Our last recession was proof that the standard way of achieving financial security and retirement as a dentist is no longer a viable option. Standard financial planning for dentists has long involved putting a certain amount of money away in a qualified retirement account. Once that money reached critical mass then that triggered our financial ability to retire.
The recession demonstrated to dentists that our retirement accounts should only be one part of an overall comprehensive financial strategy. DDSO strategies have become so important for thousands of dentists around the US in securing a financial future, creating multiple streams of income and finding one’s passion in the field of dentistry.
Some of these DDSO streams of income require active work on behalf of the dentist, while others are passive streams of income. I quip about passive income in my book, Transition Time, stating the following. “Solo practitioners have very
little leverage. If they’re not treating patients, they’re not bringing in any income. Many other businesses possess leverage in the form of residual or passive income. Franchisors receive franchise fees, authors and inventors receive royalties, patent holders receive licensing fees and real estate investors receive positive cash flow. So why do more than 90% of dentists receive no such residual income for their labors? I firmly believe it’s because dentists are only trained to be dentists—not business owners. They have no experience with the many different business models and structures that build residual income into the equation. You see, dentists are in a very secure position because it is so difficult to replace us. But this same security also shackles us. Residual income is the component that frees us from shackles and allows for scalability.” Whether you are a solo dentist, or own multiple locations across several states, DDSO strategies will bring growth, income, added value and scalability to your practice(s).
First, it is important to initially define the terms. A DSO, of course, is a dental services organization generally utilizing a dual-entity approach including a clinical entity and a non-clinical entity. The clinical entity may only include licensed dentist owners and the non-clinical entity houses the non-licensed parties to include private equity companies, and other institutional investors. The clinical and non-clinical entities are generally connected by multiple agreements to avoid violating corporate practice law.
A DDSO has two distinct definitions. A D-DSO is defined as a dentist-owned DSO which may be a solo location or multiple locations. Oftentimes, a dual-entity approach is not needed because all owners of the DDSO are licensed dentists. A DDS-O is a dentist-owned organization which may include a dental lab, commercial dental real estate holding company, dental supply/implant/equipment company, CE organization, dental software company or dental services company. In the 1960s the majority of dental supply companies, dental equipment companies and dental services organizations were owned by licensed dentists, thusly, DDS-Os.
There has been a slow shift over the last 50 years and now most Big Dental companies are owned as public companies, private equity companies or institutional investors. In fact, 9 of the top 10 DSOs are funded by private equity. Billions and billions of dollars of income have been shifted away from private practice dentists to “big dental” in recent years.
There is certainly nothing wrong with this trend. We live in the greatest capitalistic country in the world and big money has certainly found its way into one of the most profitable fields, dentistry, in a major way. Many dentists fight this trend. I say, embrace it! You have the advantage of being a licensed dentist. Most dentists are one step away from their biggest business breakthroughs in dentistry, they just need to be educated on how “big dental” has achieved their success, and replicate that through a DDSO.
Converting Dentistry’s Greatest Liability, Overhead, Into Your Greatest Asset
The field of dentistry has the highest overhead of any profession. Currently, the ADA statistic states an average overhead of 69.5% for general dental practices.** Even if you have an overhead of 52%, still the majority of the revenue flowing through your practice goes into other peoples pockets.
Much of this revenue goes into the pockets of Big Dental. As mentioned previously, Big Dental is funded by private equity, Wall Street and other institutional investors. One of the goals of the DDSO strategy is to take this money that is currently lost through overhead and turn it into profit…to convert your greatest loss of income into multiple streams of monthly passive income. This is done by analyzing each line item of expense or liability on your P&L and building that very expense into an asset class.
The DDSO strategies will provide easy to follow instruction on how to convert each line item of expense into an asset. This will culminate at the end of the article in what the DDSO Alliance calls the DDSO Blueprint Ecosystem.
DDSO Dental Cash Flow and Tax Formula
If it wasn’t bad enough that the field of dentistry has the highest overhead of any profession, the revenue that is left over as profit is taxed at the very highest income tax rate, ordinary income. Savvy dentists learn how to minimize their tax burden through an understanding of the many tax benefits available to a DDSO.
A DDSO Blueprint includes ways to map out dentists progression in mastering the formula, and the benefits to the dentist as the progression occurs. Associates have the very least financial benefits. They have the least income potential. The least tax advantages. The least equity – none. An associate position is, therefore, the very least economically rewarding position a dentist can have in the field of dentistry.
The next category within dentistry is that of the solo practitioner. Solo practitioners have higher income potential than an associate. More tax advantages and certainly more equity. This is a step up, however, solo practitioners also have a very high overhead, staffing burdens, the continual problem of having to wear seven hats and a general lack of freedom and flexibility.
The Solo-Group practice is the next rung up on the ladder. This entails a solo location with multiple doctors. DDSO business models allow for co-ownership of incoming new doctors. The Solo-Group DDSO has many advantages to solo practice. Having multiple doctors allows for a lower overhead as a percentage, more free time, shared administrative workload, a higher NET income, greater tax advantages and a shorter work week.
While there are many advantages to the Solo-Group DDSO, many clinicians have a vision of growing to multiple locations. When done properly, multiple locations can allow for a vast reduction or elimination of clinical hours for the founder, more time freedom, higher income, greater tax advantages, greater equity increase and more opportunity to invest in commercial medical/dental real estate.
The top practices in the US eventually grow and scale their business through multiple locations while lowering that tax rate significantly through shifting more of their earnings into the long-term capital gains rates bucket. Solo-group and multiple location DDSOs are then able to participate in next level vertical businesses that provide both passive income and purpose income.
Whether you are currently an associate, or already own multiple locations, it is easy to vastly improve your income and tax situation. The most important thing is to simply understand what to do next.
Here are some examples of dentists that have gone through the process of a DDSO Blueprint and are reaping the benefits:
Kevin Ison, DDS
“Early in my career I worked for Orthodontic Centers of America and knew that eventually I would want to develop a dentist-owned and driven practice or small group. When I met Brady I had two locations and now have eight a year lat-
er and launched several DDS-Os (Dentist-owned Organizations) creating streams of income and benefit to the individual practice or group.
One of the most misunderstood DDSO concepts is that it is not necessary to have multiple locations to benefit from DDSO concepts. In my DDSO, I have incorporated a 3D printing center to save on aligner costs (as low as $52 per aligner case) and also added retail revenue from serving other dental practices. My DDSO has created a CE institute for training on multiple aligner subjects. I have completed multiple joint-ventures with other dentists on practice and real estate acquisitions in the last 6 months around the nation.
I have created my own private equity/private lending organization to keep interest and equity returns within the DDSO. One of my favorite components of the DDSO concept is that every practice, whether solo or group, finds benefit from the strategies. I have also found that no two DDSOs are the same in that each dentist incorporates strategies based on their own interests, goals and financial maturity. This allows dentists at every stage of their career to participate and reap the benefits of the DDSO concepts as the practice(s) grow and mature.”
KJ Sturhahn, DDS
“After having a couple of my cervical vertebra fused, I realized that I should not rely 100% on the clinical practice of dentistry to provide for my family and future. I have embraced the DDSO concept and watched the fruits from those concepts in multiple forms.
Less than one year ago I had a solo location that was very profitable, but reliant entirely on myself as the clinical provider. I now have a multiple location Sleep Practice, multiple general dentistry practices with commercial real estate, am opening an Implant Institute very soon, practice side-by-side like-minded entrepreneurial dentists and feel much more at ease about the financial blueprint of my future. I had met Brady many years ago when I attended one of his 2-day implant courses and am so glad we continued the relationship as I am now seeing the unique vision of my personal DDSO unfold.”
Ken Ness, DDS
“I had been a solo dentist for 30 years and realized the limited impact I could have as a solo dentist. I purchased a second practice relatively near me at the beginning of 2014. I was busy building these two practices and set aside Dr. Frank’s DVD for the ”I will get to it later pile”. I added an associate dentist in June of 2014 and an additional associate dentist in June of 2015.
We revisited adding implant services to our practices and I discovered that Dr. Frank had a hands-on course in Oregon. His DVD made it seem very easy for the general practitioner to add implant placement services and I signed up for his course in November 2015. The course was full of very practical information to go back to the offices on Monday and start placing implants. What I didn’t realize was that Dr. Frank had extensive experience with buying, selling, and developing dental practices. During my time at his seminar I was able to spend some time visiting about my situation and how to develop this further. My two associate dentists were able to attend his implant seminar in January 2016 and Dr. Frank was able to meet and talk to them about practice transitions. One of the first cases one of my associates completed after attending the course involved placing 13 implants on one patient.
Dr. Frank was instrumental to developing our group and helping us set up our group practice that would allow my two associate dentists to become owners and co-founders and at the same time reduce practice debt. We plan to add additional owners in our group through the model that Dr. Frank has developed. In January 2017, we added an additional practice for $85k and the first year we collected $430k, working two days per week in that office. In January 2018, we added our fourth location and recently completed a build out into a larger space. Our August 2019 value creation in this location will be double of what it was when we acquired the 4th location, from $45k to over $90k. As a solo dentist in 2013, our average collections were $142k per month and last year, 2018, our collections averaged $386k per month. I have been blessed and I am grateful for the journey of practice transitions with my co-owners and Dr. Brady Frank.”