This is a very interesting and exciting time for dentistry. Bottom-line profitability is at risk as the booming economy throughout the United States, which was one of the longest growth economies we have been able to sustain, falters somewhat.
Why is this so? There can be many answers to this question, but let us address (2) primary ones that the average dental practice faces:
- Increased staff costs; and,
- Rents
Even as the booming economy has slowed there is still low unemployment, which has made available, qualified, experienced staff at a reasonable cost, hard to find in many areas of the country, since dental practices are competing with other businesses that are either expanding or newly developing companies, or employees with unreasonable expectations of salaries after their dot-com experience. As a result, owner doctors have had to look to increased salaries and/or benefits to be competitive in the marketplace with the shortage and competition from other dental practices and small businesses seeking new or replacement staff.
At the same time with the booming economy has come a very active real estate market, where rents in some areas skyrocketed. In the San Francisco Bay Area rents, as well as, real estate prices are beyond your wildest dreams and have not changed significantly with the faltering economy. Many medical/dental buildings are transitioning to other industries for significantly higher rents than the average dental practice can afford. This has left many practices caught in a particularly difficult position of deciding how to absorb the rent increase (in many cases as much as 50% or 68%). Certainly some dentists can trim expenses and/or increase fees moderately, but the majority of the increase is going to dramatically affect the bottom line profitability and come directly out of the Doctor’s net take home pay.
What can be a very relative, practical, and in many cases, simplistic solution to this major problem, may be right in your own “back yard”.
Look around and see if any of your colleagues are retiring, relocating or simply can not afford the increased expenses and are being forced to reconsider their career pattern. Once such a practice is located, think in terms of purchasing this practice in order to merge it into your current practice.
Many times doctors miss such opportunities because they do not see the forest through the trees. They think they are too old to assume new debt, they do not want to take the time to merge an existing practice into theirs, their staff does not want to work harder or the office is not large enough to name a few excuses/reasons. There can be any number of reasons not to do it, but it still make sense, for many dentists, in the long run.
There are several reasons why it could be just the right solution for your practice:
1. Source of Experienced Staff: In many cases, experienced staff is immediately available, including, hygienists (who are becoming a rare commodity). The cost of finding, keeping and/or replacing staff is a very expensive proposition today and this can be a quick, easy, and in most cases, less expensive way to bring staff into your practice. More importantly, they come trained and experienced.
2. Higher Profitability: Many of the fixed costs (rent, insurance, staff salaries, computer expense, etc) are already being paid for through your existing practice. Without these costs and with the addition of new patients, a merger will immediately translate into higher profit margins for you.
For example, if you, in your existing practice, are operating on a 60%/40% expenses to profit ratio, in all likelihood the reverse would be true on the production of the “merged” practice – your expenses would be 40% and your profit would be 60% including debt service. Some of your existing expenses will be a lower percentage simply due to the fact that they are based on higher income with a merger. Adjusted expenses in rent (6%-8%), Insurance (2%) and salaries (15%-20%) added to adjusted net income 35%-38% in an existing practice would reflect a 58%-60% profit margin on the new production. Even when you factor in debt service of 9%-11%, your profit margin is still 49% to 57% verses 35% to 38%. This does not take into account the new production that will, in all likelihood, be generated by the practice you merge into your existing practice.
3. New Patient Inflow: All the patients coming with the “merged” practice are considered new patients and, in most cases, especially if the selling Doctor is retiring you will find that many of the patients have been in a “maintenance” stage for several years and with the right “patient education” and “patient care” the “merged practice” production could double within twelve (12) to fifteen (15) months by providing additional necessary dental treatment on the existing patients. Furthermore, think about the cost to find and cultivate new private pay and insurance patients and you’ll see this is a practical and inexpensive way, if not the most inexpensive way, to expand your practice when you consider the cost of advertising and screening out patients looking for “a deal”.
Now is the time for each of you to reflect on where you want to be in both the near term and long term as it relates to your practice. If you are in a growth mode, or wish to be, consider merging another practice(s) into your existing practice.