February 2, 2023

Should You Buy a Dental Practice or Start from Scratch?

By: Drew Hinrichs, CPA, CEO of Engage Advisors

What’s the Competition Density?

A primary driver behind any decision should be the overall competition density of the area where you want to locate. Whether it’s a purchase or a startup, you should find out how many other dental offices are operating in that area and evaluate that number relative to the population as a whole. Generally, a ratio of 2500 people per dental practice is considered the minimum you need to be successful.

A higher ratio makes a start-up more viable. For example, if you’re interested in locating your practice in a town with a population of 10,000 and there’s only one dentist currently serving the community, a start-up practice makes sense. Conversely, a lower ratio, would make purchasing a practice look more favorable. If the same town of 10,000 already has four or five dentists, then buying is a better option.

While this ratio represents a general rule of thumb, it doesn’t tell the whole story. Demographics aren’t static and it’s worth considering the long-term outlook for an area because future growth patterns could influence your decision. Maybe the region is on track to see significant population gains in the next 2-5 years, or maybe it’s on the decline. To find out, do the research. You can track down information from sources such as the U.S. census data, or the local Chamber of Commerce. If that sounds daunting, there are companies you can hire to conduct a demographic study and produce a report that sheds light on patient population, competition density, and growth trends, along with other important information.

What Do You Need for Cash Flow?

Starting a practice from scratch requires more time to generate revenue compared to buying an existing practice. This is important to consider because cash flow can be especially challenging in the early phase of your dental career, a time when many dentists are working to pay off student loans, buy a house and start a family. Everyone’s situation is different so it’s important to know what you can realistically manage.

If you have a spouse who can support the family for the first few years while you build a patient base, a startup can work. But if you can’t survive a few lean years and need to start earning money quickly, then buying a practice is probably a better choice. Starting out with an established client base, rather than having to build up from zero, makes a substantial difference in how quickly you will turn a profit.

Where Do You Want to Focus Your Energy?

Some people look at a startup and are energized by the challenge of building something from nothing. The skillset required to be successful goes far beyond what you learned in dental school. Initially, you’ll need to spend a lot of time and energy marketing your business in order to bring in patients. You’ll also be doing things like building out an office, hiring staff, and creating business processes. If this sounds exciting to you, then a startup may be a good fit. By comparison, buying a practice doesn’t require the same intensity. It’s still a lot of work, but you already have everything in place to run a successful business, such as a patient base, an experienced staff, and a billing system. With a startup, you’ll need to create all of these things and more. If that sounds like fun – go for it! If it doesn’t sound appealing, buy a practice.

If you have questions about whether you should buy a practice or start one up, schedule a call with our team at Engage Advisors. We can help you evaluate your options and make the decision that’s right for you.