We are in part two of purchasing or opening a new practice for the first time or as an expansion for seasoned doctors who already own a practice. The strategy of owning your first practice or adding another practice may be one of the most profitable steps you could take and is an opportunity that is best taken during economic down turns. Yes, this pandemic and financial recession will be a huge opportunity to those poised for growth and ready to act. The last article covered the “ready” part of a “ready, aim, fire” strategy for new office acquisition. Today, we delve into the “aim”. There are no short cuts in successful transitions to ownership, so, make sure you read last weeks article and make sure that you can check all of the boxes before you continue on. Getting ready includes tangible things as well as a new mental engagement in your practice.
When we think about the word “ready” I tend to see myself on the firing line or about to step into a ring to fight, having done everything I need to be considered ready to take a shot. I have prepared myself physically, mentally, and have studied my opponent. You might think of a trip or vacation that takes logistics, money, time and coordination of multiple family members to plan that excursion. Today, we will assume that you have readied yourself for success and are now stepping into the arena poised to “aim”.
When I think of dentists and encouraging them to do something, I am surprised at the large majority that tend to go from ready to aim and just stay there. Instead of ready, aim, fire, we see doctors aiming, aiming, continuing to aim, still aiming, aiming one more time, until the opportunity passes and they never fire. I understand you want every detail. You need to understand the risk. Most of us are looking for that perfect timing when we have every fact, and are able to check every box so that we are guaranteed success if we pull the trigger. Welcome to life. There are no guarantees and there will never be perfect timing, but success can almost be a foredrawn conclusion. You have to decide that if you can check most of the boxes, then you can make up the deficit with consistent engagement while quickly making decisions as you adapt to an ever-changing field of play. Aiming includes everything that should be done to acquire the target. You will never be successful without deciding on the target. You can’t hit a target you cannot see.
I will divide the “aiming” process into a couple of articles so that we can discuss and create that perfect to-do list for a first office as well as an addition to a successful existing office. At first blush, it will seem that I, too, am going from ready to aim and lingering there. Do not confuse the amount of information we supply with an actual time line. The reason I am spending this time on aiming is that few people are really “ready”. Even fewer know how to select a target and aim. Assume that two articles on aiming simply emphasizes the need for being ready and detailing the process of the aim. Because there will be first time buyers, and seasoned practices that are expanding to new locations, I will try and cover both party’s needs for this process.
Aiming is, in a phrase, “target acquisition”. We are deciding the what, when, and where aspect of opening that practice. Truly, some of this could be added to our being “ready”. In fact, the first couple of topics would benefit you by limiting the search that would then decrease the acquisition time.
Remember, you have checked all of the boxes from the first article about getting “ready”. Let’s take a look at the next step of aiming.
In getting ready, you should already know what dollar amount you qualify for in a purchase or acquisition. Make sure that whatever the amount is, and regardless of whether you are buying an existing practice or doing a scratch start with buildout, that you include at least $50,000 for marketing during the first 6-12 months, another $20,000 for staffing the first few months, add in another amount for insurance, medical, malpractice, facility coverage, and business interruption and life insurance. You should also ask for a line of credit for unforeseen costs. You will also need to factor in the tax consequences of purchasing vs start up. Because of the situation we find ourselves in, if you borrow money you should expect a one to two-month lead -time on loan approval. In the purchase of an existing practice, the banks are requiring a deeper down payment and the office you are purchasing must be up to at least 80-90% of where they were before COVID. NOTE: If you are a seller, you will hear brokers tell you that the sales price will be unaffected by COVID. This has not been the case. The average sales price of a practice that is even back to pre-COVID levels is still averaging a final sales price of 5%-8% lower than before COVID. There is still too much uncertainty about rules, regulations, and government forced closures, as well as the likelihood of this pandemic not abating until late fall of 2021. This is one reason that there will be deals available for the well-prepared buyers. Sellers can price their practices at any level that they wish. It is a buyers-market, and the buyers are not going to pay pre-COVID prices, nor will banks loan without a better margin of certainty that you will be able to repay the note. The first area we should discuss is location.
- Location: Success in any venture comes down to location, location, location. I will try to be brief, but there is a wide swath of considerations we need to consider in locating that first or additional practice. This one area will be the largest determinant to your future success. Urban vs. rural is the first area of concern.
- Urban practices will have more competition, higher facility costs (building, remodel, rent, utilities, taxes, etc.), slower growth, and greater cost of marketing. It will be easier to find qualified staff but harder to keep them due to competition. Overall, the cost of a practice at a particular production level will be higher in an urban setting than a rural setting. This is driven by the fact that living in the city, particularly the affluent suburbs, attracts more dentists and their families. So, the competition drives the price up, but does not mean that there is a higher value to go with the higher cost.
- Rural practices will have less of a facility cost whether you are buying real estate or just renting. Generally, the growth of the practice will be much quicker, all things considered. Experienced staff may be more difficult to find but easier to keep due to the lack of other dental office opportunities. Keep in mind that you may need to spend more time training your staff in the process of bringing them onboard. You may find that that getting financing in a rural area may be slightly more difficult. There is also the consideration of the affect of having another dentist move into the area. In a diminished population, where you need to have at least 2,000 potential clients per dentist, having some one move into your area can quickly and drastically affect that ratio to make it difficult for both of you to do well.
- Doctor to population percentages need to be at least 2,000 to 1 dentist before I would consider buying into a practice or starting-up from scratch. Big mistake to think that you can overcome a poor ratio and survive let alone thrive, in the dental business. For the most part, you are going to find that demographically, the best locations will be 30-40 miles outside a large city, not in the city. Also, while contemplating the doctor competition, you must look at the ages and range of services offered by any competition within 5 miles of your prospective office. Age is super-important. The younger the competition, the more likely they will be aggressive about marketing while willing to work the consumer hours and become involved in the community. If you think that you are going to be competitive in a strong market doing bread and butter dentistry, think again. The patient pool is more educated than ever before. You need to be able to see kids, do cosmetics, endo, oral surgery, and even implants. Gone are the days of a profitable office that does not offer the services that our patients demand.
- Population demographics are a topic that you have seen me write about in the past so I will be quick to remind you. Incomes need to be in the $45,000-$65,000 range. Lower than that will affect your ability to do comprehensive treatment, and higher that that means that your potential clients are all college educated, always went to the dentist, and might need nothing more than a cleaning and bleaching tray in your expensive new office. Cost of living should not be over 150% of the national average. Average population age needs to be in the mid-thirties and you should consider that to grow quickly, you will need to see kids as well as adults. A growing economy is important for your location.
- Next is location relative to your existing practice (if you are using this strategy to expand) or location proximity to your existing home. You will never do well if you commute more than about 15 minutes from your home to office. Being in the community you service guarantees that you will be involved with what is going on in the schools, businesses, economy, etc. If you are not willing to live in the area your practice is in, then do not buy it. If you are more than about a 20-minute drive or so from your additional office, you will find that the management logistics will be difficult to overcome. When adding that second office, you should count on indoctrinating new staff members and doctors in the primary office and then move them out to the satellite location.
- Visibility and signage: In today’s marketplace, location is important but visibility is equally strategic. I would pause and think through your location decision when it comes to visibility. Ideally, you want your office to be where women will see it routinely. They make 92% of all the appointments in a dental office and almost 100% of the selection of a dentist. I would want a Starbucks next door, a Whole Foods grocery store on the other side of me, with a dry cleaner, Ace Hardware and nail salon next to them. I feel so strongly about this that you would never, never, never, ever open an office in a professional building. It is professional suicide for growth and expansion. If you decide to make this terminal mistake, be sure you are able to spend over 5% of your income on marketing, and add an additional $5,000/month to that to just compensate for your location. Even this will not make up for not getting that great, highly visible, convenient location. I would even try and make sure you could get LED signage visibility and local sign ordinance approval to improve even more on a specific location. Signage alone can add about 30-40 new patients a month to a good location.
As you can see, being ready and beginning to aim is more difficult than you might imagine. Sorry this took so long but we will pick up here next week. This is how you Summit.
Michael Abernathy, DDS