Home Small Group PracticesLegalBusiness Models DDSO Case Studies: The Entrepreneurial Satellite Practice (ESP)

DDSO Case Studies: The Entrepreneurial Satellite Practice (ESP)

by Brady Frank

This term implies that the practice being purchased will achieve some sort of investment objective. It is a term I coined over a decade ago when referring to the 12 practices that I purchased within 7 years after dental school graduation.

After each practice had increased substantially, I sold the practice to the associate working in the practice or another dentist. In these situations it is true that the investment return is oftentimes very positive, however, the cash flow of that practice ends. All the momentum of growth is forfeited. With the models I illustrate here, you are able to have your proverbial cake and eat it too.

ESPs with a continual exit strategy provide a return of capital, cash investment return, monthly cash flow and the upside of future equity growth.

Recently, after a full day lecture on this topic, a dentist approached me at the front of the room and regretfully said, “I wish I would have attended this lecture a year ago prior to selling my $5M 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 of 90% less monthly income than prior to selling the practice.

Experience is learning through your own mistakes, wisdom is learning through the mistakes of others.

There are three main parts to any implant procedure. The fixture itself, the abutment, and finally the prosthetic loading the abutment. Just as there are three parts to an implant procedure, there are three main aspects of importance with every acquisition: finding, funding and farming. Finding involves the various aspects of locating the opportunity. Funding involves the financial structure of the transaction from cash to seller-financing to 3rd party financing. Farming implies the transitional management and increase of the acquired practice. The following are personal examples of acquisitions. With each example I will give the details of finding, funding and farming each opportunity to grow your DDSO.

Acquisition Case Study #1

A dentist in a town with a population of 58,000, tried for 3 years to sell his 5 operatory practice of 1,800 active patients. Annual revenues had slowly decreased down to $550,000 as he looked forward to enjoying the retired life. I met with him and his wife and asked what price he would sell his equipment, supplies and patient records if we closed within a week. He surprisingly replied with a number of $20,000. I wrote him a check that night during our meeting around his kitchen table. The practice was merged with the nearby regional location and about $1M of revenue was added in the first 12 months through this merger. This was a great opportunity to add a fee-for-service patient base at a very reasonable price allowing for a high ROI. The seller was allowed to enjoy his retirement knowing his patients had a home and did not have to deal with selling his equipment on online for pennies on the dollar.

The seller would not have been in the situation of not being able to sell his practice at a more reasonable value if he had chosen to add a no-risk trial-partner to the practice. The new dentist would have sparked life to the declining practice while allowing the retiring dentist to phase-out at his own pace with a mandatory final sale to the new dentist prior. I completed this deal 15 years ago. If I were to do the deal today, I would acquire and keep the physical location and add a co-owner to the practice or add the location to an existing group of co-owners.

Acquisition Case Study #2

This opportunity was located through an online advertisement in the state dental association classified ad. A 62-year-old dentist in the same location for 20 years had slowly cut back during the most recent 3 years. He now finds himself collecting $367,000 annually out of 6 operatories with 6 hygiene days per week working 3 days per week with 1,600 active patients. Mainly placing large amalgam core build-ups and not doing crowns since he was near retirement. His asking price was $267,000 for the practice but also desired to sell the 9,000 square foot building which came fully leased. A periodontist in the 6 operatory suite next door and a dental lab in the lower level. Seven dentists had viewed and passed up the opportunity because it did not “cash-flow” with the current numbers on paper. At 85% overhead that left a net of $55,050. After debt service on the $267,000 price, that would put the buying dentist below the poverty level at an income of less than $20,000 annually. The banks generally do not finance transactions like this.

I offered the retiring dentist a package deal including both the practice and the building: $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. The seller achieved his goal of selling both assets. At the end of year one post-acquisition, the practice collected $980,000. Year 2: $1.8M and another dentist was added to the practice. Practices like this are great targets to open a geographical region or add to an existing private regional group. Diamonds in the rough like this one are out there, one just needs to incorporate multiple search techniques.

Acquisition Case Study #3

This dentist was 69 years of age at the time we made contact. He was collecting $280,000 per year on a five day work week. The majority of his dentistry involved large 4 and 5 surface pin-retained amalgam restorations. He did his own lab work for full gold crown restorations. He had 890 active patients, however, 2,200 that he had seen in the last 24 months. He did all of the hygiene himself but did not recommend regular cleanings. He was mainly fee-for-service with a few PPOs. With just two operatories this was a good merger candidate. I offered to pay him $25 for every chart of patients that came to my main practice for their hygiene visit during the first year. 790 patients came in during the first 12 months and I paid a total of $19,750 that year for a total return of $800,000 in completed treatment during that first year. Patients continued to come in for the next two years. Rather than simply close his practice and send a letter to his patients offering to transfer their charts, this method allowed a home for the patients as well as some remuneration for the transaction. Value-added opportunities like this can be great merger candidates that can be purchased on a per chart basis if the negotiation is addressed properly.

Acquisition Case Study #4

This 62-year-old dentist had a practice collecting $570,000 with 5 operatories, 3 doctors and two hygienists. He desired to cut back to two days per week and continue working in the practice as an associate. He also preferred to sell the building. He offered $280,000 for the practice and $200,000 for the building.

My grandfather had 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 fund as the the down payment. The phasing out dentist agreed to seller-finance the rest. I offered full price for both the building and the practice. If full price is offered, sometimes the seller is flexible with terms.

In this case a bank was not used, which may be a good fit in certain situations. Once the practice was acquired a sixth operatory was fit, light remodels completed and implant placement added as a new service. Several other value-added techniques were used to increase the practice by more than 300% in two years. The building served as a great long-term residual income investment.

I have continued to enjoy the benefits of permanent life insurance policies as I have invested in practices. It is very important to choose the correctly structured policy for your needs. Witnessing the improper use of whole life policies over time induced me to take the education necessary to become a licensed life and disability agent. This has helped greatly in understanding the proper policies needed for all parties, as well as the creative structuring of value-added practice opportunities. Practices like this can be excellent ESP or entrepreneurial satellite practices as locations to a regional group or can be great seed practices to a newly formed regional group.

Acquisition Case Study #5

Oftentimes, certain markets have had dentists recently retire or the dentist-to-population ratio is extremely favorable. In these cases, it can make sense to acquire a dental space that has been vacated either by 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. Opportunities to take over existing dental spaces offer incredible savings which allows for a higher amount of equity held by the founder(s) of the practice. One such opportunity involved a 4,000 sf facility that two previous dentists had vacated during the difficult recession that hit our country. It was a very high-quality buildout with an internal cost of $850,000. I ended up paying $60,000. I purchased equipment and started the practice for a total cost of about $150,000.

This practice was eventually expanded to 8 operatories to accommodate the 150 new patients per month. Equity was converted to cash through partnership sales and is now part of a four location private group of 8 co-owners. There are several specific ways to locate opportunities like this shell of a practice.

Acquisition Case Study #6

For a practice or private group that already has great new patient flow but limited space, oftentimes it makes sense to purchase an existing building that can be converted easily to dental or happens to be in a great location for a dental practice. In one private group that I am involved with, two buildings were purchased in the same year with 14 operatories in each location for a total of 28 new treatment rooms. In the case of a group experiencing rapid growth, sometimes the only way to create enough treatment rooms is to convert a larger building into a dental practice. One of these such facilities was a spa that went out of business during the recent recession and the other was a strip mall owned by a physician that had slowly gone vacant. The suite of a former Blockbuster video in that strip mall was converted to a dental practice and the remainder of the building converted to medical/dental use. These techniques are beneficial for both the dental practice owners and as individual real estate investments.

Due to the requirement of a 20% down-payment on the real estate as opposed to the typical 100% financing for practice ownership loans, these opportunities are usually more feasible for the dentist who has been an owner for many years.

Acquisition Case Study #7

Once a private group reaches a certain size, due to their financial momentum, the practice is able to creatively acquire practices without incurring any debt. This technique does require the converting of equity in the group as a whole in order to acquire the additional location.

This example is an additional location added to a group that I am currently involved with from a management aspect. The group had reached momentum with five partners collecting $586,000 monthly and wanted to open a practice in a community 30 miles from one of the existing practices. A practice of a retiring dentist desiring to sell was located through a local dental supply representative. The practice was placed under contract by the group and simultaneously a new partner was added to the practice as a whole for $675,000. The purchase price of the practice was $460,000 allowing the group as a whole to add another location without debt and still receive $215,000 to be split among the owners.

This ended up being a great situation for the new partner who was able to step into the newly acquired practice as the founder of that location without the typical downside and risk associated with a solo practice acquisition. The group guaranteed a minimum income the first 90 days of $12,500 per month even though the practice on its own merits had an after debt and marketing cash-flow of less than $9,000. Additionally, 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 a much higher income potential. A very traditional solo practice transition with all of the upside of modern regionalized private practice group ownership.

If these acquisition strategies seemed interesting to you, please inquire about our upcoming seminars in Scottsdale, AZ. Additionally, if you would like to learn these techniques in video format, just go to DDSOmastery.com. Or go to TransitionTimeBook.com for a free book + S&H. Cheers to your DDSO journey!

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