You Need to Bank Some Cash: How Much Money Do I Need in the Bank to Become a Practice Owner?
“Money speaks only one language: If you save me today, I will save you tomorrow.” – Internet Meme...
I don’t care if you want to do a start-up or if you want to buy a practice. Either way, you need to start banking some cash. “How much money should I have in the bank, I’m thinking about becoming an owner?” Is a question that people ask me all the time. My gut answer is always the same, “You need as much as possible.”
The more money you have liquid, aka cash in the bank, the more OPTIONS you will have. The less STRESS you will have. Having more cash in the bank will allow you to purchase better practices, better real estate, and get better terms on any loans you may get. Money is going to allow you freedom and options. Less money in the bank means less freedom and less options.
For many practice acquisitions, you may not even have to put any money down to buy the practice. Why would that be? Well, the bank wants you to succeed, so that they get paid. And if you outlay your last dollars on a huge downpayment to then, you will have less cash on hand if push ever comes to shove with the financial health of your business. So, putting no money down on a practice acquisition is fairly typical. But, that does NOT mean that you don’t need to HAVE any cash in the bank.
You can expect that the bank will want to see that you have at LEAST 10% of the practice purchase price as cash in the bank. So, if you want to buy a $700,000 practice you should have at least $70,000 in the bank. Remember, that this is negotiable. Everything in business is negotiable. If you’ve only got $50,000 in the bank it doesn’t mean that you can’t buy the $700,000 practice — it just means its going to be a lot harder.
If you are thinking of doing a start-up, you will likely find similar desires from the bank. They won’t ask for money down on a start-up loan. But they will want to see some CASH in the bank. Typically, less cash in the bank than an acquisition. I didn’t have much cash in the bank when I built my start-up straight out of school. But I had enough on hand to get the deal done.
If you want to go all-in on your start-up, you will need to plan to have enough cash on hand to live off of for quite a while. While some start-ups, like mine and others, are able to net a profit from month 1. It is not uncommon for a dentist to take between 1 and sometimes 2 years before they are profitable enough to give themselves a healthy sized routine paycheck for the business. So, either account for this by having some serious cash socked away.
I would say at least $100,000 in the bank. Or you can compensate for this by maintaining a job as an associate OR having a working spouse to help take care of the financial oblications at home. If you are an average dentist, with an average employee dentist income working full-time; saving up $100,000 should not take too long. If you can’t imagine saving up that much — maybe your current lifestyle choices do not match up with other financial expecations and goals of ownership you might have? Where is your money going? I don’t need the answer, as long as you know the answer.
It’s good to have a cushion. If you are going to become a new owner, you need to have 1 if not all 3 of these cushions:
- Significant Cash Savings
- Spouse that works
- Outside income from Associate Dentist Job
Start-up or Acquisition, I hope you are paying attention to your money. It should be growing every month especially at the stage in which you are considering becoming an owner. If you are struggling to bank cash, ask yourself why? If you can’t accrue a large cash savings on your personal finances; why would you be able to accrue large cash amounts for the BUSINESS once you own that? Which has infinitiely more financial variables than your personal household likely has?
Not only will the bank want you to have cash in the bank to prove you can manage money, you are going to need that CASH to pay for various out of pocket expenses to get the ball of the ground. Legal Fees, Professional Fees, Loan Fees (which can be thousands of dollars), Agent Fees — do not under estimate the amount of ‘surprise’ costs which you can incur during the process of trying to become an owner. You will need enough cash on hand so that your hair is not falling out from stress during this whole process.
You might be able to become an owner with minimal cash savings, no working spouse, and no side income…but is it worth the stress? And why don’t you have any of those things? I don’t need an answer. As long as you know the answer.
–DeAngelo S. Webster, DDS
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Dental Student, Employee Dentist, or Residents wanting to be a practice owner soon? Take Practice Launch CE for 22 CE Credits and let me work with you to help you become a successful practice owner. Email me at PracticeBiopsy@gmail.com with questions about the program.