Buy a Second Practice: How to Enrich Vendors, Get Really Stressed, and Make Less Money

Do you really like your banker, equipment supply rep, landlord, real estate broker, attorney, and accountant?  Do you like them so much you’d like to pay them even more while your fortunes decline?  Great.  Then open a second dental office.

We hear about clients wanting to buy second offices or start a DSO (Dental Service Organization, e.g, Pacific Dental Services) nearly every day.  They go to a seminar, get excited, talk to friends who’ve done it, then start mapping it out.  The first question to ask yourself is: who’s putting on this seminar and what’s in it for them?  Often times they stand to benefit by selling you something.  But it never hurts to spend / invest if there’s an appropriate return, we always say.  So let’s analyze that.

Great…double the offices, double the profit!  Right?  Almost always, no.

 

The Promise
Office 1 Office 2 Total
Collections + Z + Z + 2Z
Operating Expense – Y – Y – 2Y
Operating Profit = X = X = 2X

 

 

The Reality
Office 1 Office 2 Total
Collections + 80% * Z + 60% * Z + 1.4Z
Operating Expense – Y – Y – 2Y
Operating Profit = X = X = .6X

 

We’ll admit this is an overly simplified model.  No two situations are identical.  But it illustrates what typically happens when a second office is added: expenses double (2Y), but revenues (Z) just don’t.  Why not?

Various reasons.

  1. The doctor tries to do it all.  She shuttles between offices, working extra hours, keeping extra books, hiring new staff, and generally burns out.  Then collections really fall.  Collections can increase with hard work, but bottom line, the doc didn’t become two people and is still limited by time.
  2. The magical Associate.  The Associate model doesn’t work.  Associates take home 30% of collections, which really puts a dent in the bottom line.  To put the 30% Associate pay in perspective, the Operating Profit Margin on the best GP practices is around 40%.  If 80% of a practice’s collections is generated by the doctor, 24% of revenue goes straight to the Associate (30% rate x 80% of practice collections), leaving a 16% margin.  There is a hybrid model whereby an Associate can be offered a minority stake in the second office, which might help retention and motivation, but doesn’t eliminate the 30% expense and further reduces the majority owner’s 16% remaining profit.  Keep in mind as well that the 16% is operating profit – from which the IRS, bank, and then, lastly, the owner get paid.  Without an equity stake, which further reduces the owners profit, many Associates simply don’t have the passion for the bottom line, since they’re not compensated for it.  The result is just an employee.  An owner pursues profit; an employee pursues a paycheck.  Top-rung associates are also headed toward owning their own practice in short order, so won’t stick around.
  3. The other reason second practices typically flounder (and end up getting recycled through brokers through difficult sales) is that this business needs to be treated like a business.  Are you listening to podcasts about running a better dental business, process improvement, and willing to dig into systems and other non-clinical items?  Sometimes think you missed your second calling at business school?  That’s not common.  A great CEO knows enough about every part of the practice.

 

We also hear from members that their “friend in Nebraska owns 4 offices and is doing great!”  Usually this isn’t the case.  We have yet to see the financials of a single multi-office practice that qualify as “great.”  There’s usually a strong main office and struggling satellite offices.  Meanwhile, all the associated vendors are getting double the profit…are you?

PracticeCFO could make more in fees if the doctor opens multiple offices.  But as a fiduciary, we put your interests ahead of ours.  The best course for most doctors is to max out a single office.  Don’t double your expenses.  Double your collections.

 

Greg Maravilla | CFO Advisor | PracticeCFO

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