In a dental group practice, growth is a critical piece of determining enterprise value. Growth is achieved in two different ways: organic and developmental. Organic growth includes such factors as expanding hours, increasing services, adding specialists, etc. Developmental growth includes opening new locations ("de novos") or acquiring existing practices. This column will focus on developmental growth.
Maria G. Melone, MSA, CPA, CVA, a partner at MORR Dental Solutions.The de novo and acquisition strategies both come with pluses and minuses. Pursuing de novo growth puts you in greater control in that you select the site, direct the build-out and equipping, and control the culture of the office from day one. On the flip side, you are building up a patient base and revenue stream; therefore, there will be a drag on earnings and cash flow for anywhere from 18 months to three years.
An acquisition strategy provides the group with an active patient base and ongoing revenue stream and cash flows. The downside is that you inherit the physical plant and culture of the office, which may not be fully in line with other offices already part of your group.
A thoughtfully developed acquisition strategy can be a highly effective initiative to augment internal growth initiatives. That being said, it does not come without its challenges and can be demanding on both the operational and doctor leadership, and should be carefully pursued. The risks include the following:
- Operational: Is the proper team in place to integrate the new practice into current operations?
- Clinical: Does the new clinical staff share philosophy of care of patients and maintain the same level of standard of care?
- Managerial: Is there adequate support for the practice, either based on existing team members at the time of acquisition or somewhere else in the group's organization?
- Financial: Has the acquisition been properly priced, and have any business risks been overlooked that may threaten the continued operations of the acquired location?
Acquisition growth provides immediate growth, but it can also fill excess capacity in existing locations and more quickly provide access to different geographic areas.
The next several years will continue to provide prospective buyers, in most markets, a tremendous opportunity as the supply of practices (sellers) will outpace the demand for practices (buyers). This is largely in part caused by the difference in the numbers of retiring dentists versus the number of graduating dentists, the shift in graduates from male to female, the excessive educational debt loads of graduates, and the ever-increasing cost of technology needed to maintain the standard of care in a dental practice.
The benefits can include possible leverage with payors, creation of professional opportunities for all levels of staff, equity value appreciation, supply savings through economies of scale, and addition of services or talent. I have seen many groups successfully integrate acquisitions into their growth strategy and realized all the above-mentioned benefits. In addition, their success then built on itself, as the dental community became aware of what the group was doing, and, in some cases, led doctors to want to be part of this growing, positive force in their market.
Getting started
How do you get started? The first step I recommend is to engage in a self-assessment exercise to identify the following:
- How have you grown in the past?
- What are you trying to achieve through acquisition growth?
- What team members are available to contribute to the effort?
Once you have identified who is going to be involved and why you are interested in growth through acquisitions, your team needs to incorporate this topic into its regular meeting structure. Good deals aren't necessarily going to find you, and you may have to kiss a few frogs before you find your prince. If you are going to pursue acquisitions, you need to be attuned to what is happening in your market, and, ideally, you want to know a doctor is interested in selling before he actually lists his practice with a broker or otherwise.
I am on the board of a nonprofit, and we are currently in the process of developing a storytelling culture with three main objectives: engage our board members and volunteers in spreading the word of our organization and the amazing work we do; increase our exposure and hopefully base of contributors of both time and financial resources; and remind ourselves of the good work we do and the reasons why so many of us volunteer. I think developing an effective acquisition strategy is quite similar. To be most effective and successful, you need to engage all members of your organization in identifying potential leads; if everyone is spreading the word in regard to the organization's growth, you will likely increase the amount of leads that will seek you out, and everyone in the organization will continually be reminded of why you are pursuing growth, as well as supporting the mission, vision, and values.
The next step in outlining your strategy is to consider the different types of acquisitions and how your team's efforts may differ in each circumstance. I consider there to be three main types of acquisitions: patient records, roll-in, and new location.
Each type of acquisition requires involvement from both the clinical team and the management team, although the depth of each team's role may vary some. Generally speaking, the clinical team members are tasked with evaluating the clinical care provided prior to the acquisition. They are also trying to assess how the patients and the clinical team being acquired will fit into their organization. The management team is focused on ensuring a smooth integration, understanding how the practice's business functions are handled and the impact of any changes that will be required.
Growth through acquisition is not an easy process, but can provide meaningful increases to a business' earnings and operations in a short time. The most difficult aspect to assess in an acquisition is the people, and the people are what ultimately make things run smoothly. Spending time to understand the people and the culture of the organization you may acquire is one of the most critical elements to executing this strategy effectively.
Maria G. Melone, MSA, CPA, CVA, is a partner with MORR Dental Solutions of Westborough, MA. She began her career working for KPMG in their Healthcare/Life Science division. She then spent 10 years working for one of the largest dental practice management companies in the country. During her tenure, she was involved in nearly 100 transactions and was responsible for all aspects of the acquisition process.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
