Winning practice-transition strategies

Nov. 1, 1999
Demand for dental services continues to increase as a result of several factors. General population increases, the rapidly growing geriatric population, the expanding scope of dental procedures, the increased desire for cosmetic procedures, and the increasing market penetration of patients previously without a dentist are positive factors. At the same time, dental school closings, reductions in class sizes, and the surging number of female dentists who choose to retire or work only part-time are

Maximize the value of your practice by utilizing these seven strategies.

Roger K. Hill

Demand for dental services continues to increase as a result of several factors. General population increases, the rapidly growing geriatric population, the expanding scope of dental procedures, the increased desire for cosmetic procedures, and the increasing market penetration of patients previously without a dentist are positive factors. At the same time, dental school closings, reductions in class sizes, and the surging number of female dentists who choose to retire or work only part-time are creating a significant decline in the effective level of competition. That?s making it easier to build a high-volume practice these days.

However, these same factors also are beginning to affect the value of dental practices as well as the transition strategies dentists must use to obtain the maximum value for their practices. Based on the current dental-practice environment and my 20 years of experience in practice transitions, I offer the following strategies:

1. Buy out a competitor

Doctors looking to increase practice volume often choose the wrong approach. Enrolling or continuing to participate in a managed-care plan with average fee discounts of 20-30 percent is the costliest approach. Purchasing a nearby competitor?s practice and merging it into the doctor?s existing office location is easily the most cost-effective approach. Since fixed overhead costs (facility, equipment, etc.) have already been covered, incremental overhead (lab, supplies, incremental labor, etc.) on the additional volume purchased usually runs only 30-40 percent of the additional volume purchased, bringing 60-70 percent to the bottom line as additional profit before debt service. Since the annual debt service required on the purchased practice typically runs no more than 10-15 percent of the incremental gross income for the five- to seven-year buy-out period, the purchasing doctor can easily general a net profit of 45-60 percent after debt service.

Previously, I advised a client to purchase the patient records of a nearby retiring doctor who was ready to close down his small general practice, because he was unable to find a buyer on his own. The buying doctor negotiated the purchase of the records, as well as a jointly approved letter of introduction and recommendation to existing patients, for a total price of $5,000. Within two years, the buying doctor ended up selling his entire practice for $100,000 more than its original appraisal, due to the increase in practice collections and profitability resulting from this late-term practice purchase.

2. Purchasing a second practice

While practice mergers can work well when the acquiring practice is located nearby, in many situations the potential practice purchase is located too far away for that strategy to be effective. In this situation, entrepreneurial doctors should purchase poorly managed practices that have good growth potential. Also, purchasing practices for sale in distress situations and turning them around through implementing aggressive marketing and management strategies can result in huge profits during the holding period.

3. Bringing in an associate

There is a surge in the number of doctors reporting that they have maxed out their productive capacity and are unable to meet the growing demand for their services. Raising fees, moving to a new facility, or bringing in a practice-management consultant in order to increase efficiency, improve scheduling, and expand operatory capacity are steps that can be taken to deal with this problem. If these strategies fail to solve the problem, consider employing an associate to handle the growing patient demand.

While associate relationships generally offer minimal profit during the short term (1-2 years), increased profits are possible in longer-term relationships. Maximizing the profit potential from this relationship requires maintaining full ownership for the longest period possible. That?s why doctors should seek out part-time associates, such as retired doctors, or full-time associates who do not wish to become involved in ownership. In several situations, I have seen doctors increase practice volume by 50-100 percent during a two- to five-year relationship by having associates check hygiene, perform lower-level procedures, or procedures previously referred out. At the very least, associates simply free up more time for the senior doctor.

4. Long-term partnership

Doctors should not turn their backs on potentially lucrative practice-growth opportunities merely because they have located an outstanding associate who desires a situation with long-term ownership potential. In many situations, the potential growth in annual profits and future practice equity can make bringing in a partner a win-win situation. In larger practices, selling off a fractional interest in the practice to two or more buyers may be the only way to receive the maximum value for the practice.

5. Sell off a second practice

Doctors wishing to slow down have several practice-transition options to consider before they sell out altogether. I have helped several successful doctors sell off a second practice location in order to realize its true intangible value.

In one situation, the selling doctor merely refocused his efforts on his remaining practice location and built it back to the production and collection levels previously achieved by both practices in less than two years. This doctor used the after-tax sale proceeds to create a second retirement fund to assure his financial security, while his annual income stream was unaffected by the sale of the second location.

6. OSlow-downO merger

If several doctors are approaching retirement age, the doctors should consider a practice merger, or a space-sharing arrangement in one location. In one situation, two competing doctors each wished to reduce clinical practice time commitment to no more than two or three days a week. Doing so independently, using their respective offices, would have resulted in excessive facility, equipment, and staff labor costs.

Rather, the two doctors agreed to merge their practices into a single location and operate two-and-a-half days per week each, or five days altogether. They achieved their goals of substantially reducing their clinical workload and providing coverage for more time off.

7. Maximizing sale proceeds

Even in this environment of stable to declining practice-sale prices, two strategies can optimize the doctor?s total return from a transaction. One strategy is to bring in an associate under a contractual arrangement leading to the ultimate sale to the associate, but with a two-to-five-year closing date. By delaying the closing date, the selling doctor is able to maintain ownership and related practice profits for a longer time, minimizing the total value received from the transaction.

A second strategy is to use a post-closing associateship for a two-to-five-year period following the date of the sale. This strategy is limited to situations in which the buying doctor needs the seller?s services in order to maintain or build practice volume. With many sellers receiving compensation of $100,000 or more annually for their services, it?s an ideal way to derive further income from the transaction.

While there?s little doubt that the current dental practice environment encourages doctors to maximize the value they receive from operating the practice on an annual basis, doctors should not overlook their practices? transition value as well. Through utilizing the strategies discussed here, doctors can maximize the value they receive for their practices while achieving their personal and practice-career goals.