back-to-top
X

CONTACT US







hamburger-menu-icon

Articles

Volume 84: Small Practice Economics

Download the PDF version now!

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. Understanding Practice Valuations

  2. What To Expect When Selling Your Practice

  3. The Chart Sale

  4. One Year Later

  5. Dealing with Unsolicited Offers

  6. Covid-19 Practice Sales Update

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

  8. Partnership Pitfalls

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

  10. Smaller Practice Realities

  11. Dental Market Update - 2019

  12. Creating Your Own Most Valuable Practice (MVP)

  13. Small Practice Economics

  14. The Market is Very Efficient

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

  16. Hygiene as a Value Driver

  17. The Value of a Good Team

  18. Is it Time to Move?

  19. Staging A Dental Practice

  20. The High Cost of Dying

  21. Deal-Busters

  22. Patients - Attract and Retain

  23. Should I Stay or Should I Go?

  24. Is There a Buyer for Every Practice?

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

  26. Smooth-Sale-ing

  27. Buying Time

  28. Patients, Patience, Patients

  29. A Real Patient

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

  31. Irrational Exuberance or The New Normal?

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

  33. Finding and Being a Mentor

  34. Bigger is Better

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

  36. How Well Do You Know Your Practice?

  37. Dave's Top Ten List for Vendors

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

  39. Your Premises Lease is an Important Asset

  40. What are Associates Thinking?

  41. There is Life Outside the GTA

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

  43. Mergers are a Viable Option

  44. Is Your Associate an Asset or a Liability?

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

  46. The 100 per cent of Gross Myth

  47. The Past, The Present and The Future

  48. Caveat Emptor

  49. Overpaid Long Term Staff

  50. Selling your Practice in Stages

  51. A Potential Pitfall of Selling Shares

  52. Value in Your Practice Through Balance

  53. Only Trusted Staff Can Defraud You

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

  55. Coping With A Large Patient Base

  56. Successful Dental Practice Transitions

  57. Taking Care of Business

  58. The Investing Dentist Phenomenon

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

  60. Organize your Debt in Order to Sell your Practice

  61. Having a Better Team

  62. How Do I Prepare My Practice For Sale

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

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

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

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

  67. Transition - What to Expect

  68. Discussion on Digital X-Rays

  69. Partnerships and Shotguns

  70. Strategic Planning - How to Get Started

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

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

  73. Matrimonial Practice Valuations

  74. Purchaser's Guide to Affording a Practice

  75. Location Improvements Throughout Your Career

  76. Small Practice Valuations

  77. Partnerships – The Best and The Worst

  78. Changing Location When the Opportunity Comes Along

  79. Visual Presentation of Your Practice

  80. Presentation of Charts

  81. Your Premises Lease Can Be Your Worst Enemy

  82. How to Select an Appraiser for Your Practice

  83. How Are Your Billing Ratios?

  84. It Pays to Invest in Your Tangible Assets

  85. The Importance of Separate Financial Statements

  86. Five Time Frame Levels to Sell a Practice

  87. 12 Suggestions to Safeguard Computer Data

  88. How to Buy a Visible Practice

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

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

  91. The Balanced Practice

  92. Will My Practice Be Saleable in The Future?

  93. Buyer Be Aware

  94. Excess Profit - The Second Key

  95. Patients and Profits are the Keys

  96. Plan Ahead

celebrating-30-years
test
SUBSCRIBE TO OUR NEW LISTINGS SERVICE