Part 1: Why would anyone want five dental practices?
November 2016 – Q & A with Pete Newcomb
Is dentistry an art, science or business? At DTSpade, we’d argue that it is all three.
But every Client decides how much time they can allocate to each. Do you invest in getting better at your craft? Do you invest in the newest equipment or staff training? Do you invest in improving operations, speeding collections or negotiating with insurance?
At best, a single physician can do one or two well. Larger practices can invest in talent to delegate, but that brings another set of challenges. Single physician practices that maintain high standards of customer care are not at any more of a disadvantage than multiple practice operations that sacrifice personal attention.
But we believe this along with some changes in the way that practices are valued (that Pete alludes to below) has caused a sea of change toward dentists wanting to own and operate multiple offices.
In this “1 to 5 series”, we talk with industry experts about whether there is value in growth and how they’ve seen it best accomplished.
To kick off the series, we spoke with Pete Newcomb, CEO of Southeast Transitions, who has worked with over 400 dentists in transitioning their practices. Look for the following upcoming articles in the series:
- Bryant Cornett answers “What’s involved in managing five leases?”
Q: Before we get started, what’s going on here? What’s so magical about the number 5 as it pertains to practices and is it worth the trouble to press toward it as a goal? Couldn’t a dentist be as profitable running a single office better?
A: A dentist can certainly be profitable running a single practice or even a couple practices. But there’s been a lot of talk about getting to an EBITDA valuation that comes with a portfolio sale. With one or two offices, your value will be based on a percentage of collections—say 80%. But when you get to three or more practices the valuation method changes to an EBITDA valuation. With this change in valuation methods your offices together could be worth more than 100% of collections or 3-7 times EBIDTA depending on the number of locations (5 or more is optimum), profitability, location, and types of dentistry performed. When a large DSO adds your practices to their portfolio the value of your practice to a DSO could be 2-3 times what they paid you for it. When they aggregate the EBIDTA numbers the practices become much more valuable as a larger group. Unfortunately, a dentist who owns 3-5 practices will be unable to get 2-3 times their value prior to being a part of a larger group.
Q: As a dental practice consultant, what pieces do you see that a dentist needs to have in place, to make the growth from 1 to 5 offices?
A: There are a lot of pieces. Management is probably the biggest piece for me. You can buy 5 independent practices and run them in silos but you don’t really gain anything when you do that. The challenge is deciding when to get a full time manager for your multiple locations. Is it when you go from 2 to 3 locations, or is it when you get to 4 or 5? Somebody has to oversee all of these practices. And, at what point do you need a Clinical Director? When do you have to get someone who acts as the HR Manager? When do you aggregate resources between locations?
And there’s Marketing…are you marketing under one brand or are you marketing under individual brands? If you can figure that out and drive 50-100 new patients at every location per month, it’s Game Over! But that’s a really tall order.
Q: What would you say are the most common pitfalls?
A: Buying the wrong doctor’s practice. This seems so obvious, but it happens all the time. I have seen many transitions fail when the purchaser buys the wrong practice, different management or treatment philosophy etc. This difference in philosophy can add more stress on a transition. I see dentists who buy a super star’s practice, which makes a great profit every month. But what they don’t understand is that Dr. X has excellent chairside manners. They are an outgoing person, a very good salesperson and their clinical skills are excellent. Finding someone to “replace” them is a tall order.
So they buy that practice, the seller stays on as an associate for a grace period, and then they go on their way and they put somebody else in his place. But some of these dentists are 30 plus year, excellent providers. Once the patients find out they are no longer the provider, they’re not going back. If you’re going to buy a superstar’s practice, you better make sure you have a superstar in your arsenal to replace them.
You have to really understand what you’re buying. You have to really understand the practice. I think too many people get excited about the opportunity to have multiple practices. There’s an emotional enthusiasm so they lose sight of the due diligence to know what they’re really getting themselves into sometimes.
Q: What’s different about dentists who succeed in this growth? Why are THEY able to be successful?
A: This may sound crazy, but introverts, who have figured out a way to compensate by being very personable, make excellent clinicians. It’s very difficult to get through dental school… it’s extremely challenging. But then to be able to “relate” to patients and have great chairside, too… that’s a gift. So they have to have both.
So, on the other hand you can buy the right doctor’s practice maybe because they are very successful at surrounding themselves with a very outgoing staff, although they may not have an outgoing personality. Or maybe they don’t like to do some of the treatments that you offer, so there would be a lot of opportunity in that practice.
Q: What do you think is different today, versus ten years ago, that affects a dentist’s ability to be successful in growing to five locations?
A: I think competition has become really stiff. You’ve got close to $300 million out there, earmarked for practice acquisitions in 2016. There are 1-3 DSOs out there with acquisition budgets in excess of $50 million annually and hundreds of others with annual budgets of $10 million . It’s a seller’s market right now, so if you want to buy anything, you’re going to have to pay top dollar for it if it’s anything worth buying.
DSOs are able to offer services below the going rate because they have more volume. They can open a 16 operatory facility on any street corner and take a loss on it for as long as they need to become profitable. They have 100-400 other practices that are profitable, so they can afford to take a loss on ten while they’re setting them up. Any dentist wanting to set up 5 locations probably needs to be profitable in each location they acquire. So a lack of necessary capital also makes it more challenging to compete with that.
The problem today is most Americans probably don’t understand the difference between dentists. They think they can all do the same job. When I ask my neighbors why they go to a certain dentist, do you know what their #1 answer is? “He’s a nice guy”. You know what never comes up? “He does great work”, because they don’t know. Patients don’t see the quality in work that is performed. So it becomes nearly impossible to compete in an environment where everyone thinks dentists are all the same, and some of the largest DSOs use billboard advertising and are opening offices within a few miles of each other. It makes it hard to compete with that.
Q: As a dentist wanting to open multiple locations, would you want to expand in more rural areas, where you’re not going to have as much competition with DSOs?
A: Sure, and that’s a great plan. You would set up on the perimeter of growth, so that the growth comes to you. But if you go outside the edge of the metro area, I think your ability to attract great talent goes down. If I said I had an associateship in Buckhead, I’m pretty sure I’ll be able to fill that associateship. But if I said I had one in Rome, GA it’ll probably be a lot tougher.
Q: Do you feel this is a timing market or is this a sustainable model?
A: That’s one of the questions I think everyone should be asking, but nobody seems to care. Everybody’s throwing money at this thing like, “you can’t lose, anybody can do it.” But is that really true?
I don’t think it’s sustainable at this level forever. I don’t think everybody can make money as multiple practice owners forever. There has to be losers in this game.
You’ve got to know somebody who knows where a lot of practices are, and you’ve got to network. I can think of providers out there who have done pretty well, secretly, just buying a little bit here and there. I think getting too aggressive is the wrong move. You look at a lot and you buy the ones you think you can make work. Like anything, you’ve got to get as educated as you can possibly be.
I think the number one thing is to be ultra selective about what you’re acquiring. You’ve really got to know what you’re buying. You really have to have a good relationship with the seller, and you have to understand the ups and downs of the practice entirely. But yet, there’s still a ton of risk out there.
And second, you need to make sure you are willing to own those practices, not just build it to sell. The window will close on this valuation cycle in the market and you’ve got to have a business that you can run into the next cycle if you happen to miss it.
There exists a very real opportunity to acquire and sell practices today. How long will this model last?
Pete Newcomb is the CEO of US Transitions, the largest dental M&A firm on the eastern seaboard. Pete graduated from the University of Rhode Island in 1991 and enjoyed a career in telecom for 15 years prior to becoming a dental broker. Over the last twelve years, Pete has managed over 400 sale/acquisition transactions. Read more on Pete’s experience here.
Beki Golden