The Practice Buyer's Corner - Random Musings from the Buy-Side

The purpose of this blog is to share current, real world, experiences on the topics of practice valuation, practice transition, retirement planning, and building equity value - over time - in your dental practice.

Blog By:
seanepp

What is Key Person Risk?

Key Person Risk is the threat to a business’ stability, operations and financial performance arising from its over-reliance on a single individual or small group, such as a founder CEO or a key sales person.  If the key person leaves, becomes incapacitated, or dies, the business could struggle to survive.

People’s eyes tend to get rather large, rather quickly, when they see large revenue and profitability figures.  ‘Tis Human nature.  The same instant gratification that might initially attract you to something could also be hiding crucial red flags.

It is very important to break down the results of any practice on per-provider, per-time increment, and per-patient bases.  Only then, does the profile of the practice in question start coming into focus.

Aggregators tend to focus the $s.  Operators tend to focus on the fundamentals.  Where is this practice coming from, where is it headed? Is any of that realistic or sustainable?

Patience, patience, PATIENTS.

While everyone wants to rush to the income statement and look at revenue, SDE and EBITDA the only numbers that truly matter are patient metrics - active and new.  Why?  You can’t provide dental care to patients that don’t exist.  Have the active patients (hygiene recall) been growing or declining over time?  Have shifts in insurance participation and/or external marketing driven this?  Same questions for the new patient metrics.

What are some traits of a fundamentally risky practice that could be hidden by an attractive income statement?:

- Shrinking patient base - active and new

- Declining participation in insurance plans

- Reducing or ceasing the intake of new patients

- Not backfilling for provider turnover

- Intentionally shrinking the practice

The same choices that can help maximize profitability usually have an equal but opposite effect on growth.  A practice having its best year ever is usually only good for one person - the current owner.  More often than not, these practices have only downside for the next owner be they independent or group.

Newer and inexperienced group buyers (aggregators) continue to spring up every day.  The practice broker marketplace has gotten very effective at separating private equity firms and banks from their capital.  Heck, there are experienced group buyers still making the same poor choices, at least for now.

Not all EBITDA is created equal.

Good luck, have fun, don’t die!

Stay frosty,

Sean