The term Entrepreneurial Satellite Practice, or ESP, implies the practice you’re purchasing will achieve some sort of investment objectives. I coined this term more than a decade ago when referring to the 12 practices I purchased within seven years after I graduated from dental school.
In these situations, the investment return is often very profitable, but you do lose the practice’s cash flow once selling the asset. That means you forfeit all the growth momentum. But by using the models I’ve illustrated in the previous article, you can have the proverbial cake and eat it too. That’s because ESPs with a continual receiptalization strategy provide a return of capital, a cash investment return, monthly cash flow, debt elimination and future equity growth.
After a full day of lecturing on this topic, a dentist approached me and regretfully said, “I wish I would have attended this lecture a year ago prior to selling my $5 million practice.” He then went on to explain that after taxes were paid on the sale price and net funds invested, he found himself living off 90% less monthly income than before he sold the practice. Ouch. That’s a pretty significant drop that could have been avoided if he had followed the models I have outlined previously.
There are three main aspects with every practice acquisition: finding, funding and farming. Finding involves locating the opportunity, funding involves the financial structure of the transaction from cash to seller-financing to third party financing, and farming involves the transitional management and increase of the acquired practice.
To help you understand the process even better, I’m going to share examples of some of my personal acquisitions with you.
Case Study No. 1
A dentist who lived in a town with a population of 58,000 had been trying to sell his five-operatory practice with 1,800 active patients for three years. His annual revenues had decreased to $550,000. I met with him and his wife and asked what price he wanted for his equipment, supplies and patient records if we closed within a week. The dentist, who was ready to retire and spend more time with his family, told me he would sell for $20,000. Not surprisingly, I wrote him a check that night.
I merged the practice with a nearby regional location, adding about $1 million of revenue in the first 12 months. As you can see, this was a great opportunity to add a fee-for-service patient base at a very reasonable price, allowing for a high ROI.
The arrangement benefited the seller too. He could enjoy his retirement knowing his patients had a home, and he didn’t have to deal with selling his equipment online for pennies on the dollar. The merger also allowed for a new trial partner to be added thanks to the 1,500 additional patients added to the practice.
Case Study No. 2
I found this opportunity through an online advertisement in the state dental association classified ads. A 62-year-old dentist who had been in the same location for 20 years had slowly started to cut back. At this point, he was collecting $367,000 annually out of six operatories with six hygiene days per week working three days per week with 1,600 active patients. He was mainly placing large amalgams and core build-ups.
He was asking $267,000 for the practice, but also wanted to sell the 9,000 square foot building that came fully leased. A periodontist worked in the six-operatory suite next door and a dental lab took up the lower level. Seven dentists had viewed the practice before me and passed up the opportunity. Why? It didn’t “cash flow” with the current numbers on paper. The practice’s 85% overhead costs left a net of $55,050. The debt service on the $257,000 asking price would put the buying dentist below poverty level with an annual income of less than $20,000. The bank typically doesn’t finance transitions like this.
So what did I do? I offered the retiring dentist a package deal: $100,000 cash for the practice and $825,000 for the building, for a total of $925,000. The bank financed both simultaneously with a 10% down payment. After the first year, the practice collected $980,000. By year two, it was doing $1.8 million with the addition of minimally invasive conventional dental implant procedures. The trial partner who participated in this practice has done very well.
Practices like this one represent great targets if you’re looking to open a geographical region to add to an existing private regional group. These diamonds in the rough are out there, you just need to incorporate multiple search techniques to find them and take action on the value added techniques presented in this book. Better yet, find a team of dentists who are already on track for a great deal of success.
Case Study No. 3
When I first met this dentist, he was 69 years old. He was working five days a week and collecting $280,000 a year. Most of the dentistry he completed involved large four and five surface pin-retained amalgam restorations. He did his own lab work for full gold crown restorations and while he had 890 active patients, he had a list of 2,200 other patients he hadn’t seen in the last 24 months. He did all of the hygiene himself, but didn’t recommend regular cleanings. He was mainly fee-for-service with a few PPOs.
With just two operatories, this practice represented a good merger candidate. So I offered to pay him $25 for every chart of patients who came to my main practice for their hygiene visit during the first year. In that first 12 months, 790 patients came in, and I paid the doctor $19,750. My total return in completed treatment was $800,000. Patients continued to come in for the next two years.
Rather than simply closing his practice and sending a letter to his patients offering to transfer their charts, this doctor’s patients easily found a new dental home while he received some remuneration for the transaction. If the negotiation is addressed properly, value-added opportunities like this can be great merger candidates purchased on a per chart basis.
Case Study No. 4
This 62-year-old dentist owned a practice that collected $570,000 a year. It had five operatories, three doctors and two hygienists. He wanted to cut back to two days a week and to continue working in the practice as an associate. He was looking for $280,000 for the practice and $200,000 for the building.
My grandfather funded a permanent life insurance policy the day I was born and I continued to fund it once I was of age. I used the cash value in this policy for the down payment and the phasing out dentist agreed to seller-finance the rest. I offered full price for both the building and the practice. Why would I do that? When you offer full price, the seller is sometimes more flexible with terms. In this case, we didn’t use a bank to complete the deal, which is a great fit in certain situations.
Once I acquired the practice, I put in a sixth operatory, completed light remodels and added implant placement as a new service. I also used several other value-added techniques and increased practice revenue by more than 300% in two years.
Practices like this one can be excellent ESPs as locations to a regional group or seed practices for newly formed regional groups.
Case Study No. 5
I’ve often found certain markets have several recently retired dentists or an extremely favorable dentist to population ratio. In these cases, it might make sense to acquire a vacated dental space by either purchasing the real estate or leasing the premises. The average cost for a moderate quality dental build-out today is $90-$150 per square foot. Taking over an existing space offers incredible savings, and that of course allows for the founder(s) of the practice to hold a higher amount of equity.
I found this particular opportunity in a 4,000 square foot facility. Two dentists vacated the practice during the difficult recession that hit our country. This was a very high quality build-out with an internal cost of $850,000. I paid $60,000. I purchased equipment and started the practice for a total of about $150,000.
I eventually expanded the practice to eight operatories to accommodate the 150 new patients who came in each month. Partnership sales allowed me to convert equity into cash, and the practice is now part of a four-location private group of eight co-owners.
Case Study No. 6
When you have a practice or private group with great new patient flow or limited space, purchasing an existing building that either can be easily converted to a dental practice or that boasts a great location can be a wonderful opportunity. In one private group I’m involved with, we purchased two buildings in the same year. This gave us 14 operatories in each location for a total of 28 new treatment rooms.
If a group is experiencing rapid growth, sometimes finding a larger building and converting it into a dental practice is the best way to create enough treatment rooms. I did this with a spa that went out of business during the recent recession and with a strip mall that had slowly gone vacant. I converted a Blockbuster video that was once in that strip mall into a dental practice and the rest became space for medical/dental use.
These techniques are beneficial for the dental practice owners and make sound individual real estate investments. Because real estate requires a minimum 20% down payment, as opposed to the typical 100% financing required for practice ownership loans, these opportunities are usually more feasible for dentists who have been owners for many years.
Case Study No. 7
Once financial momentum enables a private group to reach a certain size, the practice can creatively acquire practices without incurring debt at the clinical LLC level. Exceptions to this rule are private groups that rapidly expand in their region. Dentists should have a sound strategy to pay off that debt ahead of time. Certainly, every dentist who buys into a practice as a co-owner does take on debt to become an owner, but as the clinical LLC operates to acquire other locations, debt should be carefully calculated and then eliminated when feasible. This technique requires converting equity in the group as a whole to acquire the additional locations. Here’s an example of a location added to a group I’m currently involved with from a management aspect.
In this group, there were five partners collecting $586,000 monthly. They had such great momentum, they decided they wanted to open a practice in a community 30 miles away from one of the existing practices. Through a local dental supply representative, they found a retiring dentist who was ready to sell. The practice was placed under contract as they simultaneously added a new partner to the practice as a whole for $675,000. The purchase price was $460,000, allowing the group as a whole to add another location without incurring any debt, while still receiving $215,000 to split among the owners.
This was a great situation for the new partner. He stepped into the newly acquired practice as the founder without the risk associated with a solo practice acquisition. The group guaranteed a minimum income of $12,500 a month for the first 90 days, even though the practice on its own merit had an after debt and marketing cash flow of less than $9,000. The new partner’s profits were derived from the group as a whole, with all the vendor discounts and upper-end staffing structure in place, allowing for much higher income potential. This ended up being a very traditional solo practice transition with all of the upside of modern regionalized private practice group ownership. Within the first year after the acquisition the practice has doubled in revenue, allowing for all dentists involved to “equity harvest” during the next phase.
When incorporating investment practice opportunities into your overall DDSO growth strategy, you are able to maximize your returns and add more revenue into your multiple stream of income plan. If you are interested in transitioning into a new model of private group expansion, please e-mail TransitionTimeBook@gmail.com to book a complimentary strategic planning session with myself. This 20 minute call will be devoted to talking strategy related to adding additional locations, doctors and streams of income in the contest of your existing practice or group. With today’s economy in full swing, now is the time to take action and enjoy the benefits of these principles!
Dr. Brady Frank, DSS is an author, speaker, inventor, dentist, coach and entrepreneur. He has been a private group practice owner for over 15 years. Through his own experience of employing over 28 associates in the mid-2000s, Dr. Frank created several business models that have allowed hundreds of dentists over the last 12 years Transition to Freedom. You may contact Dr. Frank at 866-775-3909 or TransitionTimeBook@gmail.com.