It’s All About the Economics

Understanding the dollars and cents behind dental practice transitions

Hy Smith, MBA

The field of dentistry is in a constant state of transition. New technologies are ever emerging, leading to better and more reliable procedures and products. Practicing dentists must always strive to keep up with the times.

Beyond the field as a whole, each individual dental office is subject to its own transitions. Dentists are building new practices, adding new partners and associates, and eventually leaving their businesses behind. In this context, the steps of a dental practice transition may be less clear-cut than what is required to adopt new technologies. This article will outline how to make a smooth dental office transition, and what clinicians can expect during this often-tumultuous time.

Essential Questions

When the author is working with a dental office in a state of transition, the quintessential questions are: What is your objective? Why do you want to do this? What is your goal? Other pertinent information includes understanding the opportunities and hurdles facing the dentist and how these factors will affect his or her transitional objective. Finally, there is perhaps the most important question: What are the economics of pursuing this objective? Once these questions are answered, then the author and the dentist can work together to set goals regarding timeframes and execution.

Not understanding the economics of a transition is one of the biggest mistakes made in the dental industry. Often dentists begin executing a transition without understanding why they are bringing on an associate or partner or without fully contemplating the purchase or sale of a practice. Not knowing the economics of a transition can have a catastrophic effect on the final outcome.

When considering a transition, clinicians should also keep tabs on all the factors that can affect it. These include such questions as: Is my goal to make more money, and will this plan do so? Will I be afforded more time off, and what will that cost? Is my facility able to accomplish my objective and if not, what will it cost to upgrade? How long will it take to recover my investment? Do I have enough active patients or new patients? Are qualified associates and partners available? How much additional staff will I need and what will their salaries cost? Can I slow down and still take home the same amount of money?

All of these questions are germane to understanding the economics, which, after defining your objective, requires a transition analysis. A transition analysis provides clinicians with a great deal of information beyond “How much money am I making?” It will evaluate your procedures, your fee schedule, your expenses, your total number of patients, your new patients, your reduced fee insurance, your facility, and your staff. Every one of these items needs to be considered to determine what your objective is going to cost and what it will produce, whether in monetary rewards, work-related benefits, patient benefits, or personal benefits.

A major element of the transition analysis is the cash flow analysis, which evaluates your income and expenses and makes adjustments for national and/or local range norms, as well as identifying and adjusting for owners’ compensation and personal expenses. Cash flow analysis helps to determine actual practice net income and operating expenses, and ultimately the range in value of the practice. Without this economic information, it is impossible to make an informed decision about any transition option.

Avoiding Uninformed Decision Making

The reasons for considering new options within the practice are varied. Perhaps the clinician is considering retirement, or there are too many patients for the practice to handle. It could also be that the current associates want more time off, or have the desire to pursue a specific clinical sub-specialty. Decisions made without analyzing the practice’s needs can have unintended negative consequences. Each situation is different, however, and clinicians should vary their approach to decision-making accordingly.

Hiring a New Associate

It is not uncommon for a dentist to hire a new associate without understanding that the facility is too small, the new patient flow is too slow, or the type of dentistry practiced at their office is not compatible with the training or experience of the associate. Worse yet are the justifications a dentist makes when going through with a hasty decision, such as, “I could expand hours; I could reduce my schedule; or I could add treatment rooms.”

If you are considering an associate, what is the reason? Do you want more time off, have too many patients, wish to work with a trusted colleague, or want to concentrate on certain procedures? Whatever your reason, make sure it’s the right one—and that you hire the right person.

Retirement

Another situation that requires careful financial planning and sound economic understanding is retirement. After determining if the time is right to retire, review the market, timeline, and prospects in your area. Ask yourself: What is the availability of qualified purchasers for my practice? How much can I sell it for and what will I take home after commissions, expenses, and taxes? How long will it take? Will I be required to stay full or part time after the sale? If I own the building, should I keep it or sell it with the practice? Of all questions surrounding retirement, perhaps the most important question is, What is my practice worth? Until all of these questions are answered, and the answers are to your satisfaction, you should not make moves toward retirement.

Selling to a Management Company

Corporate management companies are an option for clinicians looking to make a big change in their practices. There are different management company models out there, but all are oriented to operating multiple dental practices using economies of scale, central management, and increased productivity to return a bigger profit.

In many cases, management companies are looking for the larger practices and requiring the selling dentist to remain in the practice for 2 to 5 years after the sale. They expect a return on investment of at least 18% to 20% and achieve that partly by reducing compensation to the providing dentists. If you presently have a 60% operating overhead, this means that you are taking home 40% of the gross income in your practice. Most of the management companies will pay around 25% of your collections. You will not be paid for any of the hygiene revenue except for the exam. You may get a large lump sum when you sell your practice, but will be working for significantly less than you made as an owner. Some offer to share net income, but after all of the internal costs, training expenses, insurance, and benefits paid, there is often little or actual net income to share. Management companies will also hold back as much as 25% of the purchase price to ensure your compliance with the work-back agreement.

The benefits of selling to a management company include reducing your business-related responsibilities and allowing the company to oversee the day-to-day management, marketing, staffing, and all of the accounting functions of your practice, such as collections, accounts receivable, billing, and ordering and maintaining supplies and equipment. The management responsibilities of running a dental office have always been the main complaint of dentists. In addition, depending on the size of your practice, management corporations may be the best, or sometimes only, prospective purchasers.

Once again, understanding the economics of the proposed offer is critical to making an informed decision about whether to sell to a management company or not.

Transitioning the Right Way

All of these considerations are reviewed and evaluated by the transition analysis. Often dentists seek an appraisal of the practice, which would provide the answers to some of the above questions, but perhaps not all. Most appraisals include a cash flow analysis, but often a transitions analysis alone, which is significantly less expensive than an appraisal, can answer the questions required to make an informed decision about your desired objective. An appraisal still may be necessary or desired, but at least from an economics point of view, you will have tools to work with during your initial decision-making process. It is not uncommon for dentists to totally reverse their thinking once they understand the economics.

So, to simplify the process, you first need to know what it is you would like to do and why you would like to do it first. Then, is it doable and what are the economics of doing it? Once you have successfully determined that the goal is achievable and cost effective, then consider is the time frame and, finally, the execution. Without following these steps, the cart may end up in front of the horse, followed by disappointment and failure.

About the Author

Hy Smith, MBA, has been consulting and brokering practices since 1974. He has presented many courses on practice management and practice transitions. He is a former president of ADS (formerly American Dental Sales) and is currently the director for exit and transition strategy for Pride Institute.