The Lure of the Multi-Practice Model
As most of you know, the dental industry is experiencing significant changes. Among them are:
- Decreased reimbursement levels from the providers, particularly the elimination of Delta Premier reimbursement rates to all new owners of GP and certain specialty dental practices,
- The rise of the Large Group Practice, such as PDS, Western Dental, Aspen, and others,
- The rise of small group practices consisting of 2-10 offices (these constitute 80% of the DSO/MSO space),
- Excessively high practice valuations driven by brokers, banks hungry to get into dental lending, and a higher supply of new dentists than selling dentists, and
- A massive increase in student loan levels
These changes are putting pressure on new dental practice owners, causing many to explore alternative ways to increase profits. Consequently, many practice owners are turning to the multi-practice strategy as a solution. Let me share with you my take on this strategy. My opinion is largely formed from the ongoing experience I have in working with dentists with multiple offices or attempting to grow a multi-office practice. While some of my clients are doing it right, and doing it successfully, those tend to be the exceptions.
At some level, the lure to form the multi-office practice is like the siren songs of Greek mythology. Building something bigger, something beyond, and importantly something that produces passive income is a seductive call. For some, they believe a second practice will solve the cash-flow problems of the first practice. For others, they believe the second office will simply be a replica of the success of the first office. In either case, there are two reasons why bridging from one to two practices, and particularly to three or more practices is so difficult, and often leads to financial detriment:
- High fixed costs: Twice the office does not mean twice the profit, but it often means twice the work. That’s because dental offices are “hardware intensive.” I.E. they have a high fixed cost structure. If you purchase a second office, you may find some collective cost reduction, but not much. You really need 8-10 offices before you have a true collective bargaining power with providers and vendors. So generally speaking, twice the office equals twice the overhead and in some cases twice the debt.
- Languishing collections: Strong collections in a dental office typically is the result of a lot of heart and soul. It’s difficult to have enough heart and soul for two offices. Hence you generally need to rely on an associate, which leads to point three:
- The lack of dream associates: Building a multi-practice model will eventually require you to leverage clinical work by hiring an associate. The vast majority of associates will not treat the practice as if they owned it. They won’t focus on the business aspects, they won’t work overtime, or think about it when they’re on vacation, or lose sleep over it when cash flows are tight. And yet, that is generally what it takes to grow and maintain a successful practice. The dentist that is willing to work without ownership generally wants three things: to treat patients, be paid, and live a balanced lifestyle.
Because of these three factors, MOST practice owners are better off increasing their take-home income by focusing effort within their current practice. A new dollar of collections in your existing practice will likely produce 85 cents of pre-tax profits. Whereas a new dollar of profits in a second practice will likely go 100% to cover overhead or debt. It is true that you might be building equity in the second practice as you pay down the loan. However, often the second practice runs a negative cash flow and requires capital or debt from your first practice to cover that deficit. If the second practice is cash flowing to cover its expenses and debt, it’s not like a passive real estate rental property. You will invariably be pulled into the fray, distracting you from earning that extra dollar in your first practice.
Although the siren songs of the multi-practice model will generally lead to a financial shipwreck, I nonetheless believe there is a path to successful multi-practice ownership. I just believe it requires an entirely different knowledge base and skill set from those needed to produce a successful single office. Here are the ingredients as far as I see them:
- A clear business plan (and yes, documented). This business plan will outline specifics on financing, hiring, marketing, group purchasing, and how you will sustain your primary practice. It will include realistic cash-flow projections and a method to measure progress. It will outline your team of consultants and their roles (banker, attorney, accountant, practice management consultant, etc). It will have a plan for each of the stages below in the patient experience pipeline.
- A focus on business systems: For the second practice to run without your daily involvement, it must have a clear set of roles, processes, workflow, and technologies. Collectively, I call these the “system.” Most of the time, dental offices are run by people that may or may not follow a good process. And if they are following a good process, that process is only contained in their head. If that team member leaves, so does the effectiveness of that process. An effective system removes the dependency on the individual and allows for continuity of qualify work among and between team members.
- A pathway to associate ownership. To find the dream associate, you have to offer them a clear path of financial reward for going beyond the clinical. In other industries, that is done through various forms of stock options. In dental, that is direct ownership of the practice. The associate career path needs to be specific, motivating, and provide some level of predictability. Young doctors need the sense of predictable income to cope with the fixed costs of student loans.
- A whole lot of grit. Be ready to roll up your sleeves and apply the elbow grease.
Although it’s not an impossibility, for most dentists the most probable path to financial independence is to stay focused on their primary practice. If your primary practice is structurally limited by space, geography, or some other restrictive factor, it may be that you need to sell your practice and find another one that has the capacity you are looking for. If your current practice is successful, and your pre-tax income is $400K or more, you may want to think twice about disrupting a good thing. If your practice is struggling, and your pre-tax take home income is $200K or less, here are some ideas that might help:
- Marketing: Actively market. All the time. If your marketing expense is zero, or if you’ve hired a marketing company but don’t meet with them monthly, you’re not marketing effectively. You should aggressively work to get at a minimum of 100 displayed five-star yelp reviews (particularly those of you in CA). Also, getting Google reviews will help your SEO. You, your staff, and/or your spouse should be posting a short blog article every couple weeks on your website. Be sure your site is indexed effectively for SEO, and consider doing pay per clicks. Create a video page on your home page that profiles you as an owner. This helps prospective patients feel comfortable with you and confident to pick up the phone and schedule an appointment. Track where new patients are coming from to truly measure your “return on marketing dollar.”
- Culture: Every morning you walk into your office you’re entering the playing field. The game face needs to be on. You’re the leader of your office, whether that’s one staff or twenty. Your team’s attitude and demeanor will reflect yours. You should display only optimism, energy, and focus. Compliment and motivate your staff. Where change is needed, be specific, set goals, give deadlines, and follow up. Meet frequently with your team to review goals, reiterate your mission statement and value system, and motivate your team. Hold periodic out-of-office activities to create camaraderie.
- Goals: Take time to develop practice and individual staff goals. Include your team in forming those goals. Make sure they are specific, measurable, attainable, relevant, and time-bound (SMART). Then give the team vision and coaching.
- Patients: Call your patients personally. Take 10 minutes at the end of each day to contact a few of your patients that have received larger treatment plans. This is particularly important if you’re building a more fee-for-service practice. A perceived sense of caring and quality diminishes the price differential in the patient’s mind. Don’t hesitate to request referrals. That doesn’t make you a salesperson. It makes you a good business person.
I continue to believe that the dental industry can be a rewarding career, both clinically and financially. And I believe the tried-and-true path is effective single-office ownership. Although there are exceptions, my experience is that the grass is not greener on the other side where the siren sings the melodies of the multiple office mantra.
I requested another of our advisors to weigh in on this subject. You can read his article in this newsletter. It’s titled:
I hope you enjoy the articles our team has put together in this newsletter! -Wes Read