logistics and practice management. If your practice slows down every year when school starts, or maybe hits the afterburners in the beginning of the year, plan for that in your tax payments.

Your system for accounting must be proactive, not reactive. This means account reconciliations should be done every month by your accountant, with the smallest number possible of uncertain or uncategorized transactions. The numbers should then be integrated into your business strategy and tax planning on a regular basis.

Regular tax estimates should be based upon financial forecast changes and the practice’s overhead. Using prior year tax liability is a recipe for disaster if it doesn’t represent what your practice is currently doing. For example, a large piece of equipment may have been purchased and written off last year but that may not reoccur in 2015. As a result, a huge tax surprise!

3. Advice Cohesion
Finally, your business management, accounting and tax advice need to have cohesion. In a vacuum, no one can make decisions that are right for your practice. They don’t have the whole picture. To build an intelligent strategy, you have to look at your finances from both sides. To make the right decisions about your taxes, your accountant needs information about your whole financial picture (both business & personal) as well as retirement savings strategies. We’ve yet to hear from a dentist that has had this in place in over a decade—are you in this boat?

One of the biggest trends in dentistry today is the logjam that’s been created from many baby boomers still practicing dentistry. The number of dentists per 100,000 people grew from 59.8 in 2008 to 62.0 in 2011*.

The trickledown effect that this glut of practices needing to be transitioned is creating is changing the face of dental market today. Unknown to most, the issues from too many dentists holding onto their practice is only worsening the dental market in general by allowing for opportunities of corporate dental companies to take a larger hold of the market by acquiring practices on the cheap that couldn’t be transitioned otherwise due to lack of in strategy and/or buyers.

Further compounding this issue, many anxious new dentists coming out of school cannot locate a suitable, appropriately priced practice so they seek the structure and safety of the corporate practices, even though their long-term goal is to eventually own their own practice.

Read the Guide: Financial Planning for Dentists

As a result, this growing hold of the corporate movement in dentistry is pressuring the solo practitioner into taking more insurances, but that’s another article for another time. So how can you prevent this trend from continuing to happen and reverse them altogether?

The short answer is better transition planning, but let me expound on this idea more to help add clarity to this issue. Each dental transition should be as unique as your practice is—there is no one single way that is best for a dental transition. Anyone that tells you otherwise is dead wrong. It is not a square peg, round hole situation, but there is a great deal of planning that is needed in order for it to be done correctly. Here are 5 things you need to look at in your practice prior to your implementing your custom transition process.

1. Timeframe—this seemingly simple idea can dramatically sway, if not even dictate, the type of transition you can implement in your practice. According to a 2010 survey done by the ADA, dentists under 40 plan to retire at age 61, however when dentists over age 40 were asked the same question, the average drifted up to 67**. That example is a microcosm of what we see on a daily basis of our firm. Once dentists really start thinking about what it actually takes to retire and what must happen before getting to the point of a transition, they realize a great deal of planning needs to go into a proper transition strategy and some smaller practitioners just give up altogether and close the doors. We like to tell everyone to do it the right way, you will need to start laying out the plan 10 years in advance. If you’re inside your 10-year window, your options are becoming limited with each passing day.
2. Ideal type and logistics of your transition—a statistic I’ve seen in numerous venues over the years is that 75% of associates do not turn into partners and whenever I speak and mention that statistic, the crowd typically says it should be higher. Regardless, we think that is a real travesty and that things could be much improved with better planning. Be sure to ask yourself: “what type of transition to I envision for myself?” Basically there are 3 types of transitions: #1—A tiered transition—this is where portions of the practice are sold over a period of time (i.e. 50% now and the second 50% in 4-8 years, etc). #2—A “walkaway sell”—this is when the heir apparent is brought in, the transition done, and the host dentist leaves all occurring within a 12 month period typically. #3—A combination transition—this is basically a combination of the previous two options. Monetarily, the tiered option mentioned above will net you the most for your retirement, but most cannot afford this type of transition, wait too long to plan for it, or simply do not have the personality for it, but if this is done correctly, the goodwill of your sticking around will pay dividends for the transition value. Whichever type of transition you plan, you’ll want to consider what both you and the associate are looking for. The associate needs some guarantees on the front end (i.e. salary, contract, a strategy up-front for the transition, etc)—handshake deals are not okay when dealing with transitions, so that cannot be part of your plan. There needs to be specifics and it needs to be written down. Once the associate needs are covered, you need to make sure your concerns are dealt with appropriately (i.e. price, when you stop working, making sure your patients are taken care of, etc). Make sure you mention your ideal way to unwind from the practice—are you a “cold turkey” or a “phasing-out” kind of person? Whichever it is, I will give you this one bit of advice: make sure you have a plan on what you want to do once you are retired. Whether that is philanthropy, family, hobbies, etc, one of the worst mistakes I’ve seen in my 12 years of experience is a dentist retiring without having a plan to fill their time. Also, while you’re thinking about this question, you’ll want to have a pre-determined plan on the real estate if you own your practice location…that has to be part of the deal and considered as part of your transition plan.
3. Business model—once you have a timeframe and a general idea of the logistics and type of transition plan you want to implement, you’ll need to make sure your business model can accommodate your ideal scenario. One of the first items to consider with your practice is your production level. If you produce $600k, your practice is too small and you can’t afford an associate for a transition. There is not any one dollar amount that translates into bringing in an associate, but it is an amalgamation of multiple different factors: production, overhead, schedule, etc. Another consideration is the location size as well. Typically for an appropriately producing practice, having at least 6 total operatories is ideal—this would allow both dentists to work out of 2 chairs each plus have hygiene running at least 2 chairs. Well before the business model portion of the evaluation process and ideally during the Timeline section above, you’ll want to objectively identify if your practice is “transition ready” or if you need to prepare the practice to be able to sell it. No different than when you are having a baby and preparing the nursery, you need to make sure that your practice is ready to accommodate an associate. If you don’t have digital, get it—it’s not cheap, but many associates will look right past your opportunity if you don’t have it. Having a practice that is ready to walk into from an associate’s standpoint will allow you to command a higher price for your practice because it is more transition-ready. This is exceedingly important for dentists in rural locations as most younger dentists are looking to stay in suburbia as opposed to a more rural location. It also signals to the associate that you are dead serious about your transition and want to make sure they are comfortable when they come in. There is a happy medium to this however because it is not necessary to have all new equipment in your practice. Generally speaking, in your 50s you should only be adding equipment that is necessary to transition and/or are critical to your daily production levels.
4. Overhead—this is one of the most misunderstood and often overlooked portions of a transition based on my experience. Though this really goes under the Business Model section above, it merits its own discussion. The overhead value will make or break your transition plans because overhead is inversely related to your cashflow and cashflow is the #1 determining factor in a formal appraisal of a dental practice value. The lower your overhead, the higher the income you make from the practice—and the more you make, the more your practice will be worth. From a planning standpoint, the lower your overhead is, the easier it will be able bring in an associate at an appropriate salary without cannabalizing your income while also lowering your relative risk to bring them into your practice. As a host dentist, you have to offer some sort of a base salary to compete for the top talent available because your competition is and those associates need some sort of guaranteed income to deal with their six figure student loan debt. To help offset the cost of bringing in an associate to be a partner, look at expanding your schedule and spreading your costs over a 5-day workweek. To have 2 dentists in a practice and not be open 5 days is not an efficient use of your business model. To compensate for this, stagger your schedule so you work one day by yourself, they work at least a day or two alone, and have the other days be the ones where you work together.
5. Personal monetary stability—if you covered the first four items above, you’ll already be way ahead of the curve when it comes to your transition, but all of this is for naught if you can’t afford to retire, so considering your personal retirement situation is a huge factor in this as well. A statistic was real was released by the ADA a few years back stating that 96% of dentists under save for retirement to support their current lifestyle. It doesn’t have to be that way because you still have control over that as you plan for your retirement. If you think you’ll be hitting the lottery with your transition, I’m sorry to inform you that you will not. An appropriately-priced practice typically sells for 60-70% of the previous year’s revenues, so unless you live in geographically desirable area like Hilton Head, you won’t get much above that without gouging the associate. Also remember too that the price you sell for (as well as how it is allocated for tax purposes) will dictate how the transition is taxed. At a minimum, you’ll be looking at 15% and as high as 45% all in to be paid to Uncle Sam so pay close attention to ideally structuring the deal as an stock sell if you are selling or an asset sell if you are buying. Most importantly, don’t sweat the small stuff if the cashflow works for both sides and you really like the transition plan in place. After all, cashflow does trump everything and unfortunately, I’ve seen too many transitions blow up on something as meaningless as a percent of classification applied to goodwill.

They say that negotiation brings out the worst in people, but if you haven’t saved enough to retire comfortably, it will be even worse and the new owner will absolutely pick up on it which can jeopardize the deal altogether. Treat the transition as icing on the cake to supplement what you have already saved and make sure you start saving way more now so you don’t have to hold out of top dollar and ultimately have the practice decline in the process.

If you’re not on pace to hit your retirement now, you need to start looking in that mirror and start figuring it out with your team of advisors. Though it is loosening up now, this is what has happened over the last 7 years as 2008’s performance in the market led to most portfolios to be cut in half. Focus on saving more and taking less risk in the market so you don’t repeat these mistakes. If you can implement these 5 ideas in your practice transition planning it should be able to put you well ahead of the game and allow you to transition on your terms. Keep in mind, this is a transition not a transaction and you’ve worked too hard to create your livelihood to haphazardly hurry into a poorly designed transition.

*M. Vujiic and B. Munson. Despite Economic Recovery, Dentist Earnings Remain Flat. American Dental Association Health Policy Institute, Research Brief. October 2013.
**2010 Survey on Retirement and Investment. American Dental Association. www.ada.org. August 2010.

Brogan Baxter is the Chief Operating Officer and senior analyst at Four Quadrants Advisory Companies, a national accounting, financial planning, and advisory firm with only dentists as clients. They are the only dental advisory firm in the nation with a money back guarantee on their services. To learn more or put your current team to the test, contact Brian Wilson at 877.720.6213 or bwilson@4quadrant.com.