This pandemic assault on us all has turned our world as we’ve known it into a new reality. The anxiety levels can be felt, seen, and measured. The current economic climate further amplifies this undercurrent of constant assault: climbing interest rates, increased inflation, the cost of housing, and wars.
In this time of enormous change, it can be difficult to believe some things are still going strong and worth investing in. I’m speaking of purchasing a dental practice, a business that operates in the healthcare industry, an undeniable service in need by everyone. Services in this market are less likely to be impacted by economic fluctuations than in other markets. You may, however, be asking yourself what the market pressure this year will have on practice profitability. It may cause short-term reassessments and conservative choices in the transactional market; hence, owners must be vigilant in the next year or two by staying up to date with expenses and revenues.
To thwart the impact of the current climate on your practice and get through it with as little downward effect, please read and put into action the following list of recommendations. They are significant contributors that define the profitability and difference between an excellent and a mediocre practice, especially in buying and selling.
Make sure to review your premise lease and negotiate existing terms at the time of renewal. Do your homework on the current rent for adjacent commercial real estate spaces. Landlords can sometimes alter their rental rate due to economic times. For example, one of my clients paid over $52/sq. ft. Upon marketing the practice for sale, buyers commented that the rent was too high. After some fact-finding revealed that some tenants might be paying less, we approached the landlord and requested a review of the rent rate. The landlord confirmed that the rent rate had been adjusted, and rent per square foot was currently at $30 gross per square foot.
When reviewing your lease, try to negotiate out relocation/demolition clauses and have your name removed as a guarantor post-sale. Make sure you have another ten years to your lease from when you sell. The lending institution will require this to provide the purchaser’s financing.
Consider hiring an expert to evaluate the quality of your lease well ahead of the time your lease is up for renewal. A purchaser will value this enormously, and you may be able to reduce your rent as a fixed expense.
These people are the heart of your practice. This may be a shift in what you’ve believed until now: that the patient is the heart of a dental practice. Your patients are your clients; your team is the catalyst that defines your patients’ experience. Please take the opportunity of bringing your employees on the journey of owning a practice by being human, patient, and compassionate toward them, learning about them, and asking for their input and advice. Stay involved in their respective job responsibilities so that you’re current and can support them productively. After all, you’re the one who holds the decision of power in creating a thriving, rewarding work environment for them.
Since the pandemic, I’ve noticed that team loyalty and trust have defined the degree of struggle dental practice owners have undergone. Those with a high degree of these qualities had less pressure from employees with wage increases and departures. The workforce backlash from this pandemic has proven it’s worth investing in your team without question.
The key to having a great team also happens at the hiring stage. Be selective and be intentional, not only about the candidate but about your approach. Engage an HR firm that has a proven track record for hiring successfully. Look for candidates with the attitude that will fit with your existing team, who are positive, solution-driven, and effective in how they work, even if they don’t have professional experience in your line of work; this can be taught.
The longevity of employment will come to the fore when assessing the purchase of a practice. Longevity to a purchaser is a sign of stability, loyalty, and a healthy relationship between the owner and the staff member. However, it can also bring up concerns for some buyers about members who may be retiring soon. Severance pay may also come up; under labour law, it can be costly for a purchaser who wishes to terminate any long-standing employees after the sale.
This team is a crucial element in assessing the degree of attractiveness of a practice. Hygiene should generate at least 35% of the practice’s overall revenues. A team of at least two hygienists per dentist should be the minimum. Conversely, too many hygienists for one dentist can be daunting and overtaxing for a purchaser looking to take over.
A practice with no hygienist means the dentist is completing these treatments. This may cause some concern for a buyer who will certainly look to hire a hygienist to be more productive but wonder how patients will react to receiving dental care from a hygienist instead of the dentist. Consider adding a hygienist to your team.
Hygiene with a short wait time for an appointment but a dentist with a long wait time can be a sign of missed patient treatments, a shortage of dentists, or missed recall appointments. Consider hiring an associate, increasing your work hours, or overhauling your recall appointment system completely. This will improve your bottom line.
I fully understand and appreciate that dentists went to university to learn how to care for and treat patients’ oral health, not how to manage people and a business. It’s inevitable, though, that the latter comes with owning a practice. Therefore, when we evaluate a practice, we assess the management systems in place. Such systems ensure an owner knows on a timely and continual basis the degree of health of their business and remedies problem areas when required. It’s a must, especially in this climate of climbing costs of operations and more savvy purchasers who ask educated questions and look for detailed answers.
If you don’t like managing your practice, hire those who can put the systems in place and guide you when there’s a need for a course correction. Some of you may sincerely desire to take on this responsibility and follow courses to develop your skills. However, despite valiant efforts, most fail and give up obtaining and reviewing the reports and data in a continued, routine fashion, and acting. Because this information is too imperative to the performance of practice over time, especially at the time of appraisal and sale, owners cannot afford to overlook this critical area of their practice.
A healthy number living or working near the practice is an advantage. Those who live further out may revisit their decision to continue frequenting the practice in the event of a sale. Consider recruiting new patients closer to your practice.
Age – a high percentage in the elderly group may not be as attractive since they have a shorter life span with the practice; a children-centric practice is also not typically as appealing. Expand your services to reach more readily the 18 to 60 patient bases.
A high percentage of referrals from existing patients indicated a healthy, well-liked, and frequented practice. Because patient loyalty is higher, there is a greater desire to remain faithful to the practice in the event of a sale, and purchasers appreciate this. Therefore, consider developing your relationship and services with existing patients that much more.
Be leery of rolling out heavy marketing campaigns that bring in many new patients. The true measure of a successful new patient recruitment effort is their loyalty to the practice over time. For example, some practices that discount first-time hygiene appointments may inherit “one-visit” patients who shop around and don’t return over time. That’s an expensive marketing effort.
When the time comes to sell, the continuity of goodwill is evaluated by the purchaser, including maintaining the practice name. Practices under the owner’s name have garnered a long-standing reputation, visibility, and ratings online. For this reason, buyers may ask the vendor to allow them to use the latter’s name post-sale. However, from experience, my clients have sometimes been uncomfortable with the continued use of their names, especially when they complete their transition period. To avoid this, adopt a generic practice name several years before selling.
EBITDA (earnings before interest, taxes, depreciation and amortization)
This term has permeated the mainstream dental lingo today regarding buying and selling. This acronym represents revenues fewer expenses before deducting any interest, taxes, and depreciation, and an indication of the degree of the practice’s liquidity before paying the debt to buy the practice. DSOs use this measure to establish their offer price, as do accountants advising on value. Know that the higher the EBITDA, the greater the price and buyer pool.
Evidently, expenses play a critical role in establishing the EBITDA. Indeed, when preparing the appraisal of the practice, ROI Corporation assesses, among other criteria, each expense over the last three years. Therefore, our appraisers need an understanding of numbers from the owner that have significant fluctuations across these years to evaluate whether any one expense needs adjustment for more accurate reporting.
For these reasons, owners should remain vigilant in obtaining and reviewing their income statements and in the continued oversight of the practice’s financial performance. Ensure to get and understand this data at the latest quarterly to know when and what expenses to minimize and what revenues to maximize. Accountants versed in the industry will have tools to recommend and help with this, so please hire the talent to ensure this follow-through.
At ROI Corporation, we invest time with our clients to assess the areas that can be improved, sometimes years before they’re ready to sell. This offers them the time to put remedies in place for a more attractive practice for its eventual sale and purchasers. If not with us, please get in touch with a reputable firm with experience to guide you in this process.
About the Author
Pascale Guillon is a native of Montreal where she worked with dentists and graduated with a business degree from Concordia university. Her family life took her to London, England, where she obtained her Financial Planning accreditation and became a successful financial planner then onto Calgary and California where she completed an IT program. Upon returning to Montreal in 2001, Pascale was passionate about returning to the world of dentistry and noticed an underserved need. She joined ROI Corporation around 9 years ago to better help dentists in achieving their career goals with success and dignity.