Preparing to Go Independent: Buying VS Building

by Alex Zlatin, MaxiDent

1/3 NEW OWNER POCKETBOOK – A Three Part Series

At a conference in January with dental students (CDSC 2020), I saw a remarkable enthusiasm within many to own a clinic. I couldn’t hide my thrill to see driven, focused and passionate professionals excited about the myriad of opportunities coming their way. As I sat through some of the lectures, I found it hard to resist the urge to stand up and tell them that the reality of owning a practice (whether you buy it or build it) is substantially harsher than how it is usually described. Nonetheless, owning a clinic is still considered a milestone achievement – and rightfully so.

Whether you are going to be buying a clinic or building one, you need to be prepared for a variety of challenges. In this article, I’d like to “scratch the surface” of what you should know when you are preparing to build or buy a clinic.

State of the Market
In order to really understand today’s market, you have to take into account the major change factors in the last 10 years and more recently the COVID19 pandemic. Although the number 10 insinuates many changes, one of the major ones is the emergence of DSOs (commonly known as “corporate dentistry” or more officially as Dental Service/Support Organizations). Frankly, it’s not really the DSOs that caused the change. Private Equity (PE) money is the real factor in terms of market conditions change.

Historically, federally regulated financial institutions were able to finance clinic purchases at a risk level that was acceptable when it came to clients who were dentists. The main criteria measured was, like in private banking, debt servicing. With the introduction of PE into the dental industry, debt servicing, although still important, became only one variable of many.

Working within federal regulations means these financial institutions cannot lend money when the risk factors are above the set threshold. What this means is that in many cases, you might not be able to get enough money for the purchase of the clinic you want, compared to the asking price of the seller.

In 2020, we’ve seen more shifts in the market with the COVID-19 pandemic, office closures for safety and now owners deciding to retire or sell rather than updating to the new required standards. We have also seen changes in interest rates and support available to new / returning businesses that may be a new option to leverage in getting access to the funds you require for the clinic you want.

Financial Abilities – Bank Funded VS Corporations
Private equity firms are not federally regulated and, subsequently, do not have government limitations on risky investments. Any corporation, at its core, is about maximizing the return for its shareholders. In the case of dental support/service organizations (DSOs), the goal is to grow the value of the organization through acquiring more clinics. As such, they are able to offer to pay a higher price for a clinic than you would (if you are backed by a bank).

But what does that mean? It means that if you are competing against a corporation in buying a clinic, the odds are stacked against you.

I spoke with Johnny Jaswal (BEng, MBA, JD), a lawyer in Ontario that consults and specializes in dental clinics transactions, and this is part of what he had to say:

“With credit fueling the competition for dental practices, private equity firms are attracted to efficiencies that can be created by consolidating practices. With expertise in finance, banking and implementing sustainable growth strategies, private equity firms can turn practices into revenue-generating machines by making necessary changes and upgrades, that often include costly technology and sophisticated marketing strategies, that are not generally within the grasp of individual dentists.”

The good news is that if you are looking at building a new clinic, you will not face the same competition.

Geographical Location and its Part in the Decision to Build vs Buy
Since the beginning of time, the location of a business has been the most influential parameter towards predicting success or failure.

When it comes to the geographical location, there are 7 factors to consider:

  1. Accessibility/Visibility – the ability for all patients to find your clinic quickly is instrumental in a clinic’s success. The difference between having an office on the street versus an office on the 6th floor of a building is immense. But accessibility is not only for easy access for patients. It is a big contributor to your marketing ability of building a brand that is both visible and noticeable
  2. Security – a dental clinic has valuable assets (computers, medication, patient files and staff belongings). Security aspects of the clinic’s location are often overlooked, but are very important.
  3. Competition – taking a stroll on the same street of the clinic you are looking to buy/build can be extremely revealing. Among other things, it can show you how strong your competition is going to be. Just a stroll is not enough. Conducting a search on your mobile for the word “dentist” will reveal the online footprint of clinics in this area.
  4. Regulation – provinces carry different pros and cons when it comes to owning a dental clinic. Considering out-of-province opportunities should be explored.
  5. Business Rates – each location represents different rates of expenses. As such, it is important to explore what those are and incorporate them into the decision of the location.
  6. Skill Base in the Area – outside of your location, the next big factor of success is your staff. Fortunately, the location of your clinic will determine to an extent the staff that is available for you to choose from. So, choose wisely.
  7. Potential for Growth – through my work with dentists, this is the most overlooked factor when location is being assessed. Dentists rely on Census reports and do not pay much attention to the real information that is available. I recommend speaking to a few neighbouring businesses, at least two realtors, and knocking on at least two homes in the neighbourhood.

Navigating Both Information Overload and Misinformation
The abundance of information at our fingertips is both reassuring and overwhelming. It’s reassuring because we understand that, as long as we have enough battery and internet, we can always find out the information we seek. On the flip side, it is overwhelming because there is so much of the same information and we can’t always judge what is correct.

Let’s do a quick exercise. Go ahead and google “checklist to buy a business” (you’ll thank me later). For pages over pages, Google will offer a wide variety of websites that each gives us their “unique” checklist. Some have five items; others have 57. This gets overwhelming pretty fast. You have not gone to dental school and mastered the art and science of dentistry to become a business-wiz. So, in order to make sure that you are in-the-know about the important things, when it comes to business you have to do two things: benchmark and cross-reference.

Observing and asking established clinic owners is a great way to learn what to do and what to avoid. Cross-referencing multiple websites with the same information is a great way to validate some of the information you can find online through your research. As always, having a vetted professional by your side that will advise you on the various risks and the questions you should be asking is priceless.

About the Author

Alex Zlatin is the CEO of dental practice management software company Maxim Software Systems (MaxiDent). He helps dental professionals take control and reach the next level of success with responsible leadership strategies. He leverages his experience in “Responsible Dental Ownership – Balancing Ethics and Business Through Purpose”, a detailed guide providing practical tools and a unique, proven approach to running a successful practice.;