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Recently, I spoke about using targeted reinvestment to grow your practice. While specifically addressing dental entrepreneurs, the principles I covered could be used for any business. I’d like to continue down that path to answer a question I received from one of our listeners. The question is this, “What are the pros and cons of buying a practice to grow my current dental practice?” Now, this question is framed to speak directly to dental entrepreneurs, but if that’s not you, don’t go anywhere! This information can still be applied to many different industries.
Follow Along With The Financially Simple Podcast!
This week on The Financially Simple Podcast:
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(1:13) Laying the groundwork/Who asks this type of question?
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(2:26) Why you should think about buying another practice
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(7:06) Calculating market share
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(7:33) Why you shouldn’t consider buying another practice
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(10:17) Avoiding the pitfalls
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(12:39) A real-life example
Who Typically Asks This Type of Question?
Usually, when I receive this type of question, the practice owner has an excess of cash. Similarly, they’re often experiencing market saturation. Additional marketing won’t help because they already have more patients than they can handle. Although it may seem like a good problem to have, this can really put a strain on their business. Without being able to increase capacity, you could face problems such as:
- Decreased Efficiencies
- Strained Resources
- Higher Costs (due to inefficiency, overtime, outsourcing, etc.)
You see, operating at maximum capacity will almost always inhibit growth. Your capacity issues often have a compounding effect. In addition to the problems I’ve already listed, they can cause you to outgrow the space you’re currently occupying. In turn, this leads to large capital expenses either through improvements, expansions, or even purchasing a new building.
As a business owner, it can feel like your back’s against the wall when you’re in this position. So, I often receive this question from people in this very position. Whether they realize it or not, they’re stuck in the turmoil phase of the business cycle. Perhaps this is where you find yourself today. If so, you may be wondering if buying another practice is the right move. Let’s look at some of the pros and cons, shall we?
Why You Should Buy Another Dental Practice
One of the first—and most obvious—advantages of buying another dental practice is the sudden influx of new patients to your existing patient base. The average dental practice experiences about 17% patient attrition each year. Therefore, a practice with 1,600 patients would need to add 30 – 50 new patients per month to maintain positive growth.
With the average Patient Acquisition Cost (PAC) sitting around $300, you’re looking at marketing costs between $9,000 and $15,000 per month ($300 x 30 or 50). Therefore, receiving a dental practice’s client base could be a substantial benefit without the usual PAC.
Additionally, if the practice you’re acquiring has state-of-the-art equipment and best-in-class technologies, acquiring them could be a strategic move on your part. In theory, you could immediately upgrade your own equipment and technology at significant cost savings.
Diversified Revenue Streams & Expanding Market Share
Similarly, if the practice offers specialized services—or even specific services that you don’t currently offer—you could use the acquisition to diversify your revenue streams and expand patient referrals.
Still yet, buying another dental practice could help you expand your market share. Acquiring the practice of a competitor simultaneously removes them from the marketplace while potentially helping you to achieve greater scale in your operations and improved profitability. With this in mind, it may be useful to understand how to calculate market share. To determine your share of the market, follow this simple formula:
Market Share = Total Practice Sales / Total Industry Sales
Knowing where you and your competitors sit within your market can enable you to make informed decisions about a strategic acquisition to grow your practice.
Why You Shouldn’t Buy Another Practice
Integrating two different practices can be challenging, particularly when it comes to merging cultures, processes, and systems. In fact, Harvard Business Review reports that “between 70 and 90 percent of acquisitions fail. Most explanations for this depressing number emphasize problems with integrating the two parties involved.”
Because you currently have no business debt, buying a dental practice means taking on a significant amount of financial risk in the form of debt. The average price of a dental practice is roughly 72% of its gross receipts. Therefore, if a practice billed $2MM in a given year, the average suggests you would pay $1.4MM for the practice. However, this isn’t an exact science. Many other factors such as equipment, active patients, talent, and location will also determine the valuation of the practice you’re thinking of buying. Even at the base average of 72 percent of gross receipts, you’re staring at a considerable financial risk.
Client and Staff Attrition
Another common challenge you could encounter is staffing issues. As you begin the integration process, you may find redundancies within your teams, or realize that some staff members aren’t equipped to be immediately plugged into a new role. Similarly, you may find that some of your newly acquired team members just aren’t a good cultural fit. Surprising as it may be, you could also discover that team members you’ve known and trusted for years begin to display problematic behaviors during the transition.
Patient attrition is another common issue when buying another dental practice to facilitate growth. Although typically less than 10%, patient attrition can become a problem if any part of the acquisition and the ensuing transition is mishandled. This could severely cut into one of the primary strategic advantages of acquiring another practice.
Avoiding the Pitfalls
Before you give up on the idea of growing your practice by buying another, there are ways you can mitigate some of the risks involved. Oftentimes, you can avoid many of the common integration issues by being proactive. Developing a comprehensive integration plan and communicating it with your team and all stakeholders is a critical first step.
Your plan should address everything from culture, values, and expectations to plans for integrating technologies. Similarly, you should include a reasonable timeline for the completion of your integration plan.
You might be able to mitigate some of the financial risk involved with taking on significant debt by putting your excess cash flow toward the purchase price. However, this is something you should discuss with your advisory team first. You may find that it’s less risky to use debt than it is to deplete your cash reserves.
Staffing challenges can often be overcome with direct communication and various retention strategies such as career development programs and employee recognition. Remember, your team is an asset. It’s necessary to invest in them if you want the best from them. Your newly acquired team members could also be critical for retaining clients during the transition.
Finally, don’t enter into this process without seriously considering every aspect. You have to be certain that your values and those of the practice you’re interested in purchasing are aligned.
The Best Case Scenario
You’ve probably heard the old adage, “Location, location, location,” before. And it’s true… you must consider location, relative to your home practice. Is it close enough that clients and staff can easily travel between them? Is it far enough away that the two offices won’t cannibalize their respective client bases? Do they serve a similar market? The answers to these questions could determine your future.
I had a client a few years ago that went through this very scenario. He began purchasing practices in the townships all around his original office. Because of his strategic vision and the due diligence he followed with each acquisition, he was able to turn his original practice into the central headquarters. This central location served as the primary surgical center for all of the satellite locations.
However, each satellite location also had the ability to perform minor operative procedures. Therefore, they only referred patients to their headquarters if they required major surgery or highly specialized treatments. In this way, he built a scalable practice that grew its value multiplier with every new location, as long as each location was profitable.
Wrapping Up…
So, friends, if you’re thinking of buying another dental practice to prompt value growth, it can be done. However, you must approach the idea with careful consideration, planning, and sound advice from your trusted advisors. Talk through each of your options and weigh the pros and cons before making a potentially life-changing decision.
Look, I know life is hard, and trying to grow your practice is frustrating. But life is good, and buying a practice to grow your benchmark value doesn’t have to be stress-inducing. By taking a methodical and meticulous approach, speaking with your advisors, and conducting thorough due diligence, you could make the decision to buy (or not) a dental practice at least financially simple. Let’s go out and make it a great day!
Growing the value of your business is a lengthy and complicated process that requires intensive planning and a great deal of work. You don’t have to do it alone. Reach out to our team to learn how we could help you grow your practice!
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