It feels as though you cannot turn around these days without running into someone starting a new group practice or dental support organization (DSO). We also usually know someone that has sold their practices for an insane amount of money. The thinking goes that if you are at one location, there is no reason you cannot be at 84, right?
How hard could it actually be?
“Highway to the Danger Zone”
Yes, I just injected a Kenny Loggins song in an article about dental practices. Moving on…
We work with group practices and DSOs throughout the US. Each is different and face their own set of unique challenges. With that said, we oftentimes boil things down to three common areas where most owner-operators struggle in the very early stages of establishing their group practice:
- Personal transition into leadership
- A diminishing relationship with their original lending source
- High turnover of key associates
It is worth breaking these down into greater detail since every operator-owner is going to face each of them at some point in the early stages of their journey.
Transitioning Out of Your Comfort Zone
Dentists go to school to be … dentists. Many dentists lament how little formal business education they are given in dental school. They talk about their clinical confidence, yet may be terrified of actually running a business. Inevitably, the aspects of management they end up learning are through on-the-job training and trial-and-error.
Management is very different than leadership.
You can manage a solo location dental practice. With a group practice, you must lead, and doing so is difficult at best.
Couple this with the fact that the owner-operator is usually on the biggest clinical producers of the group and it creates a sense of double-jeopardy when they are forced to give up their primary strength – their clinical role – to transition into an area of critical importance where they have little to no expertise or training – an executive role.
At my firm, we refer to this as a transition from Chief Clinical Officer to Chief Executive Officer and it typically starts to happen somewhere between three and five locations.
Is any dentist every truly ready for this? Arguably no, but there are things you can do to prepare for it. The first would be to recognize the reasons why it has to happen and that you cannot, in fact, continue to perform both roles indefinitely. You need to prepare your associate(s) to be able to pick up the clinical production in your place. You also need to prepare yourself and most likely work with a business coach to identify the skills you’re going to need to develop for the new role. High producing dentists also make more income than CEO’s of small businesses do, so be aware of the possible income hit as you transition from a variable compensation structure to more of a salaries role.
It is important not to lose sight of why you’re making this transition in the first place. You are the founder and visionary of the business. You are the one that has to communicate that vision to all current and future stakeholders in the business. It also becomes nearly impossible to work on the business if you are still working in the business.
Leadership is ultimately about delivering results. You may be able to manage the business successfully when it is small, however, success on a larger scale ultimately comes down to someone being an effective leader.
Gaining Clarity Around Your Source of Debt Funding
Almost every group dental practice or DSO starts out using bank debt. Banks typically love to lend to dentists because the default risk is so low. Low risk often translates into lower lending rates, which is incredibly beneficial to dentists buying their first or second practice. However, the same risk profile starts to change around three to five locations and around $2 million in total exposure. The underwriting complications for the bank tend to increase around that level, too.
My partner, Kevin Arnold wrote a great piece about the mechanics behind this.
Frankly, Kevin is a lot smarter than I am, so I will leave the topic of banking details to him. However, I do encourage you to do two things:
- Communicate your future intentions clearly to any banker you are considering working with
- Understand the parameters around which they will continue to lend – or stop lending
Your banker is not a mind reader. When you tell them that you want a loan to buy a dental practice, they will give you a loan for a dental practice. This means one. One must also remember that a loan is not an open line of credit. If your intent is to buy one dental practice and another one every three months until you hit 15-20 practices in five years, that’s a significantly different business proposition for your banker – and more importantly, to his or her senior credit officer.
Being clear about your future intentions preserves your relationship with the right bank – and “the right bank” may not be the bank with the lowest rate. If growth is your goal, you want to secure access to a larger amount of funding over the same period of time, provided that you operate within their defined parameters of leverage and liquidity. In short, you should have a basic understanding of whether or not your bank will fund the next deal you bring to them before you even ask.
Scalable Businesses Have Long-Term Employees
Turnover is a problem in any business, however, the best businesses minimize it in multiple ways. One of the most effective ways to minimize turnover of your key clinical providers is to figure out a way for them to earn equity in the business. The “owner” of the business operates with a significantly different mindset than does an “employee.” We’re all living proof of that. Think about a job you have had and the way you cared about it and contrast that with the business you own.
Associates that have the opportunity to either buy equity or earn equity – or both – don’t leave. There are ways you can structure “earn ins” and “buy in” to either the PC, DSO or Sub-DSO level that will reward them for building you a bigger pie. These structures may be new to dentistry, but they’re long established in corporate America. I have been the beneficiary of them and can tell firsthand that they work.
Ask yourself: “Would I rather be the sole (100%) owner of a $1,000,000 business or the 80% majority of a $2,000,000 business?”
Solving the problem of associate churn is critical to your ability to scale the business because it creates continuity of culture and team cohesion. “Dark revenue days” and a general lack of engagement or commitment from key employees will age you quickly.
Building for Scale
The owner-operator dentist that can adapt and overcome in these three key areas stand to build a wonderful business that can scale from five to ten locations, and then from ten to way beyond. Leadership, continued access to growth capital, and committed employees are three cornerstones that will win a lot of battles in the emerging group practice and DSO space.