Dr Phillip Palmer, January 2006 - We live in interesting times.
If someone would have told me 2-3 years ago that there’d be half a dozen different companies buying up dental practices by the end of 2005, I would have asked them what they were smoking.
But it’s true.
Hardly a quarter goes past without somebody telling me the details of the latest company involved in practice buyouts. All of them have some point of difference about their business plan, but all of them have the same basic premise- they will buy dental practices, pay all the bills from a central business administration, and hope to make a profit from what is left.
Most of them have in mind an eventual IPO (initial public offering) whereby they float their company on the stock exchange. One of them (1300Smiles) already has done so, and their share price has risen thus far.
Is this a good thing or a bad thing for:
- a selling dentist?
- an employee dentist?
- the public?, and
- potential investors?
The answer to Q1 will depend on 2 variables: the selling dentist’s goals and the goal, business plan and abilities of the Dental Buyout Company (DBC)
If you are looking at selling your practice and a DBC is looking at buying you, it’s no different from if you’re selling your house. The more potential buyers there are for your practice, the better it is for you. Obviously with the laws of supply and demand, more buyers should translate into a better price that you will obtain for the sale.
In some cases, the DBC will be a salvation for some practices, in that they may be the only buyer for certain types of practices.
For example, it is extremely difficult to get any potential purchaser if you fit in to one of these categories:
- Non metropolitan practice,
- Multi surgery, multi practitioner practice,
- Some specialty practices,
- High end (individuals grossing more than, say $800-900k alone) practices.
Anybody owning one of these practices knows that they will have to earn well during their practicing life, because at the end, they could find it difficult to get full value (in some cases, any value) when it comes time to sell.
For some of these practices, having a DBC come knocking is their only possible exit, other than just walking away, or selling at ‘fire sale’ rates.
And best news of all-if you are a halfway decent dentist, most DBCs will want you to stay on for as long as possible as an employee dentist. As a matter of fact, some of them may even insist on it.
I know for many years in my practice I wished I could be an employee in my own practice, rather than a business owner. It would mean I wasn’t liable-my signature wouldn’t be at the bottom of every lease document, or employee’s pay cheque, or rental of premises. For many dentists, it could even mean a raise in pay. Many dentists don’t take out of their practice what an employee would take. I’ve seen practices where the principal dentist takes as little as 10-12% of turnover home at the end of the day. In one or two cases I’ve seen it be a negative-that is there was nothing left after expenses and the principal had to put extra money in just to keep the doors open. Wouldn’t those dentists liked to take home an average of 35-40% of gross, and not have the sleepless nights wondering how they were going to pay bills.
For an employee dentist (and as it says above, a selling dentist may be required to become an employee dentist for a period), much will depend on the management policies of the DBC. Many dentists are worried that the DBC will somehow dictate the dentistry being done in an effort to increase profitability. I as yet haven’t heard of this happening, but like most dentists, I think I’d run very fast away from any company that even attempted this.
Let’s look at the bright side though. Not every dentist feels they want to spend the time or effort to get on top of the myriad of issues that face a practice owner. For most dentists, if they do master those issues, they will be very well financially rewarded.
But the long term employee dentist (of the DBCs) is likely to be the type of dentist who often prefers to ‘just do the dentistry’. They will still need to learn how to get on with staff, even as fellow employees. They will still need to learn good communication skills, in order to be able to explain to patients why they should have certain treatments. They will also now need to learn how to get on with head office (of the DBC), who may make decisions that the dentists don’t quite agree with.
For the public, what do these DBCs mean?
Little effect will be noticed by the public when it comes to dealing with the DBCs, especially if the patients are being treated by the same dentist. If anything, most companies will have to compete on price when they lose the entrepreneurial spirit of the small practitioner. They are also more likely (than some practitioners) to ensure minimum standards of sterilization, equipment, and human resources are maintained.
What do they mean for the investor?
This would be different for each different DBC. Ensure that you understand how the company will make a profit in the long run and how those dollars will be split between the promoter(s) and the investors.
Most of the companies have the same aim in mind.
When you think about it, dental practices sell for between 1 and 2 times earnings of the dentist and there is usually little left after paying the dentist a salary (40%). When a company is floated on the stock exchange, the multiple becomes anywhere from 7 to 15 times earnings (depending on its predictability and dependability). The difference between the multiples (say between 1.5 and 15 of gross profit) is where the promoters of the DBC make their money.
However, that doesn’t mean it will be a good share for the investor, or holder of shares. Many of the companies that I talk to wouldn’t attract me as an investor.
If you are offered shares as your only incentive for selling, or a major part of the reimbursement for selling your practice, it probably should ring alarm bells in your head. If however, you are getting full value in dollars and a supplement of shares on top, then you are in a no-lose situation.
To summarise, having corporates enter the world of dentistry doesn’t have to be viewed as akin to having Osama Bin Laden enter Australia. Evaluate your own experience of them with open eyes. They’re not all the same, anymore than all dentists are the same. Some will be good; some will disappear without a trace. Time will tell.
[Published by Australian Dental Practice, January/February 2006]