What is the fundamental asset being conveyed in the sale of a dental practice?
Nope, it is not how much revenue or EBITDA the practice generates.
It is THE PATIENT BASE!
This applies primarily to practices providing hygiene services be they a) general dentistry, or b) pediatric and periodontic specialties.
Long story short, you can’t provide dentistry to a patient that does not exist. This is why a curious investor should focus on the interplay between patient metrics and the financial results.
It is important to point out that not all revenue and EBITDA are created equal. What matters is how that revenue and EBITDA are being generated and what that translates into per patient encounter.
Is the practice you’re considering focused on developing a healthy recall/recare/preventative program or are they focused on maximum same-day dentistry? What should you look for? What are some good targets to consider?
Active Patients
Sure, every practice management software can generate a variety of “canned” patient reports. Those may or may not be directionally accurate. I learned the hard way to reconstruct the patient base from the component parts – i.e. the individual service codes – and not rely on any PMS-generated figures as each system does it differently.
A solid number to target is 1,250-1,500 Active Patients for full-time dentist (4 days per week). No surprise, this aligns with similar targets for hygienists (800-1,000 active patients per FTE RDH). Said differently, a four-day per week practice with the above Active Patient numbers should support 1 FTE dentist and 1.5-2 FTE hygienists. This might sound familiar to readers.
Too few patients and/or too many staff hours usually translate into reduced practice busyness and profit margins. It may require diligence looking into marketing and insurance strategies to add New Patients (below) to the practice.
Too many patients and/or too few staff hours is usually an exciting, high-class opportunity to try solving for!
The grand pappy metric in practice acquisitions is not a revenue or EBITDA multiple, it is the effective price per patient (“PPP”). This can be a helpful data point to pivot around especially when comparing multiple practices opportunities at the same time.
New Patients
The gold standard for determining a New Patient is the ADA150. This is a conservative and unassailable figure. To include ADA140s would beg the question of the practice model. Practice models that have a relatively high contribution of 140s compared to 150s tend to indicate a focus on triage and/or same-day dentistry as opposed to a recall-driven, preventative-oriented practice. It isn’t that 140s don’t count, it’s that 150s are cleaner and simpler to focus on.
A solid number to target is 20-25 150s per month for each full-time dentist (4 days per week). This figure helps to mitigate natural customer attrition (death, relocation, insurance changes, etc.) and provide the opportunity to grow the overall patient base, practice and results.
How do you drive more new patients? There are no silver bullets here. It usually comes from a combination of working internal referral systems, external marketing efforts, and thoughtful insurance plan participation choices.
A fun exercise can be isolating a) the direct marketing spend, and b) the indirect marketing spend of insurance discounts - both separately and combined. What is it actually costing you to acquire those new patients? This figure can help provide perspective on what you’d be willing to spend on a practice merger, a chart acquisition, or even a change in your external marketing spend up or down.
What To Be Wary Of?
Traits of practices with Active Patient challenges can include:
- Lower overall busyness and below average provider productivity
- Carrying excess staffing which translates into reduced profitability, valuation concerns, and embedded HR/PR issues for the next owner
- Relatively high production per patient - a.k.a. the “crowning out” the practice
Practices that do not accept new patients warrant greater scrutiny. This could present a practice that should have sold whilst still on their upward trajectory. Turning away new customers is usually not a healthy choice. This is a conscious decision to shrink the practice and its value. It can also be a difficult choice to reverse once it builds momentum in the wrong direction.
Practices with low new patient metrics. What is driving this? Did they cease participation in one or more insurance plans common in the local market? Did they shift gears on their marketing spend? Reputational/PR issues?
The foregoing information is oriented towards maximizing the value of a practice upon sale or new partnership. There are all sorts of ways to profitably shrink a practice for the incumbent owner. Those same methods are usually diametrically opposed to maximizing the value of the business upon a sale.
As always, I hope this helps. Please let me know if you have any questions.
Best,
Sean