Consider These Factors Before Answering Yes
Adding a doctor to a dental practice is one of the biggest decisions business owners can make, and for good reason. A new associate will have a huge impact on the practice’s culture, operations and, of course, the bottom line. It has the potential to spur growth, invigorate staff and pay big dividends for years to come. On the other hand, bringing in an associate before the owner or the practice is ready often leads to trouble.
So, how do dental practice owners determine if and when their practice is ready to add another doctor?
Cain Watters & Associates CPA Mason Stern says there’s not one hard, fast metric owners can lean on. In fact, he counsels his clients that the first step in the evaluation process is not a financial one at all.
“The very first question I ask my clients is ‘What is your why?’” says Mason. “What problem(s) are we trying to solve by bringing in a new doctor?”
The reasons for bringing in an associate are varied and not specific to a specialty or practice. Some owners are looking for more flexibility. Some have capacity constraints. It could be purely financial. Or an owner might be looking to transition ownership of the practice in the near future.
Whatever the motive, Mason says it’s essential to ensure the addition of an associate truly fits the needs of your practice and staff.
“Understanding the why is vital to mapping the direction going forward,” says Mason. “Until we are comfortable with that, I rarely start looking into the financial impact of adding an associate.”
Once it’s established that adding an associate dentist is the right move personally for the practice owner, it’s time to determine if it’s the right move financially for the practice. Mason looks at two models when determining the financial viability of adding an associate: break-even and profitability.
Determining the Break-Even
Knowing the practice’s breakeven helps owners understand the viability of bringing on another doctor without having a negative financial impact on the practice. The breakeven number is determined by comparing the increased costs an associate will bring with what they need to produce to be able to cover that cost.
“The modeling tool we use at CWA gives owners a complete breakeven picture, down to monthly or even daily production goals for the associate,” says Mason. “The breakeven amount is typically considerably lower than owners expect because many expenses are already fixed.”
Salary will always be the biggest cost when factoring breakeven. However, Mason stresses there are many other costs to consider when determining your number:
- Are you adding in the full benefits package (insurance, 401(k), profit sharing, etc.)?
- Will adding an associate dentist require more staff?
- Will you need to build out a portion of your office to get ready?
- Do you need more equipment?
- How much added marketing costs will you need?
He strongly suggests going to your CPA for guidance on determining the costs that will factor into the calculation. “A little due diligence up front helps ensure your breakeven is accurate and avoid surprises down the road,” adds Mason.
For a deeper dive into knowing your breakeven for an associate, check out CWA’s practice transition podcast.
Modeling Practice Profitability
Whereas breakeven is more of a guide to help owners understand whether bringing in an associate dentist is financially viable, profitability modeling predicts how successful a practice can be after the transition.
“Rarely is a practice owner bringing in an associate to just break even,” laughs Mason. “The profitability models we run for CWA transition clients determine how much additional cash flow will be built because of the increased production.”
Although there are many factors at play in profitability scenarios, Mason and his team base their models on how much a new associate is able to collect each month, from very conservative estimates to aggressive projections. This can help give owners a clearer picture of the impact an additional associate will have on the bottom line.
Finding the Right Associate at the Right Time
Assuming the breakeven is in line and the profitability numbers check out, the initial hurdles have been cleared. Now the real challenge begins—finding the right dentist.
The first thing owners should consider is the long-term goal. Is there going to be a path to partnership or is this a true associate agreement?
“This is typically determined in the original conversation around why an owner is looking to add a dentist,” says Mason.
Putting an incoming associate on a path to partnership typically makes the search process easier, as most of them see the opportunity of ownership enticing. If partnership isn’t an avenue the owner is ready to explore, it’s important to be transparent to potential associates during the process.
“The highest priority is how well the owner and new associate’s personalities mesh,” says Mason. “I encourage my clients to spend the extra time upfront to ensure they are bringing the right person into the practice.”
Finding the right associate is a really important step, but it is still only one piece of the overall puzzle. You will need to determine what type of employee they will be (W2 or independent contractor) and agree to full-time, part-time and numbers of days worked.
How to compensate is also commonly an area of confusion. With many different options, from daily rates, percent of collections, and variations of the two, questions always come up. Once you work in bonuses, benefits and contracts, there are a lot of variables the doctor and associate need to agree on before any actual dentistry is performed.
To learn more about selecting the right associate or partner, check out the CWA podcast series, Creating Successful Dental Practice Partnerships, also available on Apple Podcast and Google Podcast. Be sure to download and follow along with our complimentary Practice Transition Toolkit.
Determining whether now is the right time to add an associate dentist is a complicated process, with many factors at play and no clear-cut answer. That’s why it’s important not to do it alone. Start with your CPA. If you’re not getting the detailed models and metrics to make an informed decision, contact a member of the CWA team to get started with a financial team committed to helping your plans succeed.
Cain Watters is a Registered Investment Advisor. Cain Watters only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Request Form ADV Part 2A for a complete description of Cain Watters investment advisory services. Diversification does not ensure a profit and may not protect against loss in declining markets. Past performance is not an indicator of future results.
