By Marie Chatterley
From the Fall 2016 Journal of the Colorado Dental Association
The dental market is hardly suffering from a shortage of dentists in more populated areas of the country; however, the increased supply of dentists does not equate to a profusion of ideal opportunities. Most dental school graduates prefer to live in cities and suburbs, not in rural America. This results in greater competition in the more populated parts of the country and thereby making location the number one priority in the dental career decision process.
Beyond location concerns, the availability of associate positions, buy-ins and buy-outs in many areas of the country is not keeping pace with the demand for those positions. With fewer opportunities to join an existing, traditional practice, the number of start-ups has increased in high growth areas. Currently, the number of new dentists entering the market in more urban areas exceeds the number of dentists retiring or moving away, making those areas more competitive.
The much talked about projected “shortage of dentists” in America is not to be found in the more populated areas of the country. Moreover, as the demand for viable practices in preferred cities has gone up, so has the purchase price for those practices. By contrast, in rural areas (cities with a population less than 20,000), having fewer interested purchasers is driving prices down.
Ancillary to the issue of practice availability are changes in the dental market occasioned by insurance companies and “large group practices” (sometimes called Dental Service Organizations or DSOs). Consumers and their employers seeking ways to save money, are choosing PPO type dental insurance plans and seeking care only from in-network dentists. Subsequently, patient loyalty often follows the dollar, not the dentist. DSOs and group-type practices are growing due to their wide acceptance of and participation in these plans, as well as their extensive investments in marketing, advertising and promotion.
With more practices doing external marketing, and more patients looking for in-network providers, traditional fee-for-service practices are feeling the pinch in the form of decreased patient flow. Fewer patients are choosing to stay with and be treated out-of-network by their current dentist on a fee-for-service basis, especially when the economy is slow. While some may decide to return to their fee-for-service dentist over time, the fact remains: more and more consumers are choosing providers who accept their insurance plan as in-network providers. As a result, traditional fee-for-service practices are decreasing and PPOs and DSOs are taking over their share of the market. Without a patient base sufficient to support an associate—which is true for many solo practices in the country—it is more difficult for these practices to offer traditional associateships that could lead to a buy-in or buy-out.
All of these elements combined are limiting the career choices of new dentists to either an immediate, outright practice purchase (if available); a position with a DSO; working for public health or the military; or starting a new practice from scratch.
So, in light of these market conditions and the challenges they represent, what are buyers looking for? Those dentists who choose to pursue the acquisition of a practice as opposed to the other options available, will be primarily interested in the following:
Is the city appealing to live in? Does the building have “curb” appeal? Where is the practice located in the city and is there potential for growth in that location? Most available practices are located in more established neighborhoods, which may give rise to concerns over the potential for growth and expansion. In order to be appealing, the potential for neighborhood renewal and expansion are important to prospective purchasers, as is the aesthetics of the location in order to attract and retain patients.
Practice facility and equipment
Is the practice up-to-date on technology, software and equipment, including a digital x-ray system? Does it have four or more operatories? Are the tenant improvements up to date? As mentioned above, the way the office “shows,” inside and out, is important to the average buyer. They perceive it not only as a reflection of themselves, but also as a means for attracting and retaining patients, many of which are increasingly likely to judge the quality of the dentist on the quality of the facility. Moreover, most dental schools have implemented digital radiography and other technologies as the new standard of care, and as such, many new dentists are not adept at reading traditional x-rays. They are simply not comfortable practicing without certain technological elements in place. If the practice does not already have those elements, prospective purchasers are likely to take the cost of adding them into account with their offer to purchase the practice.
What is the ratio of active patients to revenues? If the ratio is low, it will be assumed the selling dentist is providing more comprehensive dentistry than the average dentist and/or not referring out much specialty work. The perception of risk is higher in the mind of a buyer relative to a practice like this, since trying to duplicate this type of work and revenue may be difficult. If the ratio is average or higher, it will be assumed the selling dentist is conservative with treatment planning and/or refers out more specialty work.
New Patient Flow & Scheduling:
How many new patients per month is the practice averaging? Where are those new patients coming from? A high volume of new patients generated through extended, external marketing activities without corresponding and commensurate practice growth, may be an indication of low patient retention. Patients are exiting the practice as fast as they are coming in to it. Often an average new patient count of fewer than 12 per month indicates the practice is shrinking or just sustaining. By contrast, an average new patient count of 20 plus per month is more indicative of growth. In addition to the new patient flow, one of the best barometers of a practice’s health is the source of those new patients. A practice that generates most of its new patients through patient referrals is obviously doing something right in terms of patient care.
How far out is the practice booked? How strong is the hygiene and re-care program? In addition to attracting new patients, retaining existing patients is critical to an ongoing, healthy practice. A strong, healthy practice poised for additional growth and possessing the potential for an associate transition will be booked three-to-six months in advance for hygiene appointments and three-plus weeks for operative appointments.
Clinical and People Skill Set
Are your people skills commensurate with your clinical skills? Are both skill sets complimentary to a practice transition? Do you have high staff turnover or high staff loyalty? Do you have high patient turnover or high patient loyalty? The more loyal staff and patients are to a doctor, the more “weight” his/her endorsement carries relative to the sale and transfer of goodwill to a buyer.
In summary, what are buyers looking for? Buyers are looking for practices in more populated and desirable areas with potential for additional growth. They are looking for appealing facilities with the latest in dental technology. They are looking for loyal patients and staff, healthy new patient flow and an active patient base sufficient in size to accommodate consistency in revenues. In light of the growth and prevalence of DSO’s, they are also looking for lower risk opportunities and steady income.
Considering these many factors, is the current market a buyer’s market or a seller’s market? The answer is: it depends. A prospective seller in an urban market with a healthy practice, an up-to-date facility and a consistent history of patient loyalty with strong revenues will find the market favors him/her considerably. A prospective seller in a small town or less desirable area, with dated equipment and facility, high turnover and/or declining revenues, will discover he/she is at the mercy of the perceptions of value found in the mind of prospective buyers—which could be much less than expected.
About the Author: Marie Chatterley is with CTC Associates. Contact her at 303-795-8800 or visit www.ctc-associates.com.