The vast majority of today’s dental students are graduating with significant debt. Most new graduates ultimately desire to own a practice—and that’s where smart financial decision-making comes in. Everyone knows of that person in dental school who bought a new car or went on expensive vacations courtesy of their student loans. However, the reality is that generally student debt is rising right in step with tuition and fees.

According to the American Dental Education Association, Survey of Dental School Seniors, the 2013 Graduating Class averaged educational debt at graduation of $215,145 (nearly 2.5 times the level in 2000) with Public schools averaging at $189,112 and Private/Private State-Related at $249,034. This average includes students with zero debt. 10.8% of new graduates were able to finance their dental education without taking on debt. That means that 89.2% of graduates have student debt, and roughly 50% of graduates have debt levels anywhere between $100,000 and $300,000. 18.5% have debt levels between $300,000 and $400,000 and 9.4% have debt over $400,000.

The ADEA’s 2010 Survey of Dental Education showed tuition alone averaging about $159,586 for four years of dental school. So it’s easy to see why the average graduating debt is so high. A recent review of average new dentist salaries reveals that graduates average about $12,000 per month or $144,000 per year as an associate full-time dentist. However, that $12,000 per month disappears when you factor in average monthly costs of living.

• $ 3,500 taxes
• $ 1,500 rent or mortgage payment
• $ 500 utilities
• $ 1,000 car payment and auto insurance
• $ 1,250 life, disability, health and malpractice insurance

Student loans take another $2,500 per month (or more), leaving just $1,750 per month for groceries, clothing, gas for the car, health club membership and most important: savings. Which may be ok for a single person, but getting married? Having kids? It all adds up. With credit card or other non-educational debt, missing even one payment or making the wrong assumptions about the grace period before the new graduate has to start making loan re-payments, can have a negative effect on the all-important determination of credit worthiness, the credit score. And without a strong credit score, the ability to get a loan to buy a practice all but disappears. Some estimates are that it will take the average dentist over 13 years to repay his/her school debt. This conversation relates to purchasers and sellers alike.

For most practice owners, this remaining amount of ‘discretionary’ money for a younger doctor is an important consideration in your own transition plans. Just a couple of examples would be when attempting to be ‘aggressive’ in a sales price or when it comes to contemplating an associate to buy or associate after sale models.

Aggressive Pricing
When you consider aggressive pricing, if a desired price restricts practice net income (after factoring in debt service) so much that there is not residual funds for a purchaser to live on, a lender simply will not agree to provide the financing. Furthering the point with lenders, we are seeing more and more instances where a lending institution requires a potential purchaser to have either cash in the bank or to bring cash to closing. Without additional discretionary income on top of the “$1,750”, or money previously stocked away, there simply isn’t enough cash available. This is a more acute situation, though. Let’s look at the other two instances as they have been more frequently discussed.

Associate to Buy
The Associate to Buy model is a classic request of doctors looking to transition. We’ll separate this from an Associate to Partner model and look at this as just a case where an associate is going to enter the practice, work for a while and then purchase the practice. This type of transition represents a transition similar to what many doctors experienced when they started practicing and a mode where the Senior doctor can lessen his/her workload and responsibilities gradually over time and not have to quit cold turkey. Outside of the physical size of the office issue that is generally the first ‘red flag’, most practices simply do not have the patient flow or income to make this type of transition feasible or truly desirable. By patient flow, there needs to be at least, on average, two new patients per day to support an associate. To grow an associate’s portion of a practice (without giving up the Senior doctor’s own new patients to the associate), there needs to really be at least three to four. What usually ends up happening, though, is either the Senior doctor has to slow down considerably to get the associate production to be able to earn money to pay his/her expenses (essentially give up production/collections that the Senior doctor could do and earn on).

Association After Sale
For Association after Sale, this has similar constraints to associating pre-sale including physical plant and patient flow/collections. This is further complicated as the previous owner’s presence can create confusion among staff and patients when you are no longer “the boss”. Most importantly, though, if your schedule is filled with the most productive and profitable procedures, the new purchaser may not have the cash available to pay overhead, bank note and themselves (back to the ‘discretionary’expenses). Ultimately, a practice sale comes down to cash flow. If there’s not enough, the sale cannot happen. These are three of the most often experienced ‘traps’ although there are many others. It is important to take a close look and model a transition with an expert so expectations going in can be realistic expectations for what should come out.