THE MILLIONAIRE DENTIST PODCAST

EPISODE 49 TRANSCRIPTION

Announcer:
Hello, everyone. Welcome to the Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry, finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.

Casey Hiers:
Hello and welcome, this is Casey Hiers, back at it. Today we have, in studio, with us, Will Taylor. Will is a business and financial analyst for Four Quadrants. He works exclusively with practice owners in dental, and I wanted Will to come in today and dive into the topic of buying versus leasing dental office space. This is something that many practice owners have had to deal with, and maybe would have handled it differently. There's a lot that... It's on the horizon for them, so it's a topic that is important, and I wanted Will to come in and talk to our listeners about it. Will, thanks for joining us.

Will Taylor:
Hey, thanks Casey, I'm looking forward to it.

Casey Hiers:
So let's just dive in. Will, when should somebody look at building an office rather than leasing an office?

Will Taylor:
That's a really loaded question. Unfortunately, there's not a real black and white answer to that, which is kind of the point of us being on the podcast today, but there's a lot of different factors that go into it. People always want the glitz and glam of having their big, pretty office. So first and foremost, emotion, usually, is a leading indicator that goes into that, and our job here is to try to take that emotion out of it and to make it a financial and business decision, rather than a glitz and glam or a emotional decision. So one of the biggest things that goes into it is timing. Not everybody is at the right time to build a practice, not everybody's at the right time to lease a practice. So there's a lot that can happen there.

Casey Hiers:
No doubt. You just hit on something really important, I think, if somebody listens to this entire thing, emotion. The practice owners I talk to, when they want to potentially build or move into a really nice space to own, when I ask them why or the data points that they're using, typically, it's one or two layers deep, and that's it, and it's highly emotionally-driven. You had said there's a whole bunch of variables that go into this. So this'll be general in terms of how we dive into it, but you're exactly right, the emotion typically drives these decisions. Well, what costs do people tend to underestimate or not think about when they're in that emotional stage of, "I really want to build this building, I found the perfect plot of land. I want my patient experience to be better." What are some things that they underestimate at the early stages?

Will Taylor:
Great question there. So, there's a number of items that go into that, and first and foremost, building costs. Especially in today's day and age, hopefully, the costs go back down, but we are going through a global pandemic, and the cost to build right now... Now, obviously, this is an isolated incident, but are very, very high, higher than we've ever seen. So traditionally, when you're looking at building a practice building, you're looking at about 300 bucks a square foot. So if you build a 4,000 square foot practice building, that's $1.2 million for the box, that is the original building.

Will Taylor:
Then once you get the building, you've got to have operatories, you got to have space for lab work being done, you've got to have space for offices for employees, you've got to have space for patients to sit in the waiting room. You want all that to be nice. So there's a significant cost that goes with that, as well. Traditionally, 500 feet per square foot is an operatory. So if you have a 4,000 square foot building, that means you can fit about eight operatories in there with the given space that you have. We're seeing more and more, that's kind of a traditional number of operatories, it might be a little bit on the high end, but... Then you got to build out... put up walls, put in plumbing, everything that goes into building.

Casey Hiers:
It sounds like what you're saying is the word underestimate is absolutely in play here.

Will Taylor:
Oh, absolutely.

Casey Hiers:
All the things you just mentioned, there are a lot of variables, and it sounds like people aren't aware of them. So let's use the example, when you build a house, a lot of times, people have a number, they have a budget, and it's what? 30%, over 20%, over 15% over? That's no secret. The same principle, most likely, applies with the practice owner in a dental practice?

Will Taylor:
Exactly right. People get a budget to build a house, let's say it's a million dollars to build a house. Well, I can tell you right there, you're going to spend probably 1.2 right off the get-go. And then it's funny how people get to the very end of the process and forget, "Oh, wait, we've got to furnish this house now, too." So, all that's got to come out of pocket. A lot of the same thing goes along with building a dental building. Not that it's a bad thing. There are certainly right opportunities and decisions to build the dental building, but in order to make those decisions, you have to understand that there's going to be costs that you're not thinking about that are going to go in.

Casey Hiers:
If a practice owner could consider cashflow and eliminate the emotional part of it, if they could interchange those two, they'd be in a much better position when making this decision. Would you agree?

Will Taylor:
Oh, absolutely. There has to be a method to the madness. Usually, most decisions in life are made on emotion, most good decisions in life are not. So, being able to put numbers to it and figure out, is it the right move to build? Is it the right move to lease? Is it the right move to do an expansion on your lease? There's a number of options to get what you want, but a lot of it's going to go into logistics for your particular spot, and really, the real question is the why. Why are you wanting to build your own building? Is it because you want a big, pretty building, or is it because you're out of space at your current place, or is it because you're in a part of town you don't like? Trying to figure out the why is very important.

Casey Hiers:
Random, I was in a practice a while back, and there was a small waterfall in the lobby, which is lovely. But my goodness, your cashflow has to be right. Going back to emotion, a lot of people, they start to make decisions using emotion, and then as it progresses, their decision-making will alter or shift to logic. The issue with this is, you're typically signing paperwork, planning things and putting money down in the emotional stage of decision-making, the logic kicks in at the end. We've encountered plenty of practice owners who, if they had it to do all over again, they would have done a lot of things differently.

Casey Hiers:
There's really no blanket right answer to this, right? You need to have a professional run the numbers to assure you can afford it, to assure your cashflow can afford it, and you alluded to that earlier. How could a practice owner acquire an existing dental building to move their practice to? So let's say somebody looks at this and says, "Beautiful piece of land. Would love to build a practice with a waterfall on the lobby, perhaps." But that's just not in the cards. So then they decide, "I'm going to go buy an existing building." That sounds more responsible to me, but Will, will you share some details on what the upside and downside to that could be?

Will Taylor:
Sure, yeah. When you come in to looking at buying an existing building, there's a lot of positives to go there with the fact that a lot of those build-out costs that we just talked about earlier are already done. It's built to be a dental practice. It's got operatories, it's got a waiting room, it's got an office for the office manager, it's got an office for the dentist. So a lot of those costs in construction are already taken care of, which is excellent.

Will Taylor:
The followup thing to that would be, how do you get in or how to one of those become available? There's a couple of ways; a dentist could retire, so a dentist could move, and then also have their location available. Or, what we love to see here, if, again, the timing is right, as if you're acquiring that person's practice. When you're looking to grow, expand, we can do that a number of ways. I know we've covered a podcast in the past, talking about the different ways of growing a patient base. Acquiring one's an easy way and sure-fire way to do that, and if that can come with a building, that can really make a lot of sense.

Casey Hiers:
That's interesting. I feel like a lot of people make a decision on what they want to do, and they kind of put blinders on and go towards that. This option is an interesting one; buy a practice, buy the patients, and buy the building. Now, a lot of that's going to involve some networking and understanding the area and the people in it, but I like that. That makes a lot of sense. Obviously, an owner wants to have flexibility over how they're going to use the space, right? They want freedom to control the property, opportunity to build real estate equity. Boy, a lot of practice owners, they're dying to get into real estate. They want to own a lot of real estate, because they have heard of older dentists who they might know who have some real estate. That's not for everybody.

Casey Hiers:
Now, those are the pros. Large upfront financial investment, you touched on, having even more debt, boy, that's an emotional topic for practice owners. And ff course, the risks associated with any real estate investment. But really, it can come down to, does a practice owner want more responsibility? Do they want increased duties and obligations? Because that's what they get, when they're going to own, right? And there's going to be some concentration taken away from the core business of dentistry. But again, there's a lot of times where it does make sense for them to move, build, buy something bigger. Talk about that a little bit, the upside to it, when it does make sense. What factors have to be involved around cashflow or timing, where you look and maybe talk to a practice owner, Will, and you say, "This is a good decision. This makes sense. Here's the data to back it up and the emotions out." What are some of those factors?

Will Taylor:
No. Certainly, it does have opportunities where it does make sense. One of the big ones would be, you've completely just outgrown the space that you're currently in. If you're going to have to go and expand and you're in a leasing location and there's no more tenancy space available, you cannot expand, you're going to have to figure out something that you're going to do. You're either going to have to go to a different leasing location, or you're going to have to acquire or build a building.

Will Taylor:
Well, in that case, if you are profitable enough, cashflow is good enough to the point to where you're so busy, you need more operatories, there's a decent chance that you're in a situation to where building might make sense for you. At that point, you can build it, not only for your current need, but you can build a building for your future goals, as well. Say you're a dentist in your mid 40s, that's looking to bring on an associate to eventually transition the business to. Hopefully, you're thinking that far down the road already, most people aren't. But if that's the case, then yeah.

Will Taylor:
Say you only have five operatories now, and you really need six or seven for you to operate properly, but if you're going to have an associate in there, you're going to need eight or 10, building is an opportunity to give yourself that path for growth that you really need that might not be available in another location. Or, if you're looking for another location to lease, there might not be one really close.

Will Taylor:
Traditionally, what we see is once you get about more than four miles away, caveat here is that you're in a fairly populated area. If you're out in rural Kansas or Wyoming or Montana, this might not apply quite as much, but if you're in a bigger city, where there's 30 dentists in the area, if you get more than about four miles away from your practice, statistics show, you're going to start losing patients. They're going to go to somebody that is closer to them. So that's a very important part. When you're building yourself, you have a little bit more flexibility about where you might be able to put it.

Casey Hiers:
That's interesting. So if you're in a city or even a suburb that has maybe a lot of practice-owning dentists and specialists, somewhat saturated, keep that in mind, listener. If you're going to move three, four miles or more away, there is another risk associated that you have to consider. As you just went through that, Will, it just hit me, dentistry is a wonderful profession, but you get a lot of bonus jobs when you become a dentist, and you don't get a lot of training in some of these bonus jobs.

Will Taylor:
Excellent point, as well. That kind of goes into building the building, as well. We see and have heard many a dentist bring up, "Well, if I build a building, I can add additional space, and I can be a landlord." Well, just like you probably didn't get a whole lot of teaching in dental school of how to be a small business owner, I highly doubt that you got a lot of training on how to be a landlord or a property manager either. Along with that, comes a lot of liability.

Will Taylor:
If you bring somebody in there, there's tenant improvement that usually is expected for a landlord. So you're expected to dough out some cash for this person to move into your space, that's right out of your pocket. And then if something goes wrong on that building, that's now bigger than just your dental practice, it's on you to fix an HVAC system or a leak in the roof or whatever that may be. So, the question is, do you want that additional responsibility, or are the responsibilities you have as CEO of your dental practice, leader of your staff and all of that enough?

Casey Hiers:
Well, Will, this begs the question, is now a good time to build an office? There's always a lot going on, but 2020 has been very unique. Is now a good time to build an office?

Will Taylor:
Well, that's a tough question. Is it a good time? Depending on the situation someone's in, maybe, but it's certainly a very expensive time to build a building. Costs of just traditional materials to build right now are just higher than they've ever been. If anybody that's listening is going through building a house right now, same concept. The price of a two by four, I went to Home Depot the other day, is double or triple what it was back in January or February, and that adds up when you're putting up a 4,000 plus square foot building.

Will Taylor:
Could it make sense, or is it necessary? It could be. But understand, when you're going into it, you're going to have some inflated costs right now. I don't have a crystal ball that tells me when costs are going to go back down, but ideally, if you could wait until costs are a little bit lower, that would be great. But hey, sometimes you can't. So if you can't, you can't.

Casey Hiers:
One of the big messages I hope we get across is there's a lot of opinions out there on this topic. As we mentioned earlier, have professionals really analyze this for you, because you need somebody who's going to utilize the data, your practice data, the cost of building, the banking, the financing, so many of those variables. Have the data drive that decision, take the emotion out of it, don't use opinion. I think that's really important, and I want our listener to know there really isn't a right or wrong answer blanket statement, it comes down to, it's so specific to you. What do you want? What can your practice cashflow afford? Your area, your geography, your need. All those variables.

Casey Hiers:
But what I want our listener to hear is, this shouldn't all be on your shoulders, right? Practice owners, they already have a ton on their shoulders. They wear the hats of five C-level executives, they've got overhead, they've got payroll, they've got a staff. A lot on their shoulders. And then when they go to do this, ultimately, for the greater good of the practice, they think, they have to bear the brunt of that, too. Because people are happy to help you spend your money, they're happy to help loan you some money and help you build some things, but they're not telling you, does this make sense for your situation and cashflow?

Casey Hiers:
Will, you look at profit and loss statements and balance sheets and production reports, and you're very in tune to the numbers of dental practices around the country. But talk a little bit about that, how you can look at three situations and pretty clearly know which one it makes sense to maybe do a big project like this and the ones that they need to tighten up some things first.

Will Taylor:
No, exactly. So there's a number of different things to look at when you're looking at seeing if it makes sense. One is how confident is the doc in they're going to continue to grow. If that's the main objective to build the building and they are growing faster than they know how, it's probably going to make some sense. Now, I will be the first person to tell you, if you are solely building anew because you think your new, shiny, pretty building is going to bring you a bunch of new patient ends, don't build the building.

Will Taylor:
I would be doing a disservice to our founder and CEO here at Four Quadrants, Jason Smith, if I didn't say, if you build it, they will come only works and failed dreams. It's a favorite quote of his, and it's the truth for building a building. We've seen dentists come through that are a million dollar producer, they build a $2 million building, and afterwards, they're a million dollar producer. Just because you have a waterfall on the lobby doesn't mean people are going to flock through the doors to look at it. So if that's the primary objective, then it probably doesn't make a whole lot of sense.

Will Taylor:
Another factor that goes into it is the age and debt appetite of the dentist. If you're looking to retire in five, six years, do you want to be taken out an additional million and a half, $2 million a debt that's not going to be paid off when you retire, that you're going to have to find somebody that wants to take over your debt for? That takes out of your bottom line or that big check that you get for the practice and for the building when you retire? If the answer is yes, then it might make sense to build a building. If the answer is no, then it might not, and you might just need to hang on to what you've had and work with that for the last remaining years.

Will Taylor:
But there's so many factors that go into it, but I'd say the biggest one is probably growth. The most normal and situational reason to want to build a building is to be able to allow for growth that is currently not allowed.

Casey Hiers:
You're looking data of what? Patients per day. There's some really finite data that we're looking at to make those decisions. It's not a whim, if you will.

Will Taylor:
Yeah, for sure. It's how many patients you're seeing a day. How far are you booked out? Traditionally, we like to see a dentist booked out two to three weeks, and their hygiene department six months solid. If you're booked out two days and your hygiene department's booked out three weeks, you might not need the extra space right now. So that could go into it, too. But if you're booked out two and a half months and can't get an emergency patient with a broken tooth in, they're going to go somewhere else. So if you need the space available, and like I mentioned earlier, maybe carve out the space for an associate to fill out some of that, then it does make a lot of sense.

Casey Hiers:
Well, and these once-in-a-career decisions that practice owners make, if made the wrong way, they can set you back years, years, financially. Again, the goal of dentistry, for a lot of people, is to help people, and I think that's noble, but the goal for a lot of dentists is also to capture what they can and be profitable and make sure they can take care of themselves and their family and their team and staff and things of that nature, and sometimes those run counterintuitive when you make a decision on emotion. You buy and build, you've got a ton of debt, and you look up five years later, and you're kind of in the same place, except with a lot more debt. Will, I appreciate you being on today. Any last parting words for our listeners around this topic?

Will Taylor:
Yeah. One last thing that I did want to mention is, based on a lot of the conversation that we had here, it might come across that we are anti-building, and that's far from the truth. We are anti-making a poor decision, is more along the lines of what we're doing. We've seen many of prospects and clients come through here that have had dreams to build buildings or have already built buildings, and simply put, I would say more of those were wrong decisions than were right decisions. So that's why we have the attitude that we do, to where we're cautious, but don't want to seem like it's always a bad thing, because it's not. But we want to make sure that when you're making that decision, you're making that decision with all 52 cards in the deck, not with half.

Casey Hiers:
Is it fair to say, of five dentists who want to buy some land and build, probably one out of five, it makes sense?

Will Taylor:
Yeah. One, one and a half. I think that's probably a pretty good estimate.

Casey Hiers:
Yep. I think that really is the crux of, if this sounds like we are steering somebody to avoid this, we're not, we're just steering them to have professionals look at it, run the numbers. Not just bankers running the numbers to tell you that you can borrow an obscene amount of money, people to look at the numbers, to know that if your cash flow can support it. But so many want to overextend, it makes sense for very few. That's the tone, that's the reason. But my goodness, we've been in some beautiful offices, some beautiful practices, and cashflow and income, and all those data points are in place, and I think that's important. Will, I want to thank you for joining us today and just shedding some light on this topic, and be well, my friend.

Will Taylor:
I appreciate it. Thanks for having me.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.