Dec 4, 2016
The Multi-Practice Model: An Epidemic in Dentistry
Written By: Nate Williams
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?
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.
**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:
- You can stay in your existing practice, keep your overhead the same, and increase your collections by $117,647. Or,
- 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?
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:
- Consider your entire dental school graduating class; what percentage of them would you be willing to partner with?
- 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.”
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.
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.
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.