It's an exciting time for health-care practitioners, who continue to have a positive outlook and anticipate practice growth. According to TD Bank's recent survey of 360 medical practitioners, nearly three-quarters expect practice revenue to rise over the next two years, leaving medical professionals, particularly dentists, eager to implement the next strategic step in their business plans.
Of the dentists surveyed, 84% anticipated purchasing, buying into, merging, or selling their practices soon, with 42% expecting this within the next four years. Despite this desire for growth, the survey found that dentists are more eager than other practitioners to maintain ownership of their businesses rather than be absorbed by large dental service organizations (DSOs).
So, how can dentists balance independence and scaling their businesses for efficiency and income growth?
Understanding group practices
For dentists seeking to accelerate growth without handing over practice ownership, TD Bank has seen a growing trend toward group dental practices. Group practices are the fastest growing dental subsegment due to their economies of scale, greater cash flow, ability to survive a downturn, availability of cash to invest in technology, and flexibility to cater to patient needs. These practices combine single location and corporate ownership strengths and are designed to better compete with the corporate DSO model.
One motivation to build group practices is to become more competitive in the marketplace. By building privately owned and operated group practices, dentists maintain practice ownership (or partnership) while bolstering revenue over time. The strength of a group practice's earnings could eventually allow owners or partners to sell their practice group to a corporate franchise for a strong profit.
Benefits of group practices
- Scalability: Group practices offer scalability that is typically not available to ownership of one to three practices. It is advised that the ownership and management team have a proven track record owning multiple locations before moving to a fully group model, so that they feel comfortable leading large-scale organizations.
- Reduced costs: When asked for the top reason they were eager to purchase, buy into, merge, or sell their practice, 33% of dentists noted they would like to expand their patient base. Twenty percent noted it is too expensive to run a solo practice.
- Resources: When forming a group practice, additional resources become available to offer longer hours and specialty services, which provides patients with a true convenience model.
Individual practice owners are often on the younger side and are entering the industry at a different time. They see increased interest in group practices and want to capitalize on this growth. Simultaneously, large groups of dentists want to retire and sell their businesses.
Of the medical groups surveyed, dentists are most likely to sell their practices through a transition specialist or practice broker when they retire. Of the 97% of dentists who plan to sell their practices, the majority (63%) believe there will be barriers to maximizing sale price. These barriers include a limited buyer pool (29%), buyer financing (26%), and low appraised value (21%).
If more senior dentists want to sell their practices, group practices with a strong patient base and operating model are attractive to potential buyers. Sellers of profitable group practices can potentially receive a higher investment value for their practices versus the traditional fair market value. This is due to current market dynamics of private equity investors purchasing dental practices, maximizing the sale price as compared to an individual practice.
Group practice considerations
While group practice expansion is a solid investment, there are other important considerations.
- Practice expansion and relocations: If your current practice(s) is growing rapidly and you need more operatories, new technology, and additional specialty procedures, then investing to expand your current business model might be the right path versus acquiring new practice locations.
- Business processes: By increasing the number of locations, dentists must take on more of a business and leadership role or elevate team members to do so.
- Centralized management team: The group will need a proven management team to handle processes and systems, including potentially hiring an industry expert CFO, COO, and clinical director. This team will advise when operations should be centralized and how the group will benefit from economies of scale.
When looking to grow into a group model, clinicians should consider the following:
- Are you a business leader and CEO? Or is there someone who can be elevated into an operational COO role?
- Do you have the capabilities to establish the processes and systems needed for a larger, more complex business model (human resources management, training and development, financial tracking, KPIs for each location, etc.)?
- Is your business model scalable, repeatable, and profitable across eight, 10, or 20 practices?
- Are you qualified to receive bank financing for $5M to $20M to enable you to continue to acquire and build new locations?
For dentists operating as business owners, there are factors to consider before deciding if a group practice is the right fit. Therefore, it’s imperative to meet with industry expert advisors and a specialty health-care banker who is comfortable lending to group practices that need more than $5M to develop a sound growth strategy.
Dan Croft is the head of Healthcare Practice Solutions Group, TD Bank, overseeing the bank's practice finance segment, which specializes in working with dentists, optometrists, veterinarians, and physicians. He has 20 years of experience working with medical, pharmaceutical, and CPA businesses. Croft holds a bachelor's degree from the College of the Holy Cross, and he’s based in Cherry Hill, N.J.