Questions to Ask Yourself When Thinking of Starting a Group Practice

There’s a lot to be mindful of and intentional about if you're going to undertake the journey in building a group practice. 

After many years of experience in dealing with hundreds of clients, we have come up with the most important questions to ask yourself when deciding to start a group practice. 

Do you understand the risk? 

Obviously, business is not without its dangers and its risk; and working on a “high wire” act without a net can be more than frightening at times. There are a handful of risks that you want to be mindful of and intentional about when you start your growth path into building a group. 

Many dentists start out as a “solo dentist in a solo location.” At some point, you decided that you had mastered the solo practice. You felt confident about it from a clinical skills standpoint. You felt confident about it from a risk and a debt leverage standpoint. You felt confident about it from a control standpoint.

You want to build off of that solo location into a multiple location group, by either buying or building your second location.

That's where people tend to make their first misstep.

They possibly forget about the trials and tribulations of the journey they went through to build that first successful practice. And it's become easy for them now, and they think the second location is just going to be an extrapolation of the success they built in the first location.

That is never the case. The first component of risk deals with personal stress.

You really need to be intentional about this, and you need to have that “face in the mirror” gut check that says, "Am I willing to take on a lot more stress in building a second location?" 

The reason it's more stressful is that you can't be in two locations at once. 

And what worked well for you in the first location may not be glued together as tightly in the second location. You may not have the people in the second location that know exactly how you do everything that made you successful in location number one. 

All that stress comes back around to you. So, you must really understand the level of stress you're going to take on. You must be mindful about it, and you need to be intentional about your willingness to take it on because it falls on your shoulders.

The second component of risk is that you, individually, are going to personally guarantee the loan to buy or build that second location.

And that's something that you're probably comfortable with…up to a point. 

You bought or built your first location, so you're comfortable with some level of debt. Maybe you have personal debt, a mortgage, a car, any type of credit card debt. You might have some student loan debt, and you may have some existing debt on your primary practice. You are going to personally guarantee the debt on that next location.

At the end of the day, the bank is going to get paid. You may not, but the bank will get paid.

We get asked questions quite often by people who are along the growth journey of building a group, "When am I ever going to be able to get out from under a personal guarantee?"

The answer to that depends on the bank, but it's usually somewhere around $4 to $5 million in EBITDA.

When the business itself can guarantee its own debt, you move to something called a “Corporate Guarantor” status; and that doesn't happen until about $4 to $5 million in EBITDA. That’s a very large business. So, chances are, most of the people in this audience are a good bit away from $4 to $5 million in EBITDA.

You're going to be guaranteeing debt personally for quite a while during this initial phase of your growth journey.

That certainly adds to the personal stress that's born out of operations and general frustrations with owning multiple locations when you can't be in two locations at once. The personal guarantee on debt is something that you're probably aware of, but suffice to say, it's going to be there with you for a while.

And along with guaranteeing more debt comes the probable reduction of personal income. 

So right now, if you are operating a single location practice, and you are the primary economic engine in that practice, you probably make a pretty healthy amount of personal income.

The third component of risk revolves around the fixed expenses of the lifestyle you are currently living.

Do you live with the trappings of having a successful life? We all like to have toys. We all like to take trips. We like to put our kids in private schools. There's nothing wrong with any of that. It's okay to reward yourself for the risk that you've taken, and the expertise that you've earned. 

If you’re honest with yourself, what you'll find is that you have built a successful practice and you are pulling all of the income out of that business to support “a lavish lifestyle”. 

The stress point is that you have no margin for error.

The business has no margin for error because your lifestyle is 100% dependent upon 100% of the profits from it.

As you start to build a multi-location group, you're going to quickly realize that group needs a leader. That’s probably going to have to be you because you're the original visionary of the business.

So, as you transition out of the chair and into more of a leadership role, you're probably going to have to do that gradually over some period of time. Maybe it’s a year or a couple of quarters' time. As you start a transition out of the chair, you're going to have to replace yourself in a clinical capacity. Whoever you replace yourself with, you are going to pay them a clinical compensation rate to do the clinical work that you're no longer doing. 

Therein lies the rub: if you must pay an associate to do the work that you're no longer doing, that's coming out of your back pocket.

And if you are living to the maximum amount of your income, being the sole business owner and primary economic engine in the business, then you've got no margin for error.

Everyone that builds a group ends up taking some level of a reduction in personal income.

How much? Well, it depends on how quickly the business grows, and how quickly the profitability grows. It also depends a lot on the debt structure. 

The fourth component of risk is based on your principal and interest payments.

Is it a seven-year term? A ten-year term? Or a ten-year with a longer amortization schedule and a balloon payment?

As you go through this journey, you are probably going to end up taking home less, because you're going to have more debt on the business. You're going to have more people doing clinical work that replaces the work that you used to do, and it's going to be a requirement of business to have a rainy-day fund. 

Instead of distributing all the money out of the business, you may have to put some of it away as cash on balance sheet to be used for future purposes.

The combination of increased debt load plus the associates performing your clinical work plus cash on balance sheet all comes out of one person and one place – and that's going to be you.

Sit down with your advisor. Talk through that scenario. Model it out to the best of your ability, so that you and your family know what to expect. We do this with clients a lot in our Strategic Consulting program, and we see this with almost every single one of them, in terms of a temporary reduction in their personal income.

The reason you obviously want to do that is because you can create a wealth-changing and life-changing event if you are able to grow a successful practice. And that's the compelling reason to do it.

But always remember that income and wealth are competing interests when it comes to building a business.

These are just some of the many questions you need to ask yourself when you start thinking about your growth journey. Before you start your own growth journey remember to ask yourself:

• What are the risks? 
• Can you handle the stress load personally?
• What are your principal and interest payments?
• What are the fixed expenses of the lifestyle are you currently living?