Having just completed a five hundred page book covering transitions, a curious number of questions have arisen. This book takes you through the strategy of removing equity from your practice by selling fractional shares to other doctors. It clearly guides you through every aspect of the Number One Wealth Building Strategy in Dentistry Today. In addition, the book looks at walk-away sales, fractional sales, whole sales due to death, and the practice management, legal contracts, and complete strategy of doing this successfully. A surprising question has continued to surface from different aged doctors, about different types of practices, with different locations, production, overheads, and numbers of new patients. I have gotten this from older doctors who are surprised that their boutique practices are practically worthless, from younger doctors asking about how to maximize the value of their future practices, and from entrepreneurs about what is the best practice to buy. The book has an entire chapter on certified appraisals, and the valuation of practices, but we obviously should look at this from a different perspective.
In broad brush strokes a practice will be worth around 60-70% of the last 12 months collection, or about 1.5-2 times the practice net profit for the same period. Equipment, new or old, will affect it 3-5%, overhead can affect it 10-20%, new patients can affect it 10-15%, and a profitable hygiene department could affect it 10%. There are a lot of variables and they affect each purchase a little differently. One thing is for sure: Given the present economy, current political party in power, and upcoming national health care reform, in the next 5-10 years all bets are off. You have reached the tipping point where a dental practice may be unsellable within a decade.
Let’s look at several examples, and I’ll try to give you black and white answers on how, why, and how much the values differ in each.
1. Boutique practice. A well run general dental practice will produce about $2500 per new patient. This is just the number of new patients divided into the monthly production. This is not the production on each new patient, just per new patient. The average production per new patient in the US is about $1,000. Anything over the $2500/New Patient puts you in a practice that sees mostly adults, does a lot of Crown and Bridge, and shouldn’t need many staff or a large facility and thus a lower overall overhead model due to longer appointments and higher production per procedure. Their overhead should be lower (50-60%), and need fewer new patients. Most of these practices are owned by a charismatic, competent, and confident older (45-65) dentists limiting their practices to adults and a lot of cosmetic cases. Great practice. High production. Good overhead. Is it the practice to sell or buy? Is it sellable? Will it sell for a high percentage of production?
Answer: Yes and No. A Boutique dental practice is the worst purchase for a young doctor in a walk away sale (senior doctor sells and leaves). There are few young doctors who have the clinical skills to fill the departing doctor’s shoes. Unlike most general dental practices, a Boutique practice does not usually have a strong hygiene base. There are usually fewer patients who simply come in and have everything done. In a traditional general practice the purchaser can count on the hygiene department to continue to generate about 33% of the presale production. Also, in a general dental practice, the buyer could count on 67% of the presale income production coming from work spun off from recall patients. Not so in a Boutique practice. This is huge when we consider what a practice is worth, or how sale worthy it is. Think about it this way: The senior doctor of the high end practice had little or no debt, had spent 20+ years developing his clinical and people skills in order to attract and sell those higher end procedures. This practice is driven not by systems and numbers of new patients but by a unique charisma and personality of the senior doctor. When he leaves the practice will most likely die. Imagine a kid fresh out of school, no real experience, and $250,000+ in debt. This is destined to fail.
What’s scary is that instead of seeing these ready to retire doctors with their ready to sell Boutique practices having a low overhead, high production, great location, lots of patients, no competition, with a reasonably priced practice, we see just the opposite. I just got off the phone with a doctor who is 74, has a “dictator” wife for an office manager, is a graduate of the latest and greatest cosmetic, elitist, over priced institute to higher learning for burned out dentists in an overly competitive environment, with less than 10 new patients per month, an 80% overhead, collecting $55,000/month who feels like this accident waiting to happen is worth 75% of the last 12 months production. Great news though. He has found a foreign born dentist who can speak almost no English, with a name like Charlie Manson bin Laden, and the senior doctor is going to continue to work and carry the note for the next 5 years. All he wants is some help with the contracts. Are you kidding me?
What would you do? His overhead of almost 80% would mean that the most he should get is about 1.5% of the last 12 month collection or in this case $132,000 X 1.5 = $198,000. He expects to get $465,000+. I’m not sure it is even worth the $198,000. Houston, we have a problem. The senior doctor failed to build a profitable model and keep the overhead low so that he would be able to sell this type of practice as an exit strategy. Now, when he is too old to make the changes necessary, he will be faced with disappointment, and probably never be able to retire. He should have saved more and expected less on the sale.
There is one time and one time only that a profitable sale/purchase of a Boutique practice might make sense both to the seller and purchaser. Lots of new patients(60+/DDS), lower overhead, growing demographics, profitable hygiene department, aggressive successful marketing strategy, incredible staff, perfect systems and the sale is for a fractional share of the whole with the selling doctor staying for 5-10 years. This might make it possible to pass on the systems and charisma to the perfect candidate. This is an unlikely scenario in any but the rarest of practices. Note to both Buyer and Seller: Beware.
2. Sale or Purchase of a fractional portion of 5-10 year old general dental practice with great numbers (50-60% overhead, production of $25-$30,000/operatory/month, over 50 new patients/month, production of $20-$30,000/employee/month, 98%-100%+ collections). This doctor is a businessman who just happens to be a dentist. He understands that the strategy of bringing in providers as owners works even better the earlier in your career that you begin. This is a great opportunity for the young buyer because unlike older practices that may have been located in a great location for 20 years, they now find themselves in the wrong place. This practice is in the right place at the right time and because it has not reached a production plateau, has great potential for growth. The buyer can also count on the practice to have established systems plus aggressive marketing in a good demographic environment. Assuming that the overhead is not too bad, and the price is in the 65% range with the seller carrying the note, they will have no problem in a successful transition with a win/win outcome for both parties.
3. Fractional or walk away sale of a practice below our Summit benchmarks. Sales for whatever reason do not have to mean retirement. Any practice can be sold. We just need have a reasonable expectation based on the numbers of the practice, location, condition of the facility, systems, staffing, and new patient count. Every practice goes thru a predictable practice growth curve.
There are 5 Stages in the life-cycle of a Dental Practice. If you were to place these stages on a piece of graph paper, they would look like the diagram below. The Vertical axis is measured in dollars. The Horizontal axis is a measure of time. We all start day one with no money and we’ll call this the Survival Stage of dentistry. We will do whatever it takes to make a living: We are real short on experience, and long on persistence. Dr. Gordon Christensen says that “our diplomas are just learner s permits. We are just barely not dangerous.” The great thing at this point of our careers is that we don’t know what we don’t know. We are pretty clueless about the business of dentistry. We are just looking for a chance to get into the game.
The next stage is the Growth Stage. This is the most exciting time for most of us. We start practicing as a dentist, get an apartment or home, get married, and even start a family. We are gradually increasing our clinical, business, and financial skills, usually by trial and error. Everything is looking up. At almost every turn, we run into something that is a challenge. The trouble with growth is that it ends far too quickly for most of us. Very few of us are able to keep adding challenges, clinical skills, and sustained growth in our practices. Without continued growth and profitability, we are doomed to languish in mediocrity.
The next stage is the Profit Plateau Stage. You could find that you hit several different plateaus during your career. You slow down, plateau, and then you market more, add a procedure or even another provider, grow a little — and then hit another plateau. It is kind of like failing: You really only fail the last time you stop trying. As long as you fail forward and keep getting up after a challenge knocks you down, you have not failed. You may currently struggle with some challenge, but it will not make you fail.
You might find that you enter the Profit Plateau Stage in your 5th year, or maybe never. It varies from doctor to doctor and practice to practice. But I find too many doctors arrive too early and remain stuck in this Plateau Stage for most of their careers. They feel helpless to control their circumstances. They feel out of control. The practice, staff, patients, overhead, and management have taken their toll. They stopped trying years ago. They just come in, do what they have to, leave, and hope for the best. Here’s the truth: Hope is not really an effective strategy.
It is about this time of helplessness and lack of control that everything begins to go downhill. Patient numbers drop, production barely covers expenses, staff turnover is high, and the inevitable slow down into the Leisure Stage begins. The name leisure probably doesn’t do it justice. It is more of a “decay of attention and profitability”: A time when stress is the constant and profit is elusive. You begin to think of patients as the problem. You arrive late, never really are fully engaged during the day, leave early, and try to occupy your life with something other than dentistry.
It is at this point that we hit the Sellout Stage: The very worst time to try to sell a practice or bring in a partner. Your systems are in shambles, there is little or no profit, and not even enough energy to lead the practice. You will receive the least amount of money for your practice and have little or no time left to act on an investment strategy to help it grow. At the time in your life when you need money the most, and should be able to cut back, you find yourself back at the Survival Stage. This is a vicious circle that captures way too many of the dentists I encounter: Great opportunity, plenty of time, but a complete failure to follow thru. You become a thermometer instead of a thermostat. You sense what’s going on around you but you never control your environment.
Not a pretty story and not the path that you want to take. The realization of what can happen can be the first step back to a career-long Growth Stage with huge financial gains, less stress and a renewed enthusiasm for life. It guarantees a successful exit on your own terms.
The sale of a dental practice must be structured to insure that the buyer can service the note. This is done by looking at the numbers and staging the sale in order to maximize the good points and improve the sagging ones. Be realistic in your expectations. The sale of your practice will never fund your retirement that should have been done from the profits of years of practicing while maintaining a lifestyle commiserate with your financial goals. While profit and production percentages are a good starting point, they will always be influenced by the good or bad habits of a lifetime of running your business.
Keep in mind that selling fractional shares of your practice is the number one wealth building strategy in dentistry today. If you would like to look at the feasibility of removing equity from your practice as a financial plan towards financial freedom, give me a call on my cell at 972-523-4660.
Michael Abernathy DDS