The Multi-Practice Model: An Epidemic in Dentistry

Nate Williams Practice Management, Practice Transitions 25 Comments

At PFG, we hold the view that the multi-practice model doesn’t generally work. This is despite the fact that we could earn a lot more in fees helping doctors pursue their dreams of having 3, 5 or even 10 different locations – all needing bookkeeping and tax services.

And it’s time we raised our voices that the multi-practice model is an epidemic.

I remember when I had my first exposure to the multi-practice business model – 2008, pre-crash.

I was a young associate financial planner and I had spent several days working on the complicated financial plan for this husband and wife team in FL, who owned 3 separate practice locations. When they came in for their consult they acted like they were on top of the world, and I thought they were – Rolex watch, tan skin, designer jeans, good looking couple, they had it all.

They were success personified.

Within the previous year, they had purchased office #2 and they had just finished building out office #3, which was big and beautiful. They had $5 Million of debt. But nobody cared because they were building an empire. “Something bigger than themselves,” as we so often hear.

Plus, they could produce. They both put up big numbers.

$100k of monthly production seemed easy for them. And then they had this new associate who was “a perfect fit” and who would buy in one day for a big price. I couldn’t stop thinking about the $5 million of debt. It seemed crazy that they would have to pay it off, one filling at a time. That’s a lot of dentistry.

Then the market crashed. Lehman Brothers failed; then AIG; then GM; then came the bailouts; the whole world was in commotion. That was a crazy time. And then in early 2009 this young, successful couple came back in for consult #2. This time the story was different.

During the rest of 2009 I worked with this couple on a monthly basis to engineer a plan to keep them solvent. They would time bills, they weren’t taking a paycheck, they weren’t saving a dime for taxes although they had lots of income (remember, you don’t get a tax deduction for paying principle on debt) – only the most urgent things were paid. To stay afloat we did everything to maximize cash flow. But the debt was crushing. And they were desperately trying to get the associate to buy in. They wanted to sell him 33% of the “empire” for $1.5M; this was cash our client desperately needed. The whole master plan seemed to be unravelling like a bad Ponzi scheme. Soon the associate, at the advice of his “annoying” (but so sensible) attorney father, left. I left Cain Watters soon after this time and lost contact with this client. I felt sorry for them and I questioned why we didn’t raise any kind of warning voice.

A fluke you say? Just bad timing?

My second early memory of being exposed to the multi-practice model – that if owning one practice is so great, two is even better, and so forth – came around the same time. This client was a single-doctor (no dentist spouse) with two locations. He had owned one practice and had been making a lot of money. But there was a huge need for a dentist in a nearby town and the demographics were just too perfect to pass up; so he opened location #2. And then he found an associate to work part-time in one, but the associate didn’t want anything to do with management or the burden of ownership; he just wanted to produce and go home. At the time I’m sure this plan sounded perfect.

In preparing for this meeting I couldn’t help but compare the pre-two location numbers to the post. The collections did increase a little with the second location and the second doctor, albeit a part-time doctor; but our client’s income plummeted.

When we met with him that day he complained of a sore back. And he complained about being tired and stressed out due to the extra debt and responsibility. He was tired of staffing issues, including the turnover they were having.

After looking at the numbers and realizing that he was much better off financially when he had just one practice, and hearing the complaining about his declining quality of life, I suggested the obvious: “why don’t you just get rid of the second location and go back to one practice?” The room went silent and everyone looked at me like I had just suggested we strip naked and streak through the office.

The meeting went on without me.

“Please excuse my dumb associate; he clearly doesn’t understand that two is better than one.” Nobody said those words but that was the message.

A few months later the associate dentist quit. I lost contact with this client too, but just a few months ago I stumbled across him on LinkedIn. He is out of dentistry and now sells insurance for Northwestern Mutual.

What do you say to that? Congratulations?

Are these two isolated cases? Perhaps the doctors weren’t smart enough, or not hard working enough. No, absolutely not. These doctors were at the top of their class, in school and professionally. They were good.

In my short 10-year career I have been exposed to dozens of multi-location practices. And although I’m not saying they never work, I do want to state emphatically that I personally have never, as of yet, seen the multi-practice model work out for anyone. Meaning I have never seen someone actually turn a higher profit with two practices. Again, I’m not saying that it can’t be done; I am saying that I estimate that 9 out of 10 doctors who venture into owning multiple locations end up working much harder and longer, taking on more stress and responsibility, more debt, much more risk, and they do all of this while making less money.

But why? And if I’m right (I am), why is this such a massive trend in dentistry? Or as I would call it, an epidemic.

The Flawed Business Model

Let me be clear again: am I saying that you can’t make money owning multiple practices?

No.

If you are making money, good for you.

What I am saying, to be crystal clear, is that if you venture to a second, or third, or fourth location, you will take on much more stress, responsibility, time at work (much less time at home), debt and risk…and there is a very, very high probability (I suggest 90% or more) that you will make less money over time than if you just stay put with one awesome practice.

Why? There are four main myths about the multi-practice model that just aren’t true.

Myth #1. More practices equal more profits.

Fact: if you open a second practice your profits will plummet. In a dental practice almost all the costs are fixed, meaning you have to pay them whether you produce or not (e.g. rent, utilities, insurance, salaries, etc.). Of course if you never produce anything you don’t need employees. But let’s assume that you have a $1.2 million practice and you show up for work expecting a full day of patients; then that dreaded event happens – nobody shows up. Not one single patient. For that day you still have to pay your people, you still need to pay your rent, your insurance, your utilities, etc. Those costs are fixed.

The only variable costs – those costs that “vary” with production/collections – are dental supplies, your lab bill, and maybe office supplies. In a healthy general practice these costs will range from 10-15% of collections.

Let’s say a typical dental practice costs $500,000 per year in fixed costs. So if a doctor is producing $1,000,000, the profit is $350,000 (assuming 15% variable costs). This doctor might also say that his overhead is 65%. But this would be misleading. The correct interpretation of this practice is that the fixed costs are $500,000; then the overhead is only 15% after the fixed costs are paid. Compare the difference in the chart below of the profit compared to the collections in each practice. Notice how the profits soar after the fixed costs are paid.

multi-practice-model-numbers1

**Notice although collections increased only by 20%, income increased by 49% (this is because the fixed costs are already paid for). Understanding this simple point has powerful and important implications.

You have to understand that you don’t really start making money as a dentist until after you cover your fixed costs. One simple application is that we almost never advise our clients to pick up Fridays in someone else’s office. Why? They didn’t even make any money this week until Thursday!

One other application is to not open a second practice!

Let’s assume that you’re collecting $1,000,000 as in the example above. As such your net take home (before debt service and taxes) is $350,000. And let’s assume you want to increase your take home pay by $100,000; you have two options:

  1. You can stay in your existing practice, keep your overhead the same, and increase your collections by $117,647. Or,
  2. You can go buy or start a second practice location. And to get the same income, now you need to collect, in the two offices, $705,882 more. Which would you rather do?multi-practice-model-numbers2

To make matters worse, with option #2 you not only need to collect a lot more just to make the same income, but now you also have an additional debt burden to deal with, further increasing your risk and stress while lowering your income.

Myth #2. You will have associates work the other practices for you.

When I explain the fixed cost dilemma to doctors they, being smart people, catch on very quickly. But then they say the following: “well, it doesn’t matter because I’m going to have associates run those other practices.”

Oh, you are?

Yeah, about that whole “associates making me money” business…

Frankly, for the vast majority of you this is a false dream. Look, there are two types of dentists in the world: the good ones, and the rest of them. Guess what, with rare exception the good ones don’t want to work for you. They want to be you. And the minute they begin employment with you they will be looking for their own practice to buy, or start. We know. We talk to them every day. And this used to be you too.

So what ends up happening is that these practice owners are constantly recruiting the next associate because the last good one just left.

“Come on,” you say; “it can’t be that hard.”

Let’s look at this another way…

Recently I randomly polled about a dozen of our clients. I asked them these questions:

  1. Consider your entire dental school graduating class; what percentage of them would you be willing to partner with?
  2. Consider the same graduating class; for what percentage of them would you be willing to do this: borrow half a million dollars to start a practice, then take personal responsibility for another half a million dollars of annual fixed costs and then put all this risk, with your reputation on the line, in the hands of this person as your associate?

Regarding #2, this is exactly what you’re doing when you buy or start a second practice to be run by your associates. There is much more at stake here than simply wanting to make money off of other people.

The answers I got ranged broadly from “1 person” at the lowest to about 3% at the highest. But for some reason when you start a practice you think it will magically be run by “associates.”

Good luck.

Myth #3. If you’re a good dentist, you’ll be good at managing a large organization.

Fact: More likely is that you’ll be good at one or the other, but not both. Most doctors who want to open a second or third practice are very successful as direct dental service providers. These guys always put up big numbers – they are the best of their class, the Alphas of dentistry. And most of them say to themselves, “This is easy. If I’m making so much money with one practice, and I’ve got such an incredible business with such good systems, just imagine what I could do with many practices.”

And then they make this leap of logic: “if I’m so good as a dentist, I’ll clearly be good at managing a large organization of many dentists and staff.”

Well, maybe, but probably not. Guess what: managing a large organization requires a very different skill set than being a good dentist.

Here’s an example: how many great athletes try their hand at coaching once their career is over? A lot. How many great athletes succeed at being a great coach? Very, very few. Why? It’s simple, to be a great athlete, you have to be a great athlete. And to be a great coach, you have to be a great coach. And the two are very different roles.

Selling and producing dentistry requires one very specific, very lucrative skill set. Managing a larger organization requires a completely different skill set. And the odds are that you’ll be good at one or the other, but not both.

Myth #4. You’re getting good, unbiased advice when people encourage you to open multiple offices

Fact. The advice you’re getting to open another office is almost always conflicted. As I explain these intuitive concepts to dentists they often ask, “why isn’t anyone else saying this?” The answer is simple. Every single person around you wins when you open multiple practices. Except you… you lose. And your spouse and kids lose too.

This sounds bleak. But it is true. Let’s consider the voices we hear in the dental industry:

  • Equipment sales reps and companies. They would be overjoyed if every dentist opened and equipped 10 different practices. Just 10. Interestingly, Patterson and Schein are providing much of the fuel to grow the fire of this multi-practice scam.
  • For many of them, their goal is to loan you just enough to barely keep you from hanging yourself. Just the other day we met with two bankers from Washington D.C. who said arrogantly, “we want to work with the doctors who are buying multiple practices; the more practices the better.”
  • The more legal entities and contracts and overall complexity you cause in your life, the more they can bill you.
  • CPAs (this is us at PFG). We win too. The more practices, the more complex your needs are, the more we can charge in accounting fees.
  • Real Estate Professionals. Yes, more locations please. More leases, more buildings, etc.

The sad truth is that everyone of your “advisors” wins if you fall into this multi-practice trap.

Conclusion

We speak out against this trend at significant professional risk. There are a lot of people who have large financial interests in dentists buying multiple practices. These organizations will be upset to hear this truth get out.

Who cares!

I am writing this for one reason: to try to save you from the lie and subsequent nightmare of the multi-location business model. If you’re considering opening a second location, I strongly advise you to think very, very hard about doing this.

And if you already own more than one location, I strongly advise you to think very, very hard about this model and to consider – under the guidance of a qualified financial professional – getting rid of the excess practices. We have helped more than a few doctors do this and all of them are making higher incomes with one location AND they all report to have much, much better lives…again.

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Nate WilliamsThe Multi-Practice Model: An Epidemic in Dentistry

Comments 25

  1. Tal Wilkins

    This article is spot on. In all of my experiences and in helping other dental professionals, I can say that there is more truth in what I have just read than any other practice management article that I have read to date. Kudos to PFG for making this known.

  2. N Fogel

    The is great! Makes so much sense, and I can just see all of the backlash on dental town saying it’s balogna and they have 20 offices and are making a billion dollars, etc…

    1. Post
      Author
      Nate Williams

      Jonathan,
      The decision to not go to multiple locations is a no-brainer for 99.9% of dentists. Having said that, once you have already made the leap, getting back to one practice requires a lot of very careful maneuvers and doesn’t come with any easy answers. The calculation, in theory, is simple: take your combined P&L (all offices), then start carving out costs you would save if you were back to one office (rent, utilities, taxes, staff, advertising, associate pay, etc.). Then the question becomes “what could you produce/collect in one location?” The answer is simple: you can only produce what you can produce, so in theory you should be able to produce in one location the same as you can in two. The question is whether or not the patients are there.
      It is likely, however, that the larger, more sinister costs don’t show up on the P&L – cost to morale, maybe; the cost of your life (time, energy, attention) and the personal costs that go with that, to name a few.
      I’d be happy to discuss your situation more in depth if you’re interested. Shoot me an email: nate@practicefinancialgroup.com

  3. Dental Entrepreneur

    Excellent article. Thoughts are thoroughly put together, especially numbers. I agree with most written here. I would like to add or may be take a shot from different angle. Based on what I learn from this article here, I think one can be successful if you take your existing practice to its maximum potential or at least to it’s >= 95% potential , make it runs effortless first and then replicate your existing model and maybe add one or two more with a proper exist strategy. You have to agree that there is limitation to what you can produce with your two hands but there is no limitation to what you can do with entrepreneurship skills. Associates turn around and other issues inherently comes with multi locations are all well known. Higher the risk, better the return. That is why VC’s invest in startups, some make bigly return some looses, its all part of the game. There is a way to defy the numbers in the article here and become that 1 out of 10 dental entrepreneur but there is an assigned risk. After all you went to dental school and took on that debt..that was a risk!

    1. Post
      Author
      Nate Williams

      Dental Entrepreneur,
      Thanks for your comment. I remember back in 2009 when I started talking about leaving a good job to start a company. I got a lot of crazy looks. As a business owner/entrepreneur I don’t want to be the guy who says “no you can’t” to anyone’s dreams. But out of duty to my clients, friends, and to my own conscience, I have to tell every dentist I talk to that “you probably won’t succeed” as soon as they bring up a second location. And even if you do “succeed,” at what cost did that success come? But very specifically, I question the idea of “make it run effortlessly first” (referring to your first practice). The universal law of entropy ensures that no dental practice will ever run “effortlessly.”

  4. Steve Parker

    Awesome perspective. I see this literally every day. If you love doing dentistry, invest yourself in doing more of the dentistry you love in your solo practice. The moment you decide to scale your dental “business,” you become less of a dentist and more of an entrepreneur. If you continue to grow, you will eventually be forced to leave the dentistry behind. If you’re not prepared to do that, don’t start down the road of multiple offices.

    1. Post
      Author
      Nate Williams

      Steve,
      Great comment. I would add that when you leave you not only leave the dentistry behind (which is very appealing for some), but you also leave the high-paying salary. The market value of a business manager of multiple dental offices (what you become when you start opening offices) is much, much less than the profits earned for the dentist of one, very well run practice. You create this lower salary for yourself by creating a much less profitable business model.

  5. Eric

    Fantastic article- I would argue though that the bigger DSOs like Aspen, Heartland, Pacific, are the fuel. People admire what they have created and want to replicate it- without knowing the complexities, and painstaking energy those entities went through to get where they are today. At large, distribution companies, manufacturers, CPAs, bankers, brokers and builders are just riding the wave of this dream that everyone can play in the big leagues. Some are trying to bring the same level of transparency you are. Some are taking advantage of the dreamer. With the right resources, the right values and vision, anything is possible.

    1. Post
      Author
      Nate Williams

      Thanks for your comment Eric. Who wants to disagree with the phrase “anything is possible?” Not me. And I wholeheartedly agree with you that those servicing the dental industry are making a killing, at the expense of the dentists who venture off this cliff. This multi-practice craze reminds me of a gold rush. A few golddiggers get rich (Aspen, Heartland, etc.) causing pandemonium and fueling dreams of big money, but the vast majority of the gold diggers spend their lives in a vain pursuit of a mirage and die broke. In California in 1849 the people who made the most money were selling food, clothing, housing, and tools to the gold diggers, not the gold diggers themselves.

  6. Cindy Schonert

    This is a fantastic article! As an advisor to many dental practices this is one area that I try to steer my clients away from as I too have walked into many hornets nests to help a client out of a mess due to bad advice such as you describe in your story! Thank you for great insight and advice!

  7. Jeff V.

    Great article. When I graduated from dental I took over a small practice from retiring dentist. Bought it cheap because he was slowing down. Triple its revenue. After a few years, bought another practice close by, also from retiring dentist. But, this time, merge two practices by moving into the new practice, closing old practice ( lease was up anyway), bringing patients to new practice. I have one big practice and happier. Dr V.

  8. Amy Drewery

    Truth! We see a similar epidemic when a solo practitioner expands their existing practice and hires associates to do the ‘stuff’ the owner dentist doesn’t want to do.

    In many cases, a large percentage of the practice is made up of PPO’s, so the dentist is already writing off a significant amount. To add insult to injury, the associate is paid a hefty percentage of the piddly, high overhead procedures. The math simply doesn’t work. The only thing the practice gains is more stress and higher overhead.

    I recently reviewed P&L for a new client in this situation and the associate was taking home more than the owner dentist, and one of the hygienists wasn’t that far behind! This particular dentists’ solution? Expand and hire another hygienist. Ugh.

    It’s certainly easier to get rid of an associate and properly wean off of PPO’s that are taking a big chunk of the profitability than it is to get rid of a 2nd and 3rd practice, but so many are getting caught up in this ‘bigger is better’ trap.

    What are your thoughts on associates, and at what point do you recommend it as a profitable move for a solo practitioner?

    1. Post
      Author
      Nate Williams

      Amy, thanks for your comment. You make some great points. In general, there is no answer that fits for all situations, as you know. But we try to identify the principles that are universal and that describe how and why things work, and what will prove true in the future. Two things that jump out to me here are first, the personality of the doctor in question. Many doctors don’t have the right personality to bring on an associate, regardless of what the numbers say. Other doctors probably should not be practicing along. Second is the desire of most doctors to own their own practice. Of course there are exceptions, but in most cases the idea of holding a doctor in an associate position forever is unsustainable – they want to own. So, in general, we don’t recommend hiring an associate unless what you really want is a partner. If that’s the case (the doctor wants a partner), we’ll start the conversation about an associate. The idea that you bring up of “I’ll have the associate do the low-end stuff and refer to me all the big cases” is a pipe dream in most cases – it might happen for a time, but it is an unsustainable model unless a doctor gets lucky. We never strategize hoping for luck.
      Another big component of this whole debate is the “probability” of success. You can score a touchdown very quickly with a Hail Mary pass, but what is the probability of success with that play? The probability of financial independence and a good life for a dentist who works hard, does good dentistry, treats people with kindness and respect and saves money is very, very high. Once you start adding associates, second offices, trying to win the lottery, etc. the probability of success goes way down.
      Many people don’t like this philosophy, but we have observed over years of working closely with hundreds of dentists across the country that those who stay the course and focus on being excellent service providers end up with the best lifestyle and the most money.
      Feel free to reach out if you’d like to discuss further.

  9. J. Kolby

    Hey Nate,

    Thanks for the perspective and insight. I am curious what you think about the following;
    1. The desire to not earn 100% of your income from Chair side dentistry.
    2. The model of forming a management DSO that allows current owners to thrive in their own practices with systems and an organization to help them work less, make more and not feel like a solo island. In teased buying power, economy of scales, insurance negotiation, lease negotiation, better lending terms, clinical and financial support from a network or colleagues, equity in a larger company with increased income coming from shareholder distributions instead of personal income….ect.

    I think your comments hold true for the dentist that is eager to become stable, work chairside and put in their 25+ years within the walls of one location. But what if you don’t?

    What recommendations do you have to achieve a different destination?

    Thanks!

  10. Johnny

    One thing you don’t mention as a possible benefit of owning multiple practices is that you are building equity faster, which could allow you to retire sooner when you go to sell the practices. What do you think of this argument? Thanks.

  11. Bo Bojovic

    Very misleading. There is no logic and the scenario is not based on actual data but made up numbers. If this were true DSO’s would be going out of business, instead they’re opening more locations.

    The reality, when you have a larger practice YOUR FIXED/DIRECT EXPENSES GO UP!!! For example and this comes from CWA data (client averages):
    1 dentist practice grossing $1,146,187 has 18.81% fixed expenses ($215, 812) with net income 40.11% (459,490) before non-operating and doctor costs and 2 dentist practice grossing $2,123,14 has 15.66% fixed expenses ($332,708) and net income 44.94% (953,450) before non-operating and doctor costs .

    Moreover, associates do not run practices!!! I’ll write that again, associates do not run practices!!! Associates practice dentistry and managers manage offices and staff!!! Owners run practices.

    In summary, if you can grow your existing practice and add an additional dentist your fixed/direct expenses increase and do not stay the same, it will increase proportionally. Therefore, owning two $1 mill practices will make you as much as owning one $2 million practice.

    The reality is that practice ownership is not scary however retaining good associates is key. There are a lot of great dentists, that want to work and are not interested in ownership. There are also ways to retain talent by offering partial equity.

    If you can delegate responsibility and trust yourself to hire good staff and invest/motivate them you will be very successful.

  12. Ebrahimi

    Thank you for this candid and thorough article. It is clear that you and your company have a strong moral-compass, and sharing these stories and experiences is life-saving for many dentists who are confused by the misinformation out there. I wish more professional in dental industry had as much integrity to speak honestly. Thank you!

  13. Sandra Hebert

    SANDRA HEBERT
    10/18/18
    I don’t know if there is an interest in the consumers point of view. I am because I’m a consumer and trying to wrap my mind around the current dental industry. I have had the same dentist for 11 years in his private practice . A little over a year ago he sold the practice and it became another multi practice model. My first appointment after the transition, I was met with not one of the original employees. My dentist remained and is still there . He says for the next five years. I’ve had extensive dental work i.e root canals, implants, crowns, extractions. Each appointment there are new people working. Each time I ask questions I don’t get consistent answers re: recommendations for procedures. Now I’m told, I need a deep scaling which must be done every 6 months. My next appointment full x-rays are required. I don’t trust these recommendations. I think procedures are recommended that I don’t need.

    1. Post
      Author
      Nate Williams

      Sandra, thanks for the comment, you bring up a great point. It is impossible to judge the intentions and efforts of all practices, including the owners, dentist working in the practice, and the rest of the team. However, I would venture to say that a practice that is owned AND operated by the same person will, generally speaking, take better care of the patients who come to the practice. Compare the “own vs. rent” principle when it comes to living in a home: who will take better care of a home, generally speaking, the homeowner who also lives there, or a renter? And which car do you take better care of, your own car, or the car you rent while on vacation? Again, this doesn’t answer the question for every circumstance, but if I were choosing a dentist, I would expect a higher level of care, and therefore quality and integrity, from a doctor who owns this one practice than someone who is just there collecting a paycheck. In my case, my dentist is a guy who owns his one practice.

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