Should I buy a practice or start up is the most frequently asked question to our team of medical real estate consultants. If you’re asking the same question, we have four helpful filters that can help you decide:
1. What's Your Timeline?
If you’re in an associateship that’s challenging, and you are daily discouraged by and depleted from working for someone else, our agent team would encourage you to follow the data, find an amazing location, and sign a dental office lease.
The COVID-19 Pandemic prompted many associates to speed up their timelines and start up their own practice. Young dentists that once saw practice ownership in their long-term 5-year plan are eager for more control over their careers. Many associates lost their positions during the pandemic and may be at risk of losing their jobs again. This has made starting a practice now often part of the short-term 2-year plan, which almost certainly means starting up.
On the other hand, if you’re an associate that:
- works for a great boss
- wants to open a practice at some point, but currently loves their role
- is willing to be patient for 2-3 years
- isn’t necessarily prioritizing location or dental office lease terms
- is willing to prepare financially to be competitive with an offer
Then waiting for the right practice to come along can be a great option for you.
If your timeline is up to five years long, consider buying instead of starting up. See what’s out there,
Sign up for a buyer’s list (https://practicetransitionsgroup.com/join-buyer-list/) and see what comes in. If you’ve signed up with good brokers, they’ll be in consistent contact with you, sending listings your way that they’ll think you’ll like.
2. Where Do You Want to Be 18 Months From Now?
It’s been a year and a half. You’re still at the same job. You’ve been bouncing around from office to office because you have to work part-time here and part-time there as an independent contractor.
You’re exhausted from searching, and getting outbid. (A million-dollar practice in Austin is going to have 10 buyers, and you’ve been 1 of those ten several times.) You’ve learned that sellers ultimately get to choose their buyer - and they often want a certain profile of the person to whom they can hand off their life’s work. So, even though you’re qualified and have the financing, you still haven’t bought a practice.
Would you feel like you missed out compared to the person that went the start up route? They would have signed a lease when you were starting your buying search and are already open and growing their business.
If yes, starting up is for you.
If no, and waiting works for you, buying might be for you.
3. How much cash are you willing to set aside?
Whether you’re considering starting up or buying, the financial preparations are similar, but the amount of cash you need is different.
To start up, you’ll need at least $50,000 on hand, more if you want to buy.
- This number is due mostly to lending requirements. Some banks require cash on hand, usually $25,000 - $30,000. In addition, if you want a consultant to walk you through the process, you’ll need more. Most consultants charge around $50,000, requiring at least $15,000 as a down payment for their services.
- Even if you work with a bank that doesn’t require cash and you’re not interested in a consultant, you’ll want that same amount - $50,000 - as working capital for a six-month run rate.
To buy, you’ll need to save $50,000 - $100,000 and be much more conservative with your debt. Many young dentists get out of school and immediately buy new cars and new homes. We cannot offer financial advice, but as medical real estate consultants, we can say that lenders do look at debt. A lender may look at a practice you want to buy and say, “We love this practice. It has great cash flows. But we don’t love your situation.”
Either way, be wise. We’d say be conservative. Everything you do now will affect you 18 months to two years from now as you're planning your business. By being conservative, you have all your options from startup to purchase.
4. Consider how important location and real estate really are.
If you’re starting up, you know this well. You’ll be able to run demographics and competition reports with your medical real estate consultant. You’ll get to choose your location. You’ll be in control of where you ultimately sign a dental office lease.
But if you’re buying, you don’t always get to choose terms of your dental office lease, although it should absolutely be something your real estate broker reviews. Oftentimes real estate is offered with a purchase, but you don’t get to choose your location. We recommend prioritizing the practices you’re looking at by location and running the same demographics and competition reports that you would if you were starting up. Keep in mind that a practice that started ten, twenty, or even more years ago started based on a set of assumptions about the market that have likely changed. You owe it to yourself, and the health of your future business, to know what the market looks like in the present.
- commit to a timeline,
- have a conversation with your future self 18 months from now,
- decide how much cash to save, and
- consider the role of real estate in your venture.
Spend time now thinking through these four decisions to save years of meandering in your career. Your answers can help you come to a much clearer place on if, how, and when you want to open your dental practice.
More questions? Email us.