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Articles

Volume 84: Small Practice Economics

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In the Canadian dental practice market, it is a fact that purchasers are looking to acquire large practices. In fact, the demand for dental practices is almost directly proportional to its size - the bigger, the better. This fact is not surprising given the cash flow needs of most dentists, and the relative comfort in knowing that a large practice has a proven ability to attract patients. The demand for the larger practices has also contributed to significant price wars and multiple bids driving prices up to all-time highs.

Unfortunately, this has also meant that demand for small practices is declining and as a result, they have been falling in value over the past few years. Obviously, the cash flow is a concern as the small practice may not provide a full-time job for a dentist meaning that he/she may still need to associate elsewhere to subsidize income needs. In addition to the lower incomes, the small practice may represent a higher level of uncertainty for the purchaser. Is it small because of management? Or, is it small because it is simply in a location which cannot attract or retain patients? The other reason for the low demand for small practices is the buyers’ overall lack of confidence that they do not have the expertise in internal or external marketing to be able to grow it to a more profitable size. 

Given these concerns, we generally have dozens of offers on our larger practices, with premium offers, and sometimes the small practices don’t sell at any price. 

While the high demand for large practices makes sense, we also see that a large number of smaller practices are passed up just because of their size. For some of the small practices, the location is a clear disadvantage. In the past, when patients were plentiful, you didn’t need broad visibility or exposure since patients would find you. In today’s market with intense competition, practices do need to have at least some exposure or benefit to their location (street level, exclusivity in a building, etc.). That being said, many small practices are well located, but are owned by dentists who have aged and/or are comfortable with part-time practices. For example, buyers are always disappointed by low new patient flow even if the dentist is seventy years old. How many patients will start with a seventy year old dentist?

Although dental expenses are typically predictable, the cash flow of small practices is surprisingly variable and there are areas where a dentist can improve the cash flow. In fact, just recently we listed two small practices that couldn’t be more different. One of the practices had a gross income of $310,000 and overall overhead of 80%, generating a cash flow of $62,000. Another small practice had a production of $425,000 and overhead of only 48%, generating a cash flow of $220,000 for the dentist. The first practice is situated in a strip plaza with excellent exposure and in a growing community; the practice has a relatively high rent of $5,000 per month, and high advertising costs to attract 15 new patients per month. The second much smaller practice is located on the second floor of a professional building with no exposure, and the dentist accounted for half of the total hygiene revenue, and there is no advertising expense. Which practice is better? The fact is that both practices took almost one year to sell, as both didn’t fit the eyes of today’s buyers. While the first practice has potential, the second practice had the current cash flow.

As I mentioned expenses are typically predictable and non-adjustable in the short term. For example, rent, supply costs, dues, accounting fees, telephone etc., are all not adjustable. However, there are some strategies that can improve cash flows of smaller practices, making them attractive enough to work with while they grow. While some of these strategies may not be practical or preferred, sometimes you have to do what is necessary until the practice builds. These strategies may include the following:

1. Perform your own hygiene work. This may not be preferable, but in a small practice, can you afford to do nothing while paying your hygienist? Also, this will allow you to possibly develop more rapport with your patients and find more required treatment. 

2. Reduce staff or hours. At the outset, you don’t necessarily have to have a receptionist, assistant and hygienist, nor does your practice need to be open 6 days per week. In some cases, staff can do more than one function (i.e. reception/assistant). Also, if it is a small practice, although you want to demonstrate to new patients that the office is open, you can adjust hours by booking properly to limit staff overhead.

3. Associate elsewhere. There is no point in sitting in your office for the week, working on a couple of patients per days when you can compress your schedule and pick up some associate days.

4. Improve your skills. By providing more comprehensive dentistry, you may be able to expand treatment options, billings and ultimately, provide better care for your patients.

When assessing the potential of small practices, the most important factor is to determine whether you feel that this location can generate patient flow. Consider factors including: exposure, competition, anchor tenants, demographics, and population growth. If the location passes your initial test, it may mean that the former owner wasn’t trying to grow it or didn’t take advantage of the potential. If this location does make sense, you can further improve your investment return by implementing some of the cash flow strategies while you grow it. 

In summary, don’t immediately discount small practices, as some are hidden gems. Do your research to determine if there is potential, and build a business plan to focus on growth and costs. You may be able to acquire these practices at a more reasonable price, and when they do grow, you can be assured that the patients are there because of you.

Colin Ross is a Partner in Professional Practice Sales Ltd. (www.ppsales.com), which specializes in the valuation and sale of dental practices.  He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: colin.ross@ppsales.com

The Professional Advisory

  1. One Year Later

  2. Dealing with Unsolicited Offers

  3. Covid-19 Practice Sales Update

  4. When is the Right Time to Sell Your Practice and Why?

  5. Partnership Pitfalls

  6. The Real Cost of a Dental Practice Set-up

  7. Smaller Practice Realities

  8. Dental Market Update - 2019

  9. Creating Your Own Most Valuable Practice (MVP)

  10. Small Practice Economics

  11. The Market is Very Efficient

  12. How Can Dental Practice Values be Rising and Declining?

  13. Hygiene as a Value Driver

  14. The Value of a Good Team

  15. Is it Time to Move?

  16. Staging A Dental Practice

  17. The High Cost of Dying

  18. Deal-Busters

  19. Patients - Attract and Retain

  20. Should I Stay or Should I Go?

  21. Is There a Buyer for Every Practice?

  22. Good, Better, Best - The Market has Spoken

  23. Smooth-Sale-ing

  24. Buying Time

  25. Patients, Patience, Patients

  26. A Real Patient

  27. Why Do a Practice Valuation? I'm not Selling

  28. Irrational Exuberance or The New Normal?

  29. Do dental equipment and dental technology affect a practice value?

  30. Finding and Being a Mentor

  31. Bigger is Better

  32. Dave's Top Ten List for Buyers (Vendors should read this too!)

  33. How Well Do You Know Your Practice?

  34. Dave's Top Ten List for Vendors

  35. What will happen to dental practice Values in the next 10 years?

  36. Your Premises Lease is an Important Asset

  37. What are Associates Thinking?

  38. There is Life Outside the GTA

  39. When Is the Right Time to Sell My Dental Practice?

  40. Mergers are a Viable Option

  41. Is Your Associate an Asset or a Liability?

  42. Has your Practice Facility Kept Up With Your Billings?

  43. The 100 per cent of Gross Myth

  44. The Past, The Present and The Future

  45. Caveat Emptor

  46. Overpaid Long Term Staff

  47. Selling your Practice in Stages

  48. A Potential Pitfall of Selling Shares

  49. Value in Your Practice Through Balance

  50. Only Trusted Staff Can Defraud You

  51. To Own or Not to Own Practice Real Estate? That is the Question.

  52. Coping With A Large Patient Base

  53. Successful Dental Practice Transitions

  54. Taking Care of Business

  55. The Investing Dentist Phenomenon

  56. Two areas to focus upon that could negatively impact the value of your practice

  57. Organize your Debt in Order to Sell your Practice

  58. Having a Better Team

  59. How Do I Prepare My Practice For Sale

  60. How Do I Prepare My Practice For Sale? Part 3

  61. How Do I Prepare My Practice For Sale? Part 2

  62. How Do I Prepare My Practice For Sale? Part 1

  63. Advice to My Son or Daughter Graduating from Dental School

  64. Transition - What to Expect

  65. Discussion on Digital X-Rays

  66. Partnerships and Shotguns

  67. Strategic Planning - How to Get Started

  68. Calling All Vendors - Practices have Gone Up in Value

  69. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates

  70. Matrimonial Practice Valuations

  71. Purchaser's Guide to Affording a Practice

  72. Location Improvements Throughout Your Career

  73. Small Practice Valuations

  74. Partnerships – The Best and The Worst

  75. Changing Location When the Opportunity Comes Along

  76. Visual Presentation of Your Practice

  77. Presentation of Charts

  78. Your Premises Lease Can Be Your Worst Enemy

  79. How to Select an Appraiser for Your Practice

  80. How Are Your Billing Ratios?

  81. It Pays to Invest in Your Tangible Assets

  82. The Importance of Separate Financial Statements

  83. Five Time Frame Levels to Sell a Practice

  84. 12 Suggestions to Safeguard Computer Data

  85. How to Buy a Visible Practice

  86. Why is there a shortage of good practices today?

  87. The Importance of Equipment in the Purchase of a Practice

  88. The Balanced Practice

  89. Will My Practice Be Saleable in The Future?

  90. Buyer Be Aware

  91. Excess Profit - The Second Key

  92. Patients and Profits are the Keys

  93. Plan Ahead

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