Evaluating the purchase of a competitor's practice and merging it into your own
In a time when competition in the dental industry is at an all-time high, many practices are now operating at only 70% to 80% of optimal capacity.
Wade Coleman, JD
John K. McGill, JD, MBA, CPA
In a time when competition in the dental industry is at an all-time high, many practices are now operating at only 70% to 80% of optimal capacity. For the average doctor, this translates to $100,000 to $200,000 of lost profits annually due to reduced busyness. While many doctors have attacked their busyness problems by increasing external marketing expenses or increasing managed care, there's a more cost-effective strategy.
Purchasing a nearby practice and merging it into your existing location in order to build practice volume to a desired level as quickly as possible can be an immediately profitable decision. Since fixed overhead costs such as rent, equipment, utilities, and insurance have already been covered, incremental overhead such as supplies, lab, and actual labor usually run only 30% to 40% of the additional volume purchased.
As a result, the buying doctor can bring 60% to 70% of the additional volume to the bottom line as added profit before taking into account annual debt service costs. Since annual debt service on the practice purchased typically runs no more than 10% to 15% of the incremental gross income (and typically only for seven years), a purchasing doctor can easily generate a net profit of 45% to 60% on the additional volume purchased, even after paying the debt service.
In one recent transaction, a doctor had a practice grossing $500,000 in production and struggled to add to his patient base with traditional marketing channels. To increase production, the doctor located a $300,000-grossing practice in the area and bought it. Although he only increased production by 60%, his practice profits jumped to $380,000 in the year following the purchase, up from the $200,000 he made previously. Even after debt service payments, his profit still increased by over $145,000, representing a 73% increase in the practice profit in the very first year. This was a return of much more than 50% on the $195,000 purchase price.
The challenge to implementing this strategy is to avoid alienation of the patient base and capture as much of the goodwill purchased as possible. This means focusing on maximum patient transferability. To accomplish this, the selling doctor should send a letter to his patients announcing the transaction and extolling the virtues of the new doctor (you). Moreover, consideration should be given to the employment of the selling doctor on a part-time basis in a role reversal for a limited time (six to 12 months) after closing in order to maximize patient retention.
Finally, if additional labor is needed, consider hiring the seller's front desk and/or hygienist on a part-time or full-time basis after closing to help maintain relationships with patients and to maintain the patient base. Also, review the roster of insurances accepted and managed-care plans participated in to make sure they match up. Doctors who follow these guidelines typically maintain 90% or more of the patient base in a transition.
Take advantage of this opportunity by contacting local dental supply company reps, practice brokers, and local dental society officers to determine names of potential sellers. In addition, send a mailing to all competing doctors in your market area to determine who may be interested in selling out. Don't make the mistake of "cherry picking" who you send the letter to. By doing this, doctors often overlook legitimate prospects or colleagues with whom they may not be familiar.
It is common for doctors to dramatically boost practice profits through implementing this strategy. If your practice has slowed and you have excess capacity, consider this aggressive and proactive approach to increasing practice profits on a cost-effective basis.
Wade Coleman, JD, provides transition planning through Roger K. Hill & Company Inc.
John McGill, JD, MBA, CPA, provides tax and business planning exclusively for the dental profession and publishes the McGill Advisory newsletter through John K. McGill & Company Inc. Both are members of the McGill & Hill Group LLC, the one-stop resource for tax/business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com.