Ask a recent dental graduate for a description of the practice he or she would like to purchase, and you will hear, “I want a high-quality crown and bridge practice, in the best area of town, where I can do my kind of work on my type of patients.” For that matter, it would be amazing if a purchaser ever had a different response. Vanity is usually the reason he or she wants to purchase this kind of practice, but is it the best opportunity?
Well, therein lies the question. Just what is an opportunity? It could be that an opportunity is something that satisfies the ego; a practice in the best area of town and meeting high-income patients can provide ego satisfaction. It looks like a beautiful opportunity, but will this “ideal practice” produce the most economic rewards? Is it the best opportunity? Over the years we have received feedback from dentists who acquired “ideal practices.” They told us the ideal practice had an excellent patient recall system, and like a well-oiled machine those patients were accustomed to coming in every six months for cleaning and check-up. The problem was that the former owner had seen those patients every six months, and had completed most or all of the crown and bridge treatment that those patients would ever need.
These patients have a high dental IQ, and they take care of their teeth and gums. If they need dental work, they have it done. By the time the purchaser takes over the practice, he will wait years before finding a substantial need for comprehensive dental services for those patients. In the meantime, the overhead and loan payments have to be paid which produces lean months and even years. It often proves not to be the best opportunity after all.
Now suppose you have the chance to purchase a “maintenance” practice from a dentist who has been trying to slow down and practice fewer days a week for fewer weeks a year. As a result, this dentist is less inclined to do the more time-consuming, comprehensive services unless it is necessary. Even though it may not be what the purchaser perceives as the “ideal practice” in the best part of town, it usually provides the greatest financial opportunity. The gross production of the maintenance practice is lower than that of the “ideal practice.” Remember, patients don’t leave the practice because their dentist did not tell them they needed a six-unit bridge! Indeed, they feel they have been given a reprieve after every office visit. These patients have the same high dental IQ as those in the “ideal practice,” iIt’s just that they have not yet been presented with the need for the work. This practice will cost a lot less to purchase and will be loaded with patients who need a lot of work!
Another way of determining practice value is to look at the current, fee for service patient count for the practice. The ideal, high-end practice will have a high gross income and a small active patient count (example: $700,000 gross income, 80% valuation, $560,000 selling price, 1,000 active patients equals a price of $560 per active patient). A “maintenance” practice will have a high active patient count and a comparatively low gross income (example: $400,000 gross income, 80% valuation, $320,000 selling price, 1,600 active patients equals a price of $200 per active patient). You are paying for a patient base when you buy a dental practice, and the more patients, the better. Remember, patient treatment acceptance reflects the doctor’s communication effort and skill, not patient resistance.
As a result, the sales price for the ideal, high-end practice will reflect an average cost of $560 per active patient; the selling price for a “maintenance” practice will have an average value of $300 or less per active patient. The lower your active patient cost, the better the transaction. The purchase price as a percentage of gross revenues is less an indicator of practice value than is the cost per active patient. Any practice that sells for $300 or less per active patient is a good deal, less than $250 per active patient is a great deal, and less than $200 per active patient is a once in a lifetime opportunity.
The purchaser can implement a recall system and begin presenting more comprehensive services after he/she has acquired the maintenance practice. Patient acceptance of treatment will be just as good as the “ideal practice.” These patients know they need the dental treatment, and if the purchaser presents things correctly, they will accept the treatment. Usually, the average dentist who buys a maintenance practice doubles or triples the gross revenues of that practice the first year, and it never goes back down! The maintenance practice is a “Diamond in the Rough.” It is a no-brainer, you only need to know the general area that the practice is located and the cost per active patient to make a decision to buy or not to buy. As long as the cost per active patient is low, everything else is superfluous.
AFTCO is the oldest and largest practice transition consulting firm in the nation. With our experience and reputation for fairness, we can locate these “Diamond” practices and offer them to our clients. These are tremendous opportunities for the astute practice investor. It’s time to call AFTCO!