In my last essay, I tried to convey my assessment of where the profession of dentistry stands relative to the phase on consolidation we’re in.  I basically stated that consolidation will continue due to the “economies of scale” argument, but that consolidation doesn’t have to be driven exclusively by Private Equity-backed DSOs.

Quite the contrary, actually.

I think we’re at a unique point in time where the top end of the PE-backed DSO market is in a state of flux that will hinder their ability to acquire practices at the prolific rate we’ve seen over the last several years.  I also think there are a lot of soon-to-be sellers who are highly skeptical of PE-backed ventures based on the disillusionment of many of their peers who elected to sell their life’s work to a DSO.  I think that outlook is justifiable.  The phrase “equity roll” doesn’t carry the lofty expectations that it once did.

And therein lies the opportunity…

Self-Assessment & “Going Long”

I concluded the last essay by dissuading those who are “near retirement” from taking any unnecessary risks of taking on more debt to building a business that would arguably be sold before it reached it’s near-full potential.  If you’re 55 or 60 and are planning to retire in around five years, then simplify – don’t complicate – your coming years.

If you’re “mid-career” or younger, my advice is different.  Dramatically different.

You have a lot of time on your side, so you should “play the long game” without putting undue pressure on yourself with too short of a term perspective.  However, before you just go off and tell yourself you’re “in it to win it,” you need to assess whether or not you yourself are truly prepared to lead this emerging venture.

Here’s a list of mindsets and skillsets to work on that basically build off of the “10 Key Questions” I posed in the last essay:

• Skillset: have you invested in yourself to the degree that you can confidently say that you’re a “Master of Your Craft?” You’re going to be the de facto Chief Clinical Officer of your group for quite a while, so if you cannot truly evaluate the clinical abilities of your associates from a comprehensive perspective, then your business is going to underperform in THE ONE KEY AREA that makes or breaks a group practice.   If you have achieved mastery, then build a clinical skill development program off of your own journey and implement it with accountability.
• Skillset: after you feel confident in your own Clinical Skill Development, then it’s time to seek Professional Development. YES, this is totally self-serving because it’s what I do in my program, but building a group practice means you can no longer “out-work” your problems.  You’re going to have to create greater Clinical and Operational results through others – and that’s a leadership skill that they didn’t teach you in Dental School.  To make matters worse, you’ve been at the top of your company hierarchy for a while, so you have no one above you to model your behavior after.  At Patterson, I could model behavior and learn from those above me; you can’t, so you need to “learn leadership.”
• Mindset: your approach to your business has to evolve through several ceilings of complexity from “a Clinician who owns a Practice” to “an Executive who leads a Group Dental Practice” to “an Entrepreneur who owns a Business.” None of these are equivalent, so simply making it up as you go along is fraught with danger and only guarantees that you’ll make the same mistakes that your predecessors did.
• Mindset: you are the biggest risk in your practice, so how do you build a business based on others? More specifically, can you make an impact in the operations of the business?  In the patient experience?  In the clinical efficiency and conversion rate?  And in how the business is viewed by the public?  If you choose to build your own group practice, the chances are high that you’re going to have to lead it in almost every facet, and that can’t be done from behind the chair.
• Skillset: look at yourself objectively and grade yourself on “internal leadership” of the team and “external leadership” of your business in the community. Do you have a plan to improve your business acumen and your communication skills specifically in the coming year(s)?  Do you know what your own personal growth really looks like?  Or are you “stuck” in groundhog day where you can’t break free from your past (lack of inertia)?  Becoming a more effective executive is more than simply a mindset change; it’s a whole new phase of personal growth – and you have to be intentional about what the coming years look like for you individually.
• Mindset: If you’re truly patient and are willing to play the long game, then you can be more disciplined in your acquisition (or build) strategy. Taking the approach of adding one additional practice every few years will most likely ensure better integration; greater financial performance; and a lower overall debt burden for more consistent free cash flow.  If you don’t have any pre-defined deadline for selling your business, then why rush into making a bunch of bad decisions?  Think: Acquire – Evaluate – Analyze – Improve – Repeat
• Skillset: I’ve mentioned this numerous times on the podcast and elsewhere, but “Who is on your Personal Board of Advisors?” And what areas do they cover?  What roles do they play?  You need to surround yourself with people (contractual or collegial) who can help you avoid mistakes, challenge your thinking, and reinforce your appropriate actions.  In the long run, this will save you money, but more importantly it will save you time.

I think it’s worth mentioning that this short list of mindsets and skillsets is in no way comprehensive.  Furthermore, most of these are aspects of professional growth that require recommitment and continual reinvestment.  In my opinion, “mastery” doesn’t have a finish line or an end point.  If you don’t reinvest in yourself, then don’t expect anyone else to do the learning for you.

Your 5-Year Growth Strategy

Let me be clear: I’m not here to talk anyone into taking the risks to build a group practice.  Period.  I am, however, acutely aware of just how increasingly challenging it’s going to be to own and operate a solo healthcare practice if it has only one provider in it.  If it means taking the risk of personally guaranteeing some additional debt to relieve the provider risk of a solo practice, then there are compelling reasons to do just that.

It goes without saying that every business is different, every market is unique(ish), and everyone reading this is at a slightly different stage of development.  Given that, here’s a rough overview of a timeline with a laundry list of priorities and “things to get right” along the way.

YEAR 1: Preparing for Growth

I’m sure you’d laugh if I told you that most of your peers acquire a practice, then realize they were nowhere near prepared to integrate it.  Let’s face it, acquisitions are a challenge and you should be prepared for things not to go accordingly to plan.  That being said, it doesn’t absolve you of the responsibility of planning in and of itself.

First, focus on building up your cash on balance sheet.  More is better because you should anticipate two key things: one, the newly acquired practice to take a revenue dip; and two, that you’re going to have to spend time working in the it clinically.  Given both of those, you should be ready to make reinvestments in order to right the ship.  Stockpiling cash takes time, so start this process as far in advance as possible.

Second, begin the recruiting and development of an associate(s).  They either need to be able to back-fill behind you or take over in the new practice to give it a lift.  If the new practice takes a nose dive on account of your clinical team not being able to deliver the dentistry, that’s on you.

Third, begin to reduce your personal living expenses.  This plays off of the first point about cash on balance sheet.  Everyone who builds a group practice takes an income hit early on in doing so.  If that puts you in conflict with your family and compromises your standard of living, then you’re burning the candle at both ends.

Fourth, focus on your practice’s operations (systems and processes) and be thinking about those from an integration perspective.  What core competence does your ops team have that could be deployed into a new location?

Fifth, I’m constantly amazed at how people acquire a second location, then for some reason think that they can be “an absentee owner.”  My advice it avoid that at all costs, which most likely means diminishing your own clinical responsibilities in your core practice in advance of that.  You should probably plan for a maximum of 3 clinical days per week to allow for at least 2 days per week in the next location.

YEAR 2: Team Leads & Target Profile

First, commit to cross-training a few key people on your team because you may have to reallocate them into the new practice.  I would focus on a lead Operations person, a lead Hygienist, a veteran Dental Assistant and a highly capable Associate Doctor.  You may not need to juggle all of these roles upon integrating the new practice, but it would be far better to be prepared ahead of time if the need arose.

Second, define your “Target Acquisition Profile” from a standpoint of what you do NOT want to acquire.  Think of it as your “hard NOs” that don’t meet your capabilities.  For example: 6 or more operatories and/or the ability to expand; around $600,000 in revenue and around a $500,000 selling price; no Medicaid; the seller to exit; and around 10% cannibalization of your current patients to alleviate growth challenges in your core practice.   My advice is to know what your strengths are and build your acquisition profile off of those.

Third, start your own Business Development analysis of your local market and start to make an effort to connect with potential sellers that could fit your profile.  Do NOT rely exclusively on brokers.  Be comfortable with your own “value proposition” to a seller that might be different from the competitors in your area.  In other words, answer the question: “why would someone want to sell their life’s work to you?”

Third, continue to stockpile cash on Balance Sheet.  This is probably a two-year effort and “more is better” in this area.   Plan for the worst and hope for the best.

Fourth, start a light recruiting effort to back fill any transitioning team members.  I’m not advocating that you load up on salaries and unproductive headcount, but in a growing business, you’re always recruiting.  It’s important to have a list of candidates 5 to 10 deep for every position.  Those candidates may even be employed right now, but it doesn’t mean that’s where they’ll retire.  If you have to pull from your team to reallocate into the new practice, then you’d like to have your replacement search process already started.  Plan ahead.

YEAR 3: Acquire & Invest in Growth

Around this timeframe, you should be financially and operationally prepared to acquire and integrate your 2nd (next) practice.  If defining your Target Acquisition Profile is critically important in the Business Development phase, then having an Integration Plan with designated leadership is even more important because you’ve already borrowed the money.  There’s no going back.  It’s critical to proceed methodically through the change management process.

Second, begin to hire, on board and develop any “backfill positions” left open on your original practice’s team due to employee transitions into leadership roles in the new practice.  In the aftermath of the acquisition, everyone is going to be doing extra work, so prepare your team for the expected hardships.

Third, invest some money into marketing, technology and general aesthetics of the new location.  You never buy a practice to maintain it.  Only buy it if you feel confident that you can improve it both from an expense structure standpoint as well as a revenue standpoint – and be sure to quantify those expected improvements prior to closing.  The likelihood is that revenue generation will be the result of investment in marketing or technology or hiring new people, so have a plan and a budget for that.

Fourth, more than likely you are going to continue to drop clinical days in your original practice (down to around 2 days per week) while starting to devote more time to working in the new practice (probably around another 2 days per week).

YEAR 4: Leverage Strength

Now that you’ve successfully integrated your second location and gotten your revenue generation and expense reduction efforts to stick, you should once again first focus on rebuilding your cash on balance sheet position.  It’s incredibly hard to build cash reserves while reducing your own clinical work and investing in growth initiatives, but that’s essentially what you have to do.  If these sound like competing interests, trust your instincts.

Second, being to drop to 3 clinical days per week total in both practices.  You ultimately want to build a business that can generate revenue without you, so making the investment in expanding your productive capacity (Associates) is critically important.  The other thing to consider is that your personal role is starting to change from Clinician to Executive, and that requires freeing up time to lead the business and coach your key people.

Third, it’s time to either pick back up where you left off or restart altogether your Business Development efforts to find your third practice.  Add to that the necessity to add and develop productive Associates means restarting your recruiting efforts as well.  In a growing business, your Business Development and your Recruiting & Developing efforts are constant.  You never take your foot off the gas.  Wash.  Rinse.  Repeat.

YEAR 5: Stabilize & Consolidate

Hopefully your search for our next practice is more efficient and an overall shorter process than the first acquisition, so the first step is to acquire and integrate successfully your 3rd practice.

Second, you’re surely going to need to replace or upgrade a few key roles due to the likelihood of “leadership promotions” from withing the existing team.  At 3 locations, this is actually becoming a decent-sized business, so keeping an eye on culture, teamwork and communication across different locations becomes important.

Third, for all of the same reasons I mentioned in the previous acquisition, invest into marketing, technology and aesthetics of new location.  As before, focus on revenue generation and expense reduction to create greater free cash flow (after debt service).

Fourth, by now you should easily be able to be at one (or two) clinical days per week in your primary practice with maybe one day in location two and one to two days per week in the new practice.  Working in the new practice for a period of time is important because you get to really see how the practice runs as well as feel what the culture is like.  As I said early on, I’m not a fan of “absentee owner” approaches to acquisitions.

An Entrepreneur Who Owns a Business

At the end of a 5-year effort, this is probably a business that generates around $4 to $5,000,000 in Revenue out of 3 locations.  If each practice has 6 to 8 operatories, then it’s a business that could yield as much as $7 to $8,000,000 in Revenue in due course.

A collective business that generates $7,000,000 in revenue with an operating margin of 15% yields a little over $1,000,000 in Operating Income (pre-tax and pre-debt service).  That’s not a bad business.  Add to it that it probably has 5 to 7 full time Associates and it starts to look like a business that can withstand a lot of competitive pressures or market fluctuations.

I realize that building a business requires a lot more than a thousand words on two or three pages of paper, but the point here is that you have to think through all of this sequentially and from the best perspective you can muster.  The whole point of this two-part essay is to get you to realize the window of time and opportunity I feel that we have right now.

What you do with it is up to you.

Go grind some beans.