by Dr. Jeffrey Dorfman
Income = “money received, especially on a regular basis, for work or through investments.” Income can be discussed as either: a) before- (“gross”) or b) after- (“net”) taxes. Examples of Income: Your paycheck, increases in your bank savings accounts or stock dividends.
Asset = “property owned by a person or company, regarded as having value available to meet debts, commitments, or legacies.” Examples of Assets (all of these assets values are considered after paying off debt like a house mortgage, auto or business loan): 1) bank savings, stocks and bonds, 2) home or other real estate ownership, 3) autos, and 4) equity in a dental practice.
Net Worth = Sum of Assets minus sum of Liabilities. It is an important measure of the economic value of a person or business. Example of Net Worth: If you make a lot of money (i.e. income) but spend it all you will have a Net Worth of ZERO! You are “worth” nothing!
1. Consider working as an Associate in a dental practice:
If you make $100k/year Income for ten years you will have made $1 million.
If you saved 10% of your Income during those ten years – then (assuming no interest) – at the end of ten years you would have an Asset of $100k in savings for a TOTAL NET WORTH of $100,000. In this example it is assumed you have built no equity in this practice.
2. Now consider working as a Junior Partner in a dental practice:
If you make $100k/year Income – in a dental practice you created – for ten years you will have made the same $1 million.
But in addition, a dental practice – as an Asset – is typically worth 80% of one year revenue. If you were making 50% on Collection (neglecting other fees for simpler discussion) then that would imply you had built a $200,000 practice that at 80% is worth $160,000 as an Asset.
If you saved 10% of your income during those ten years then (assuming no interest) – at the end of ten years you would have an Asset of $100k in savings AND an Asset of $160k in your dental practice for a TOTAL NET WORTH of $260,000. Recognize also that Income is typically taxed at 50% (in higher tax brackets) while selling an Asset such as a dental practice is only taxed at 20% because it is considered “Capital Gains.
Conclusion: Young dentists should recognize the significant long-term economic advantage of building their own dental practice with their own referred patients. They will likely learn that the Asset value of their dental practice, along with the Asset value of their home, comprise the greatest portion of their Net Worth.