Home Practice ManagementManagement Multiple Locations and Multiple Streams of Income: Cracking the Code

Multiple Locations and Multiple Streams of Income: Cracking the Code

by Brady Frank

The ADA statistic is sad, but true, that "94% of dentists are unable to retire with financial abundance by the age of 59 1/2." It is no wonder why the vast majority of us dentists fall short of our financial goals with some of the current threats and conditions in the marketplace. Multiple dental schools have opened in the last 5 years leading to increased competition, insurance reimbursement has been reduced in recent years, more dentists are competing with high marketing budgets, overheads remain at higher than desired levels and DSO expansion has created more competition with private practitioners.

I was once so emotionally burdened by these statistics and their effects on my life that I intensely studied this 6% of financially abundant practitioners that broke the chains to freedom: financial freedom, time freedom and professional freedom. What I found amazed me. The 6% who defied the odds all used very similar pathways, protocols, systems, investments, tax-advantaged strategies, vertical businesses and dentist-owned transition strategies.

Back when I purchased my first practice in 2001, the road map for success in private practice seemed well-defined. Over the last 15 years, however, the dental landscape has changed significantly. I will focus on how the business environment of dentistry has changed. Specifically, the conglomeration of a very fragmented dental industry and how the private practice dentist can leverage these changes for practice growth.

Fifteen years ago, a very small percentage of dental practices were contracted with DSOs (Dental Support Organizations). Today that number is multiples higher, and growing rapidly. For many dentists, this has caused concern. For others, this has produced excitement for new opportunities. Whichever side of the fence you are on, you can learn the specialized knowledge, techniques, and protocols that the most successful DSOs have used, and take part in dentistry’s new boom.

Graph 1: The evolution of vertical companies and multiple streams of income within the DDSO model requires a great deal of strategic planning as you transition to freedom.

Graph 2: This graph demonstrates the various rates of return for different asset classes commonly utilized by dentists. The bottom line item represents the creation of your own private equity vertical company and investing in yourself in the dental niche.

There is a trend that causes a lack of financial abundance nearing retirement. In order to avoid being a casualty, savvy dentists must utilize models that have created financial abundance and security for dentists in the past. As I began getting more active in the dental transition environment, I began working with more and more private group practices and was a member of the AADGP (American Academy of Dental Group Practice) studying DSOs that had proven track records of success. When I started applying my transition background to the DSO environment, a unique and new breed of business models began to form. I categorize these under the title DDSOs: a majority DDS owned DSO. DDSOs at their empirical level incorporate the strongest business systems of DSOs, with modern private practice management and ownership. These business models incorporate various business avenues to include passive income, vertical business opportunities, creative mergers and acquisitions, multi-state expansion, dual-entity approaches, economy of scale vendor discounts, and continuing education via advanced IT. Many of these avenues were previously untapped by private practice dentistry, which has allowed for a whole new world of opportunity.

I will lay out actionable steps that will lead to debt elimination, cash-flow and wealth accumulation and increasing incomeproducing assets. As a general premise, these concepts are very simple in that they involve acquiring practice assets at wholesale and building them into valuable assets. After the asset has undergone an increase in value, the increased equity is converted to debt-reduction or cash through a term called equity harvesting. Therefore we are finding, and adding value through what I term, value-added practice acquisition opportunities.

I am a firm believer that most private practicing dentists have the goal of owning their own practice, or being an owner in a small group of growing practices. Truly understanding this fact will allow you to create the most desirable situation for your practice’s business model moving forward. Many dentists very tightly grip the ownership/equity component of their practices, and thus, unknowingly smother the practice growth potential and their own personal financial futures. With proper specialized knowledge you can create ownership opportunities within your practice without losing control or diluting your financial position.

These ownership opportunities begin as what I call trial partnerships as opposed to associates. Trial partnerships provide a low-risk, high-income and equity opportunity for the new dentist. For the practice owner, trial partnerships have a much higher retention and success rate than associates. Let me tell you why this happens. An associate generally earns income or equity from one source, a percentage of production or collection. A trial partner has four sources of income/equity. Base income as a percentage of production or collections, part of the management or DDSO (majority dentist owned DSO) services revenue, pro-rata share of pooled monthly profits and equity/value growth in the practice. Given the choice, I think we all quickly deduce which opportunity, associate or trial partner, a new dentist will view as the most valuable, profitable and fulfilling opportunity.

At the end of the 90 to 365 day recommended trial period, the vast majority of trial partners become clinical co-owners. This means that the new dentist has acquired formal bank financing and purchased an interest in the entity holding the clinical assets of the practice(s), the PC. This new dentist co-owner may also now be a part-owner of the business assets of the practice, the DDSO. Some dentists want to just focus on clinical dentistry, while others desire to have a hand in the business management of the practice. The business management functions are all handled at the DDSO level. (Graph 1). The DDSO is a vital part of the ongoing business model as it allows for increasing business structure within the growing group, an avenue for dentists to earn non-clinical management income and the ability for the founder to maintain control, even while adding multiple co-owners. In my experience, clinical co-ownership incorporating a DDSO has a much higher success rate than the general partnerships of old.

In essence, this model, or family of models, provides a deep transition component, mixed with some of the successful business strategies that the DSOs have been using for years. The result is a sustainable, growing practice that is built for dentists, by dentists. Perhaps the most important facet of these practice strategies is the sharing of the wealth with other dentists via ownership. T. Harv Ekar, entrepreneur and founder of multiple businesses once said, “You will never earn as much income from operating a business as you will from selling a business.”

Using a simple case study, I would like to demonstrate a value-added practice opportunity within the framework of this DDSO/transition model. Whether you currently own a solo practice or a group of 20 or 30 practices, the empirical principles remain the same. This actual case involves a two location practice with the founder and two associates. The founder has $1.4M of practice debt and would like to continue growing as the founder of the practice without the financial and emotional burden of holding the debt. He also realizes that buying another practice with his existing associate model would require taking on more debt if the banks approved him for another loan. There is the nagging problem of the “associate windmill” created by the statistic that the average associate leaves the practice within 18 months. Even of greater concern is the fact that a third location with an associate-driven model will create even more management and administration burden for the founder. Converting to a DDSO model will solve these problems and create the freedom to move forward with confidence.

In this example, I personally worked with the founding dentist to convert his associates to become equal 33% co-owners at the clinical PC level. The founder simultaneously formed a DDSO and gave a certain membership interest in the entity to his new co-owners who are recent graduates still paying off dental school debt. (Graph 2 case study). Now the founder is entirely debt free and has used the excess capital from the co-ownership sales to open his own funding company (similar to a private equity company) to fund the purchase of location #3. Now the founder is developing his multiple streams of income plan earning the interest that the banks would have been receiving. Thus, the value-added practice is acquired from a dentist in the regressive phase of the practice cycle.

The founder’s DDSO managed the transition and applied a variety of practice management, marketing systems to the practice allowing it to double in value within 5 months allowing for a trial partner to be added. At the end of the trial period, the new dentist will acquire bank financing to be an equal 25% co-owner while the existing partners reap the benefits of dental school and practice debt reduction. As long as resources and marketing invested, the value-added practice growth allows for equity increase/appreciation which is then converted to cash for the founder and debt reduction for the previous co-owners. This win-win transition concept is termed equity harvesting.

In this example, within 6 months, the founder has released over $1.4 debt, started his owns practice acquisition funding company, helped two new dentists become practice owners and acquired his third practice earning interest through his own bank.

There are 7 key streams of income that many of these doctors had built into their practices and businesses. These streams of income I refer to as Transition Freedom vertical companies that are related, but separate, from the actual clinical practices. (Graph #1 Vertical Companies) Let me briefly explain a few of the more popular strategies vertical companies used in a multiple streams of income plan. Income producing commercial real estate is a wonderful, tax-advantaged life-long income stream. Using value-added approaches, properties can be purchased to accommodate additional locations and provide a solid ROI for revenue originally created at the practice level. Secondarily, building your own dental membership savings or discount plan can dovetail with your marketing strategy to provide for a multiple return. Building your own plan allows you a passive stream of income, is a wonderful lead generation tool for new patients, and creates a deep level of retention for current patients of record. Thirdly, building your own private equity company is not as complicated and sophisticated as it sounds. Your private equity company will simply use your resources to “invest in yourself” by acquiring undervalued practice assets, increasing the values and then harvesting equity returns on those investments. (Graph #2 Investing in Yourself) Fourthly, Building your own dental lab through wholesale lab relationships in another great vertical to add value and quality to your practice or group. There are three different ways to set up this company, each having their own set of advantages. The details of building these vertical companies, building your own DDSO and others are explored in greater detail in my book and podcast series, TransitionTime.

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.

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