I am going to divide the last two topics into two separate areas so that we don’t lose site of what we are looking for. The search that we have been pursuing is a dental practice in need of care, in a great location, with a huge upside after the sale. The next addition to fill out our search is how to read and interpret a broker’s sale package of information. If you have not been faithfully following the last month or so of blog entries, be sure to go to www.summitpracticesolutions.com/blog and read the entire series. If you have been following the crux of our discussion, remember that we are looking for a practice that an average dentist could buy and then double or quadruple the production and profits in the first 12-24 months. It would be great if you could also go back and re-read the information that we have already covered.
Unless you have been hiding under a rock for the last 6 years, most of you will have heard of Chip and Joanna Gaines who operate Magnolia Homes, a remodeling and design business in Waco, Texas, and their TV show “Fixer Upper” that shows the process by which the couple turn dilapidated but potential-rich houses into showplaces that become their clients forever homes. They always looked for the worst house in the best location and then transform it. This transformation is so dramatic that you can barely tell it is the same house. This too, is what we are talking about, and there is a reason we are looking at this type of practice transition.
It is commonplace for potential new owners, and even seasoned owner doctors who are looking for a second practice, to search for offices producing over a million dollars a year. As we discuss this different strategy, we will move from commonplace to common sense. At the risk of repeating myself, we are looking for practices that are average ($650,000) to half that with at least 4-6 ops, great location (low competition, income levels $45K-$65K, growing economy and population, with the ability to also buy some real estate), averaging 25-30 new patients a month, strong hygiene recall, and long-term staff.
On the other hand, we are looking for things that the current owner is not doing that we could easily add to double our results with very little cost and a huge return on investment. For our purposes, we will call this the inventory of things we can add after the sale as new value as opposed to just the asking price of the practice. It is this rarely discussed value that makes this strategy so powerful. These practices generally only do bread and butter dentistry, send out all of their endo and oral surgery, don’t see kids, and only work 8-5 Monday-Thursday. No ortho, no implants, no perio, and not in-network for any insurance. You get the idea. There are numerous areas where we could add value to the practice by expanding the services offered to a wider age range of patients over a more consumer-oriented schedule.
We will strive to work peak demand consumer hours (7-9AM, 3-5 or 6 PM, plus Fridays and Saturdays), we are hungry enough to immerse ourselves in the community (schools, soccer, football, baseball, volleyball, church, etc.). We will make sure that we go out for meals in restaurants around the office, leave our card with a good tip, attend our patient’s school and extracurricular activities, and go out of our way to always spend money in our community so that we can meet potential new patients. You need to live where you work. Don’t think you can own a practice 30 miles from where you live and still enjoy the natural marketing that becoming part of the community provides while not living there. You will also need to volunteer for various community things going on within 5-10 miles of your new office. Remember patients’ names and make sure you run into them at community gatherings. This type of strategy pays huge dividends.
The doctors that buy higher producing practices that are already doing everything right usually find themselves unable to stimulate additional growth. In fact, many times the existing team find that the new doctor is not as good as their original owner. This could be clinically, personality, leadership, mentoring and being a boss that someone is excited to work for. New offices have died from staff attrition or as I like to say, failure to deliver. Losing team members and existing patients almost always creates a ripple effect that spreads through the community and crushes your potential growth. As you can see, we are depending on staging each step of the transition to ensure we retain the team and patients that are key to our success.
Since most dentists come out of school with little or no practice management expertise and are barely not dangerous clinically, while stepping into the shoes of a previous owner that does twice what the average dentist does is a slippery slope to failure. It is unlikely that most dentists would be able to maintain, much less accelerate, a good practice. Generally, by commission or omission, these new owners find themselves resetting the bar to around $650,000 to $750,000 a year. Do this and try to service a note for a million-dollar (or more) practice and try to achieve the dental dream of financial independence. Good luck!
If you are reading this and are a first-time buyer, you are already ahead of the pack. It will pay off in the future. Since 1999, when 98% of the dental graduates became owners, we are now seeing about 32% of female graduates and 67% of male graduates never becoming owners. That figures out to less than 50% of the graduating classes that will ever become owners compared to 20 years ago when it was almost twice that. Certainly, student debt is a factor. But generational proclivities and higher populations of doctors who end up practicing part-time well past traditional retirement age has changed the ownership statistics. In fact, prior to 2005 we never had the penetration of large corporations in US practice ownership. It has been the unlimited number of employee dentists that has driven the drastic growth of DS0s and large corporations in the dental field. I congratulate each and every one of you who are moving towards ownership.
Bottom line is we are looking for practices with an upside that even an average dentist could improve. Like shooting dead fish in a barrel with a bazooka: You can’t miss. One word of caution, you will need to look at a dozen practices before you find a potential one to buy. It takes time to find the perfect match to our strategy. It is unlikely that one broker or the first two practices you will look at can fulfill the list of needed characteristics we are discussing. Take your time, don’t compromise, don’t fall in love with the deal unless the numbers add up to make it the right transition to pursue. Don’t get disheartened if the price is not right, some doctor or bank turns you down, or things don’t go your way. Each try will get you closer to exactly where you need to go. It takes patience and this educated consumer mentality to wade through the mediocre practices to find the one you really want.
Other reasons to look for a practice like this include cost, financial risk, and return on investment. There is something that is worse than going under and declaring bankruptcy. It is working in dentistry and barely surviving on a financial level. Yep, there are countless dentists just barely getting by, but just can’t pull the trigger on calling it quits and starting over. Surveys tell us that over 50% of dentists do not like their career path. Many say that they wish they could go back to school for a different career and never practice dentistry again. Banks are finally noticing that there are a lot of dentists just barely being able to service their notes. No bankruptcy, but a life of stress and disappointment with very little financially to show for their investment and time in school. Many times, these struggling dentists got their information off of Facebook where everyone is killing it and knocking home runs over the wall for a bases loaded, game ending time at bat. All of this to say that you cannot believe everything you hear or see on social media posts. When it comes to buying a practice, make sure you can afford (money in the bank or the amount that you can borrow) the practices you are looking at. The average practice is selling for about 75% of the last 12 months collections (DSOs are paying 90%-120% but not that much at closing). A million dollar a year practice would be around $750K plus, or at current rates and terms about $8,139 a month for ten years. This will typically increase existing overhead by about 10 percent. This is in addition to the practice’s overhead you are looking at. If you have to add equipment, hire more team members, or need capital to run the practice, it could easily be a 20% increase in overhead. Think about the cost of adding the new signage, changing the web site, having to purchase the practice management software, etc. There are actual numbers in a sale that make it impossible for you to service the note and banks understand this. I was speaking to a dentist this week that was so excited about the practice he was going to buy that he bought a new house just a few blocks away, new furniture on credit that he will easily pay off once he actually owns this awesome practice only to find out that his credit, the price of the practice, the current overhead, and the service of the debt was light years more than the bank would loan and he could afford. Sometime the numbers just will not work. That is why we are looking at lower priced offices in great locations.
There are those of you that feel you would rather open an office from scratch. Find the property, build or lease, invest in new equipment, and follow the pied piper called your local dental distributer and grow a practice from scratch into the perfect Dental Economics Practice of the Year award winning doctor and team. Sounds great, but the reality would be like winning the lotto in a scratch off ticket the first time you ever played. Cost will be at least double that of buying an existing practice, you will have to find, hire, and train a whole new team, and there will be no patients. So I hope you are an expert at marketing and onboarding patients, should any actually show up. The risk level is far greater, and that risk level is only multiplied by young doctors who are clueless and even current owners looking for that second office who have no idea of how competitive opening a practice is in the new dental economy we find ourselves in. The strategy we have been discussing puts almost every risk in your rear-view mirror and can almost guarantee success from the average dentist graduating today. Roll the dice or bet on a sure thing. For me, a dentist and entrepreneur, I will put my time and money on what I know will work.
Finally, if we summarize this strategy, we are building in a cushion or safe harbor of borrowing based on a can’t miss strategy, so that we have more margin for error. Yes, that is right. You will not make it through a transition without making mistakes. In fact, there are no perfect transitions, or offices, or teams, or location. We just want to make sure that of the 20 or so “very important KPIs” we have discussed, we can check the boxes on most of them. We will have done our homework, gathered all the numbers, checked the location, looked under every rock, and are now educated consumers when it comes to the purchase of that practice that will double or quadruple in just 24 months. The final step is making sure you understand how to shop and read the information that is provided to you by a broker. It will be couched in misleading descriptions, undisclosed data you will need, and centers around a quick sale and a 10% commission to the broker. Sales portfolios become a task at codebreaking to really understand the underlying information you need to select the right office to buy. I can’t wait to explain the next level of a successful purchase of a practice.
Michael Abernathy DDS
972.523.4660 cell
[email protected]