What You Need to Know About Scaling Your Dental Practice

What You Need to Know About Scaling Your Dental Practice. Image courtesy of Jeff/stock.adobe.com.

Dental practices don’t exist in a state of equilibrium. They are either growing or declining, and where your practice is in the life cycle significantly affects its value. Like any other health care provider, all dental practices reach a point where the owner decides to make a business change, and actions they took in the past determine whether they can achieve their goals.

The inflection point might come when a solo practitioner decides to sell a practice and retire. Or maybe a dentist plans to expand operations at their practice, open new locations, join a group practice via a merger or acquisition or sell the practice to a dental service organization (DSO). In each of those scenarios, what you do now will have an impact on practice value.

Whether you plan to scale up or scale out your practice, you’ll experience a practice transition eventually, so it’s critical to keep a time horizon in mind so you can enter the transition phase with a financial edge, whether it’s 5 or 15 years down the road. Your specific exit strategy will depend on your goals, so let’s review some factors you’ll need to consider.

Evaluating Options for Improving Practice Productivity

Before taking a step like opening a new location, it’s crucial to ensure the existing practice is operating at maximum efficiency. If you want to improve your practice’s productivity, you have 2 options: serve more patients or increase the amount of work you do for your current patients. The location’s size, layout, and diagnostic equipment will play a major role.

Ideally, a dental practice that focuses primarily on preventive care will have 2 full-time hygienists to generate sufficient demand for the dentist’s restorative work. Preferably, a practice with 1 dentist and 2 hygienists would have 5 operatories available to comfortably manage patient appointments and handle emergencies, walk-ins, and overflow for other procedures, such as crown seats, whitening, etc.

Standards and layouts vary across regions–what’s applicable and available to a practice located in a major urban center won’t translate seamlessly to a practice in a rural area. When you add staff, they’ll need space and equipment to work, which could mean expanding or reconfiguring the physical space or extending operating hours.

Expanding to New Locations

For some dentists, maximizing value by expanding the practice into new locations makes sense, but it’s critical to understand that opening new practices does not automatically translate into more value. Some dental groups that operate in several locations have a single practice that brings in most of the revenue, but their satellite locations don’t pull their weight.

This can cut into transaction value, especially in today’s market, which has evolved dramatically as investors pour capital into health care businesses. A productive dental practice might have been valued at 75% to 80% of collections at one time, but those days are gone. Now, rising demand and volatile inventory are increasing transaction values across the marketplace.

In this environment, it only makes sense to expand if adding overhead in the form of leases, operatories and equipment, staff, etc., are offset by revenue gains–which only happens if operations at each location are fully optimized for efficiency. Also keep in mind that banks will usually require proof of concept before funding an expansion for a single practice owner, such as 12 to 24 months of growth at an existing location. Scaling up more quickly may require accessing other sources of capital.

Another factor to keep in mind is that scaling beyond 2 practices as a working dentist requires systems and administrative capacity. You can get your arms around 1 practice and 2 with more effort, but if you plan to maintain clinical work, it’s challenging to handle 3 or more practices without additional systems and leadership in place. These systems include methods to create policies, handle finances, manage compliance, marketing, facilities, maintenance, and more.

Dental practice owners who put the right systems and people in place to manage a third practice can scale up to manage many more locations efficiently and position themselves to generate excellent profits. But it all depends on careful planning, and it’s imperative to maximize efficiency at each location to create the most business value.

Setting Professional and Personal Priorities

Solo practitioners who are contemplating an expansion or measures to increase productivity through extended hours or by hiring additional personnel should also assess the professional and personal impact of that decision. Managing more people and/or seeing additional patients and performing new procedures will disrupt existing roles and routines.

It’s important to make sure you will be content with those changes. Maximizing practice value and generating higher income is important, but it’s not the top priority for everyone. The ideal quality-of-care standard varies, and dentists need to identify what works best for them to ensure that they reach a balance that makes them comfortable.

Some dentists are willing to take on higher fixed overhead in exchange for more personal time by hiring additional staff to provide support. That’s a tradeoff that can work under the right circumstances. It all comes down to what your priorities are and where you find your comfort level. Creating capacity can help you find a balance that works for you.

Using Data to Drive Decisions

“Data-driven” is a buzz phrase in the wider business world for a reason. Any type of business operation is enhanced when decisions are based on data rather than intuition. The systems multi-location practices use to manage operations generate data that informs policies and procedures, and that’s how they achieve greater efficiency.

Decisions on expansion should also be based on data, as they are at companies that operate sites nationwide like major grocery chains, fast food restaurants, and home improvement stores, among others. Instead of spending huge amounts on location research like those companies, dentists can delve into their own patient location information or market data from a dental-specific analytics organization. Real estate brokers with dental-specific experience can also help.

For example, a practice’s sphere of influence can be defined by the radius in which most patients who visit the location live. In a suburb or city, it might be 3 to 5 miles. In a rural area, it might be as large as 30 or 45 miles. Analysis of the patient base’s ZIP codes can indicate an area outside the sphere of influence where a significant number of patients live, which can help the practice owner decide where to expand.

Beginning With the End in Mind

Every dentist who owns a practice will be ready to transition to a new phase eventually. If you begin with the end in mind, you can scale your practice to ensure a profitable transition. That means making plans now so that you have a strong record of growth when you’re ready for the next phase. A merger & acquisition advisor who works with dentists can help.

If expansion plans are in your future, you’ll need capital, a real estate broker with dental-specific expertise, a builder who understands the specific construction needs of dental facilities, and an accountant who understands the dental industry to advise you as you develop new business. Sometimes called the “4 Bs” (banker, broker, builder, and bean counter), these professionals are an essential part of an advisory team.

With a time horizon in mind and partners with deep dental transition experience in place, you can scale your practice and prepare for what comes next from a position of financial strength. Timing is everything, so start planning now.