Buyer/Seller Perspectives (Senior doctors and Junior doctors): Everything affects the value and sale-ability of your practice. I believe that every business is built to ultimately sell. If this is true, then we should always move towards how to make our practice worth more, having a lower overhead, and increasing profitability while incorporating a practice strategy that will guarantee unlimited growth for decades to come. Today’s topic outlines the five major types of practices with their positives and negatives, and how senior doctors and junior doctors perceive value. Many of the points that are made here are counterintuitive in the sense that many doctors look in just the complete 180-degree wrong direction for solutions to their problems. They have been listening to the wrong sources and moving in the wrong direction for sustainable practice growth for way too long. It is time for a course correction, and I hope you will see the logic as we consider things from the perspective of the seller (Senior DDS) and buyer (Junior DDS).
Senior DDS – May or may not have it. Does not relate it to success. The value of a practice is only affected 2% to 5% by having the newest and best equipment.
Junior DDS – Expects and wants it in order to be successful. Attaches too much value to “shiny objects”.
Senior DDS – Has changed over the lifetime of the practice and most dentists don’t consider it to be a factor. Everything changes around your practice except you. This can drastically affect value in a sale.
Junior DDS – Knows it is important, but doesn’t understand it.
Senior DDS – Is everything. Begin early (3-5 years). You have more choices if you begin early. Most wait too long and fail to properly “stage” their transition.
Junior DDS – Needs to understand that is never perfect timing.
Senior DDS – Refers out more procedures. Fails to upgrade or add services and treat a wider range of ages. Sometimes has shifted to reduced hours that are likely to not be consumer friendly.
Junior DDS – Strangely, this can be a plus to the buyer. By adding these needed services plus more and better hours to a wider range of ages, the buyer can quickly increase production and profitability.
Senior DDS – Few doctors look at this decision as a strategic plan where age and value are important aspects of a successful transition. What is your “Freedom Number”? What is your burn rate or life-style “suck” that creates a greater need for more money in retirement?
Junior DDS – Trends are moving to fewer practice owners and more lifetime employee doctors.
Senior DDS – Needs upgrades to systems, equipment, staff, location, marketing, signage, and curb appeal.
Junior DDS – Poor first impression. Everything outdated. Clutter creates a low buying attitude.
Senior DDS – Resists change. Set in ways. Unmotivated and not engaged.
Junior DDS – poor competence and confidence. Few (or none) of the business skills needed to be successful.
The Five Types of Practice:
- Boutique: High production per new patient ($4,500/NP and higher), total production in the $1,500,000 to $3,000,000 range. The struggling Boutique Practice may just be getting by with low production, higher fee schedule for each individual procedure, “all or nothing” case presentation without consideration of “wants” or “needs”, overhead in the 67 to 75% range due to doctor purchasing all of the new toys available on the market (The Shiny Object Syndrome), doctor usually over 40 years of age, few new patients/month (10 to 15), usually has a lower direct referral rate, patients are all adults between the ages of 50 to 75, high square footage to operatory size creating a higher overhead, often times the practice is overstaffed for the total production per employee ($12,000 to $16,000/employee), high end finish out, location is usually in an exclusive high end area meaning higher rent, very difficult to ramp up new patients or to be able to adapt to changing demographics and over all branding, high overhead dependent on the number of large cases per month (feast or famine), personality, competence and confidence driven, difficult for another doctor to reproduce, in a sale or transition there would be low value per production due to lack of transferability or reproducible for a buyer, moderate to high stress, influenced more from economic trends and demographics (only 3% of population wants, needs, or can afford this type of treatment), and location can be everything, due to diminishing locales that can support this type of practice. On a scale of desirability (1 to 10) to buy or work in, this is a 4 to 6. Ten year success prospect is low (1 to 2) due to trends of increasing managed care, decreasing needs for implants and full mouth rehabilitation, more competition with more competitive prices and better hours and corporate practice growth. There will always be Boutique Practices but only in certain diminishing locations available to support this strategy with a select few talented, charismatic doctors that have the skill to pull it off (it is probably not you). This doctor is always surprised that their practices are not worth more on the market. Younger dentists have become more knowledgeable about the risks of ownership and are shying away from this type of practice. It is almost impossible to transfer ownership with an expectation of growth or upside increase in productivity. Seldom will the younger buyer have the charisma, clinical excellence, appeal to higher net worth older patients, or the confidence in their business skills to pull off a successful transition toward growth. There is almost no upside for the buyer.
- “Donor” General Practice: Low production ($400,000 to $600,000/year), high overhead (67 to 85%), poor production per operatory ($8,000 to 10,000/op), low production per staff member ($10,000 to 12,000 each), poor condition of office environment (looks old, poorly maintained, smells bad, old equipment, no digital x-rays, nitrous, weak staff, marginal systems), may not have a hygienist, poor systems, no marketing, low number of new patients (less than 20/month), few direct referrals, usually an older doctor, or a start-up practice in the first two years of practice, older staff, poor location, and no consumerism. Grade of 2 to 4 for a job, but could be a 6 to 8 as far as purchasing (cost would be low, increase in productivity with systems and marketing allow for very fast growth and possible upside). Ten-year success prospect depends on the doctor and the location. Could be great or even the best purchase with the right systems, staff, and doctor. Keep in mind that while the doctor is the number one reason practices do well, they are also the number one reason they struggle. Poor to average practices are what they are for a reason. Don’t be the doctor with a great self-image for no apparent reason. These doctors will not be able to take a practice like this a run it up to the next level.
- “Recipient” General Practice: High production ($1,000,000 to unlimited), 2 hygienists per doctor producing 1/3 of total production, 50 to 70 new patients/month/doctor, marketing consistent with an outreach for all patients and ages. They spend 3 to 5% of collections each month on marketing. Production per staff member will approach $20,000 to 25,000/month each with production per operatory approaching $25,000 to 30,000/month each. Usual age of doctor will be 35-55. The practice will be poised for growth with systems designed to meet consumer needs. Hours are consumer driven and practice is in need of another provider. Facility is in new or “as new” condition with up-to-date design, at least 6 fully equipped operatories, probably 8 to 10 self-motivated and long-term staff having fun and getting the job done. Ten-year success prospect is likely 7 to 10 for a job (great learning environment from a doctor that is doing it right), and 6 to 8 for buying. A problem occurs in how to bring in an associate or partner: If the value is too high (usual value would be 70 to 80% (or more) of the last 12 month’s collection or 1.5 to 2 times the practice net income, but waiting too long means that no single doctor can afford to purchase it. This limits the range of buyers unless owner is willing to carry the note or do multiple fractional sales. These types of practices with low overhead and high production are targets for corporate or DSO purchasers. As a solo buyer you should also consider that any practice that has been in the same location for 10 to 15 years is probably in the wrong location for future growth now. Think ten years in the future for demographics, and more competition moving into the area.
- Medicaid Practice: A well-run Medicaid practice can easily do $300,000 to $500,000 per month. Production per new patient is low (less than $1,000/patient), but numbers of new patients are extremely high. A systems-driven practice with low overhead, high staff and doctor turnover, no life-long patients, marketing driven with location best near the source of patients. Value is extremely high since none of the patients come for the service, staff, or doctor. They are there because it is free and convenient. Value is high because if purchased on Friday by another doctor, the productivity would remain the same. It has a high transferability after the sale. It is not uncommon to value these practices at more than 100% of the last 12 months collections. Buyer beware: Prediction for the future is that Medicaid will cease to exist in its present form. The US can ill afford to support non-productive, non-citizens that fail to contribute to our tax base. The pressure should cause this to taper down within five years.
- Specialist Practice: Terrible trends and a poor future might be in sight for specialists. With the trend toward high over population of dentists in metropolitan areas, specialists can count on fewer and fewer referrals. Only Pediatrics and Orthodontics have actually marketed their message to the public. The rest of the specialty practices rely on a referral from a population of doctors who are finding that they struggle to maintain their standard of living and productivity. With extra holes in their schedule, these same dentists are finding that about 90% of these “specialty services” can easily be performed by a general practitioner. If the consumer could vote and have their preference, they would never be referred. They are looking for a one-stop shop. They would much rather have a trusted friend and family dentist see their kids and do ortho, endo, implants, sedation, and cosmetic procedures. Add in the advances in technology making it much easier to do services that ten years ago only a specialist did, and you have the numbers we have today. Orthodontists are down 47% in the last 5 years due to Invisalign and General Dentists taking up ortho. Oral Surgeons are taking on implants and facial cosmetics to replace wisdom tooth referrals and other sedation cases that GPs are taking on, and Periodontists are struggling to replace implants and perio-hygiene being done by hygienists in general practices. You can see the writing on the wall. These specialists had better take heed because they will need to reinvent themselves or perish. Take Prosthodontics. I don’t know a single dentist that refers to them. The ADA, on the other hand, states that only a board-certified Prosthodontist is qualified to take on difficult full mouth reconstruction and complex cosmetic cases. They go on to point out that claims of cosmetics, aesthetics or any other iteration or claim of expertise or sub-specialty do not exist and are making false claims and are in violation of their State Dental Practice Act in many states and certainly in the legal arena or courts of law. Dentists betting on sedation or implants along with adult cosmetics are bucking the statistical numbers. In fact, if you look at totals of organic dental searches on the Internet you will find that the number one search (at 47%) is for a “dentist in a location”. Number two at 14.7% is “braces”. Not until you go to the bottom of the search list do you ever see a search for cosmetic, implant, or sedation dentistry. Add them together and you find they total only 4% of the total dental searches and a dismal 1% of the searchers. Decayed, missing, and filled teeth are almost nonexistent in our younger generations in most parts of the country. In 1975 the average adult had 16.4% of their teeth decayed, missing, or filled. Compare that with 2019 at 3.1% for the same group and you can see the supply and demand effect. This year we will graduate 6500 plus dental students and will add a couple more dental schools to boot. More and more dentists offer what used to be specialty services and therefore dilute the available patient pool for each specialist. Costs are rising and fewer patients are seeking the “specialist” for their services. From a referral perspective, the number one question to your receptionist if you refer is: “Are they in network for my insurance?” If the answer is no, forget it. In fact, it has gotten difficult to find any marketing or any dentist that doesn’t tout themselves as a cosmetic, aesthetic, sedation, implant, sleep, or smile and cosmetic make over specialist. Even the best Boutique Practices are seeing diminishing referrals due to their existing patients not referring because they were afraid their friends and neighbors could not afford to go there or might think less of them for spending so much money in a vain attempt to look perfect.
In between each of these practices are many nuanced levels and situations. This should give you a “heads up” on the pluses and minuses when you begin to look. Throw in the possibility of a National Health Care Plan with the eventual inclusion of Dentistry and you can see the challenges that face us. You have only to look at Canada and England to get a feeling and historic perspective of a government run health care system. In Nevada in 2005, the IRS seized a business for failure to pay millions in back taxes. During the year that the government ran the business trying to recapture the tax lien it slowly went out of business (failed and was closed). This only leads credence to the trouble with big government and the illusion that any agency of the federal government could guide, control, or legislate health care. Oh, I forgot to tell you. The business was a highly profitable, multi-million dollar a year, high-end brothel selling “companionship” and alcohol. I’ve got to think that if you can’t make money selling those things, what hope do we have if the Feds stick their finger in our businesses.
Michael Abernathy, DDS
PS. Don’t forget that we will host a live Zoom meeting on Tuesday, April 6, at 7:00pm Central time (announced last week). Just let us know you’re interested via email and you will be sent the link. No cost for this and no further commitment required. Just a time of interaction with other dentists interested in achieving more in this great profession.