The previous “big thing” before COVID-19 was the unprecedented number of Private Equity groups buying dental practices. The appeal is no surprise. The partnership will allow you to focus only on dentistry. After all, they have lots of business experience and your degree is in dentistry. Just think of it! No more managing staff. No more researching the best lab or taking out expensive loans for equipment. No more gathering financial data or answering directly to your CPA. 😉 Or maybe it allows you to get out of dentistry entirely. The pros are obvious—less responsibility and a big payout.
Not so long ago, only bigger multi-location practices were in the sight line of Private Equity groups. But now they’re finding ways to roll up several single-location practices into a desirable portfolio. And why is PE so interested in dental practices that they’re finding more creative ways of doing deals? Well it’s simple…dental offices are profitable and lucrative. And PE wants a piece of that pie.
Those of us serving the consulting and financial needs of the dental industry see the trend very clearly. It’s going the way of the medical profession, where you now find very few privately owned practices. But owning a dental practice is about more than just doing dentistry and more than just making a living. Do you have an entrepreneurial spirit? Do you want to determine the direction of your practice—its personality and quality level? Do you want to keep your profits or sharethose profits with investors? And most importantly, do you want to be told how to care for your patients? Private Equity gives lots of assurances of not directing how your practice will provide dental care, but that often is a bait and switch job.
Bloomberg had a good article this month about the effect of Private Equity on the medical field.
This is one of many tales we’ve heard of the affect non-medical owners have on practices. It’s not a paranoid perspective, but what has been demonstrated time and again. We’re not here to lecture you about the evils of Private Equity owners. And when you’re offered that big payout, we understand you have to think about your family and your financial needs. But we do want you to go into any transaction with your eyes wide open to all matters under consideration, which include more than total dollars.
Will I really continue to be in control of my dental care decisions?
What long term effect will this have on my industry? On my colleagues? On future dentists? On my child that planned to follow me into this field?
Could a private dental buyer give me a competitive offer as an alternative?
Could I bring in a partner to relieve some administrative burdens?
What future revenue will I forfeit by doing this deal?
It’s a seller’s market right now. Both Private Equity groups and individual buyers are looking for valuable practices. Younger dentists are searching for practices that will afford them the entrepreneurial opportunity you’ve had, and they’re motivated to compete against big players in the industry. And lenders are willing to make the loans to help them. Our point in all this? Your decision whether to sell to Private Equity will affect far beyond yourself.
Authored by Evan Reynolds, President of Dental Space Advisors
How To $AVE BIG DOLLARS When You Renew Your Office Lease
Most dental professionals are searching for ways to cut their overhead cost, however, many largely ignore the valuable opportunity to materially reduce one of their largest operational costs. This opportunity comes in the form of an office lease renewal which usually only comes around every five or ten years. Most dentists wait until there are only a few months or even weeks left on their lease to start discussions regarding lease renewal terms. This procrastination results in the landlord possessing all of the advantage as they know you have no intention of going anywhere else. The building owner will usually offer the busy dentist a “preferred renewal rate” and that generally ends the negotiations. The dentist never really had a chance in this one-sided scenario however it is very common for the vast majority of dental tenants. The biggest problem is that most dentists do exactly the opposite of what they should do when they are renewing their lease and in the process forego significant savings. A dentist that leases 2,000 square feet can easily forfeit $20,000 to $40,000 over the term of a typical dental lease by failing to effectively negotiate their lease renewal.
The key objective for a building owner is to maximize rental income and your goal is to minimize rental cost as much as reasonably possible. So how do you go about effectively negotiating your lease renewal? The short answer is that you approach it as if you were absolutely going to move your practice to a new location. It is important that you convince the landlord that you have serious, viable relocation alternatives and that there is a real possibility that you will move. Every communication with the landlord must reinforce the premise that you are diligently evaluating the alternatives in the market. This may include relocating to a new lease space or perhaps purchasing an office condominium. The landlord needs to know as early as possible that you are considering other options and that they have something to lose. It is often costly for a landlord to re-lease a space as it much more preferable to renew an existing tenant. They will have a vacancy for a period of time after you leave and will have to spend money on refurbishment and leasing commissions.
The objective is to maximize your negotiating leverage and this can be a challenge for most dental tenants. Dentists are at a huge disadvantage in the world of commercial real estate. They often have to sink large dollars into their space for build-out and are usually hesitant to move due to potential patient confusion (not to mention the hassle of moving itself). The building owner views a dental tenant as being largely captive. They are aware of the tendency for dentists to stay where they are for long periods of time. The average dental tenant stays in one location for about 18 years.
You may think that this strategy requires too much time and effort, however, you should hire a commercial real estate broker (at least nine months prior to lease expiration) that specializes in working with dental tenants to manage the process and lead negotiations. Very little of your time is required if the process is managed appropriately by an experienced broker. The best part is that the broker exclusively represents your interests and is paid by the building owner. Landlords much prefer to negotiate directly with the tenant and might discourage you from having representation. The fact is that your broker’s commission is a small fraction of the overall savings that can be generated by effective representation (the landlord’s broker typically gets a greater fee if the tenant does not haverepresentation). Hiring a broker also reinforces the idea to the building owner that you are serious about evaluating other alternatives.
In addition to the cost savings that can be captured during a lease renewal, there are other aspects of your lease that can be improved. You can potentially eliminate a personal guarantee that was required in the original lease (important when selling a practice), get your security deposit refunded or change other terms of the lease that need improvement.
Effectively negotiating the renewal of your lease can save you significant dollars and the opportunity only comes around a few times during your career. Make sure that you take advantage of this opportunity and put more money in your pocket instead of the building owner.
Almost 1 out of 6 dentists have been, will be or are being embezzled.
In a recent post we outlined the profile of a typical embezzler and were troubled to discover they often look like model employees. So if embezzlement is a big risk but you can’t spot an embezzler by appearance, how do you know it’s happening? Fortunately even expert criminals leave red flags to help bring a problem to your attention. Some things to look for:
· Accounts Receivable
· Patient adjustments
· Job performances
· Bad debt write-offs
Also look for:
· Employee lifestyle changes
· Disorganized books
One major area of concern is Cash Receipts. Here the crafty embezzler can find many ways to siphon cash from your practice to her hand. One way is called “lapping.” In this method:
Patient A owes $400—pays $400—staff embezzles $400
Patient B owes $400—pays $400—payment is credited to Patient A
Patient C owes $500—pays $500–$400 is credited to Patient B; staff embezzles $100
At this point the accounts for Patients A and B look great. Patient C’s account shows he hasn’t paid but unless he receives a past due statement, he’s in the dark. The embezzler avoids that problem by continuing to post payments just in time to avoid past due balances and continues to drain a bit off the top when convenient. But your A/R will continue to rise. And you will often find patient accounts with incorrect balances—they just come to your attention in various ways. You may chalk it up to mistakes that happen from imperfect employees. But continued “mistakes” can be a big indicator of things more nefarious.
Be sure it’s standard practice that the patient receives a receipt at check-out, with account balance details if possible. These days, customers are often asked if they want their receipt and frequently decline. Don’t allow that. Just the fact that the staff member knows someone is seeing the posting helps deter them. Print out your Day-Sheet daily and keep them in a secure location only accessible by you. These should be reconciled to your appointment book and to your daily receipts. Checks should be electronically deposited daily. Cash should be taken to the bank daily or secured in some way. Credit cards should be batched out daily. The longer the delay in any of these tasks, the more opportunity there is for manipulation.
Just some key procedural steps and a little vigilance cuts down on key opportunities for theft—theft of your family’s income. Your practice is important in your life—be watchful of it! – Lynn Ledbetter
When you think you are ready to hire an associate, consider why you think you need one. Are you just too busy? If so, is it because your systems are a mess, or do you really have too many patients for one doctor? A good problem to have! And at what point are you in your career? We have some clients who need associates but the owner dentist is too young to consider an associate for a possible buy-in scenario. In that case, you have to be sure you don’t recruit an associate with ownership aspirations. What else should you consider?
Make sure you have enough patients to support a second dentist. How many patients should that be? Most practices should be seeing 30 to 45 new patients per month. According to industry sources, 85% of those should accept treatment. No associate wants to just do the procedures that you don’t want to work on. So, consider the associate will see the new patients. Then you will need to attract at the very least, 30 new patients per month for the associate to have an opportunity to produce over $10,000. Any less than that and you are risking patient relationships by being too aggressive with treatment.
Take a look at your systems. Make sure the reason you are busy is because of the patients, not your systems. Take a step back and really look at those systems. Better yet, hire a consultant to take an objective view of the practice. Sure, it’s expensive. But it’s the best investment you will make in your practice.
Be realistic. Do you have the space necessary to support another dentist and the related staff that comes along with bringing on an associate. Right away you will need another chairside assistant. Eventually, you are going to add front desk and hygiene personnel to support the increase in patient flow.
Keep in mind, again according to industry sources, that 80%, that’s 4 out of every 5, associateships or dental partnerships don’t work out. Why most of them fail is due to expectations that didn’t correlate between the dentists or weren’t communicated during the search for the associate. Be transparent. Go overboard. Meet, build a relationship. Take the candidate to dinner, lunch or better yet some sporting event where you have a captured audience for several hours and can talk, talk and talk some more to get to know each other. Obviously, this doesn’t happen overnight. You have to start before you really need someone, but you can see it coming. Or if you are too close to the operations to see the details, ask us for our opinion. We work with several hundred dentists and have seen many situations with associates over the last 15+ years. – Robert Edwards
There is much focus today in the “small business owner” arena on protecting assets. What are the assets of a dental practice? There are lots! In fact dental offices are asset heavy as small businesses go. You’ve got your dental chairs, your x-ray machines, numerous hand tools, televisions, and computers, boxes of gauze and rubber gloves as well as oodles of other supplies, and the list goes on. If you operated a Best Buy, your inventory would be most at risk, which is why there are security detectors and staff stationed at the doors. But your patients and staff are not likely to walk out with either your dental chairs or your latex gloves. And why not? Well the big stuff would be tough to sneak out and there’s not a lot of money to be made on reselling gloves. So what do you have at risk?
Not physical cash in most cases because that is going the way of the dinosaur. But funds from your bank account, your credit card, even from your patients and insurance providers. It should start becoming clear who is most able to perpetrate these crimes…your administrative staff. “Not my staff!” you say. You treat them well, sometimes like family. They’re loyal to you, surely. And besides, you know what a thief looks like. They act shady, wear black, probably don’t shower. Your staff are professionals, often moms and grandmothers, and they do their jobs really well.
Yep…they’re the very ones. It’s like a dagger in your heart!
So what does an embezzler actually look like? Unfortunately they look like the model employee. They typically:
Arrive at work early and stay late
Are extremely well-liked by other staff and patients
Are one of the “family”
Never take vacations
Insist on handling everything him/herself
Almost 1 out of 6 dentists have been, will be or are being embezzled. We’ll be providing more information and tools you can implement to safeguard your practice in future blogs. Our advice for the moment: BE ALERT. Most dentists are just too busy or too content to notice the leak in their practice. If you suspect employee theft, don’t brush it off to paranoia. Those red flags may mean something.