Expanding a dental practice is an exciting step for dental entrepreneurs, but deciding where to grow can be daunting. Should you focus on densely populated urban areas or target spread-out rural regions?
Deciding which practice to purchase is rarely a straightforward choice between one type or another. The decision requires the right advisers along with a deep understanding of market dynamics, patient needs, and your practice's unique capabilities and operational logistics.
Lessons from real-life scenarios: Why you need experts with dental industry experience
Kim McCleskey.
Consider a recent example: A dentist looking to expand took poor advice from their certified public accountant (CPA), who lacked dental industry expertise. The CPA discouraged the clinician from purchasing a practice 15 minutes away, sharing concerns about overlapping patient bases.
On the surface, the recommendation could seem logical: Why risk redundancy between two locations in such close proximity? However, the practices were vastly different: one focused on general dentistry, while the other had a general dentistry foundation but specialized in cardiovascular-related periodontal care and other specialty services that were not offered at the other location.
While both practices were in a dense suburban area, their proximity offered huge advantages. The specialty practice, focusing on cardiovascular-related periodontal care, not only filled a niche in the market but complemented the dentist's existing general practice. Together, these two practices could have provided comprehensive care under one network, offering opportunities to:
- Attract niche patient demographics in a highly populated market
- Offer comprehensive care across both locations to increase patient retention
- Leverage the dense area's large population to sustain both practices without cannibalizing the patient base
- Reduce overall tax liability by operating multiple locations, which could allow for greater expense deductions and tax advantages
For market saturation, we typically recommend having a minimum of 1,200 patients per dentist in the area as a solid foundation for multiple practices. This specific market fit well within this threshold, making it ideal for expansion.
The CPA's advice led the dentist to pass on a unique opportunity, one that an expert familiar with the dental industry would have recognized as a strategic move. By skipping this opportunity, the dentist missed out on the benefits of expansion in a dense area, where the market had the capabilities to support not just one but two thriving practices. This example underlies why it's so important to consult an expert who understands the nuanced opportunities of the dental industry when evaluating areas for expansion.
Market dynamics in dense vs. spread-out areas
While a dense market can offer unique opportunities, it also brings its own set of dynamics that must be carefully considered when deciding where to expand. Here’s what to consider in dense versus spread-out areas.
Opportunities and challenges in dense markets
Expanding into a dense urban market offers unique advantages, but it also requires a thoughtful approach. With a larger patient pool, urban practices can cater to specialized services such as orthodontics or cosmetic dentistry. However, the abundance of dental offices in these areas creates intense competition, making it essential to stand out through innovative marketing strategies and exceptional patient care. The convenience of urban locations, with high foot traffic and accessibility, often translates into greater patient acquisition, but maintaining patient loyalty can be more challenging.
Advantages of spread-out areas
In contrast, practices in more spread-out areas benefit from less competition, allowing them to establish a strong foothold in their communities. Patients in rural or suburban regions tend to be more loyal, viewing their dentists as trusted healthcare providers. While these locations may lack the high-density patient base of urban centers, they offer a steady and reliable stream of patients who value continuity of care.
Cost considerations
Cost considerations also play a significant role in expansion decisions. Urban real estate prices and operational costs are considerably higher, but these expenses can often be offset by premium services and higher revenue potential.
Finding available space in competitive urban markets can be a challenge, making established practices an appealing acquisition target. On the other hand, rural areas offer lower real estate and operating costs, making expansion more financially feasible. However, the need to invest in patient outreach, such as advertising and community engagement, can add to overall expenses.
Scaling and talent acquisition
Scaling operations presents different challenges in each setting. Urban practices benefit from the proximity of multiple locations, allowing for centralized marketing and administrative services. However, patient bases may overlap, potentially leading to revenue cannibalization. Access to a larger talent pool in cities makes recruitment easier, but competition for skilled professionals can drive up salaries and benefits. Meanwhile, rural practices may struggle to attract talent, particularly specialists, due to a smaller candidate pool and less willingness to relocate. Despite this, employee loyalty in these areas is often stronger, leading to lower turnover and a more stable team.
Patient demographics and needs
Patient demographics further differentiate these markets. Urban patients often seek a wider range of services, including cosmetic and high-end procedures, but they may be less loyal due to a greater number of available options. Conversely, rural patients tend to form lasting relationships with their providers, appreciating the reliability and accessibility of local care. In underserved areas, general dentistry and family-focused services are particularly valued, making these locations attractive for expansion.
Valuation and exit strategy
When considering a long-term strategy, valuation and exit opportunities should not be overlooked. Urban practices are highly attractive to dental service organizations (DSOs), which manage nonclinical operations for dental practices, and private equity groups due to their strong revenue potential, often driving up practice valuations. In contrast, rural practices may have a smaller pool of buyers, but their strong patient loyalty and minimal competition can still make them appealing to the right investor.
Strategic advantages of mixed expansion
Combining dense and spread-out locations can offer a strategic advantage. Urban practices may generate higher revenues, while rural practices foster patient loyalty and provide stability. For example, a dentist with multiple practices in dense areas might acquire a rural practice to diversify their portfolio and create feeder opportunities for their urban locations.
Key takeaways for dental entrepreneurs
If you're weighing whether to expand your dental practice to an urban or less densely populated area, take the following actions:
- Consider your long-term goals. Whether you're planning for a future sale, sustained growth, or diversification, align your expansion strategy with your ultimate objectives. For example, for a future sale, you might focus on building buyer appeal through profitability and patient volume. For sustained growth, you could prioritize scalability, patient loyalty, and underserved markets. If diversification is key, consider a mix of urban and rural locations or general and specialty practices to create multiple revenue channels. Clearly defining your goals will guide your decisions and ensure your strategy supports long-term success.
- Surround yourself with experienced advisers. From brokers to CPAs to financial experts, working with professionals who understand the dental industry is critical. A seasoned specialist will use a combination of data and industry acumen to inform decisions. They can analyze patient demographics, sphere of influence, and market dynamics to identify ideal expansion opportunities. Tools like PTS' e-book on The 3Fs of Large Practices can provide valuable insights.
If you don't know where to start, turn to trusted brokers with dental industry experience. They can connect you with vetted, experienced advisers who will help you navigate the complexities of practice expansion and transition, ensuring the best possible outcome for your unique goals.
Bottom line
Expanding your dental practice's footprint requires careful planning and a nuanced understanding of market dynamics. By weighing the pros and cons of dense versus spread-out areas and working with the right advisory team with dental industry experience, you can make informed decisions that set your practice up for long-term success.
Kim McCleskey is a practice transition consultant with Professional Transition Strategies. She has worked in dentistry for more than 30 years and is a certified professional business coach. She can be reached at [email protected].
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.
