Financing an expansion or an additional location

Additional revenue is not incremental profit

An additional operatory that produces $300,000 of collections does not produce $300,000 of anything you can spend. Against it sit the variable costs that move with the work (lab, supplies, some clinical labour) and then every fixed cost the project actually causes: the hygienist or assistant you now need, the additional administrative hours, the extra rent, the software seats, the maintenance on equipment that did not exist before.

The right test is incremental. Only include costs that change because of the project, and include all of them, including the value of any additional work you personally do. Existing overhead that does not change is not part of the calculation, and existing overhead that does change belongs in it entirely.

The expansion calculator is built around exactly this arithmetic, and its default example makes the point uncomfortably well: mature-year cash flow of $80,000 a year, and a five-year net present value that is still negative once the ramp and the discount rate are accounted for.

The ramp is where the cash goes

New capacity fills gradually. New collections arrive at perhaps half of their eventual level in the first year and three-quarters in the second, and the costs do not ramp with them. The hygienist is paid from week one at full rate. The rent starts when the lease starts. The equipment payment begins the month after funding.

So the early years of a sound project are often negative, and the project needs funded working capital to get through them. Financing only the hard costs of a buildout and assuming operations will carry the ramp is the most common way a viable project runs out of money.

Buildout: what it costs and what it interrupts

• Construction costs exceed estimates often enough that a contingency is not pessimism. Dental buildouts are mechanically complex: plumbing, vacuum, compressed air, electrical, imaging shielding and ventilation all have to be right.
• Permits and inspections take as long as they take. The lease, the loan and the equipment delivery all have dates; the permit does not care about them.
• Working in a construction zone costs production. Fewer patients, noisier visits, a disrupted schedule, a team working around trades. That loss is part of the project cost even though no invoice arrives for it.
• New equipment needs installation, calibration and training before it produces anything. Budget the downtime and the learning curve, not just the purchase price.

A second location can consume cash while the first stays profitable

This is how profitable practices get into trouble. A second location has its own rent, its own team, its own buildout and its own ramp, and for a year or two it is likely to consume cash. The first location remains profitable throughout, which is exactly what makes the situation hard to read: the consolidated numbers look acceptable while the second location quietly absorbs everything the first one earns, plus borrowed money.

Model each location separately and look at the second one on its own. If it only works because the first one is subsidising it, that is a decision to make consciously with a date attached, not a condition to discover eighteen months in.

Management capacity is the constraint nobody budgets

One practice is a job you can do while also treating patients. Two locations is a different job. Someone has to recruit, cover absences, manage two teams, watch two sets of numbers and be in two places. If that person is you, your clinical production falls, and if the model assumed your production stays flat, the model is wrong. If that person is a new hire, their full cost belongs in the incremental fixed costs.

No calculator can price this. It is worth being honest with yourself about it before signing a lease.

Expanding, buying, or building from scratch

These are three different risk profiles for the same ambition. Buying an existing practice comes with patients, collections history and a team, at a price that reflects them, and it can be modeled in the acquisition calculator. Building new costs less up front and asks you to create demand from nothing, with a longer ramp and a period of negative cash. Expanding what you already have is usually the narrowest version of the bet, because the demand evidence is your own schedule.

Whichever you choose, the question underneath is the same: where do the additional patients come from, and what is the evidence? Equipment does not create patients, and a fourth operatory does not fill itself.