Crucial considerations for growth: The group practice model

It’s an exciting time for health-care practitioners, who continue to have a positive outlook and anticipate practice growth. According to TD Bank’s recent survey of 360 medical practitioners, nearly three-quarters expect practice revenue to rise over the next two years, leaving medical professionals, particularly dentists, eager to implement the next strategic steps in their business plans.¹

Of the dentists surveyed, 84% anticipated purchasing, buying into, merging, or selling their practices soon, with 42% expecting this within the next four years. Despite this desire for growth, the survey found that dentists are more eager than other practitioners to maintain ownership of their businesses. Specifically, they prefer not to be absorbed by large dental service organizations (DSOs).

So, how can dentists balance independence and scaling their businesses for efficiency and income growth?

Understanding group practices

For dentists seeking to accelerate growth without handing over practice ownership, TD Bank has seen a growing trend toward group dental practices. We have found that group practices are the fastest growing dental subsegment due to their having economies of scale, greater cash flow, ability to survive a downturn, availability of cash to invest in technology, and flexibility to cater to patient needs. These practices combine single location and corporate ownership strengths and are designed to better compete with the corporate DSO model.

One motivation to build group practices is to become more competitive. By building privately owned and operated group practices, dentists maintain practice ownership (or partnership) while bolstering revenue over time. The strength of a group practice’s earnings could eventually allow owners or partners to sell their practice group to a corporate franchise for a strong profit.

Benefits of group practices

Three of the key benefits of group practices are scalability, reduced costs, and resources.

Scalability—Group practices offer scalability that is typically unavailable to ownership of one to three practices. It is advised that the ownership and management team have a proven track record owning multiple locations before moving to a group model, so that they feel comfortable leading large-scale organizations.
Reduced costs—According to the TD Bank survey, when asked for the top reason they were eager to purchase, buy into, merge, or sell their practices, 33% of dentists noted they would like to expand their patient base. Twenty percent noted it is too expensive to run a solo practice.
Resources—When forming a group practice, additional resources become available to offer longer hours and specialty services, which provides patients with a true convenience model.

Generational dynamics

Individual practice owners are often on the younger side. They see increased interest in group practices and want to capitalize on this growth. Simultaneously, large groups of dentists want to retire and sell their businesses.

Of the medical groups surveyed, dentists are most likely to sell their practices through a transition specialist or practice broker when they retire. Of the 97% of dentists who plan to sell their practices, the majority (63%) believe there will be barriers to maximizing sale price. These barriers include a limited buyer pool (29%), buyer financing (26%), and low appraised value (21%).

If more senior dentists want to sell their practices, group practices with strong patient bases and operating models are attractive to potential buyers. Sellers of profitable group practices can potentially receive a higher investment value for their practices versus the traditional fair market value. This is due to current market dynamics of private equity investors purchasing group dental practices. Group practices can better maximize the selling price as compared to an individual practice.

Group practice considerations

While group practice expansion is a solid investment, there are other important considerations:

Practice expansions and relocations—If your practice is growing rapidly and you need more operatories, new technology, and additional specialty procedures, then investing to expand your current business model might be the right path versus acquiring new practice locations.
Business processes—By increasing the number of locations, dentists must take on more of a business leadership or CEO role, or elevate other team members to do so.
Centralized management team—The group will need a proven management team to handle processes and systems, including potentially hiring an industry expert CFO, COO, and clinical director. This team will advise when operations should be centralized and how the group will benefit from economies of scale.

Self-evaluation

When looking to grow into a group model, clinicians should consider these questions:

Are you a business leader and CEO? Or is there someone who can be elevated into an operational COO role?
Do you have the capability to establish the processes and systems needed for a larger, more complex business model (HR management, training and development, financial tracking, key production indicators for each location, etc.)?
Is your business model scalable, repeatable, and profitable across eight, 10, or 20 practices?
Are you qualified to receive bank financing for $5 million to $20 million to enable you to continue to acquire and build locations?

Final considerations

For dentists operating as business owners, there are factors to consider before deciding if a group practice is the right fit. Therefore, it’s imperative to meet with industry expert advisors and a specialty health-care banker who is comfortable lending to group practices that need more than $5 million to develop a sound growth strategy.

Reference

Medical professionals anticipate revenue growth; concerned about political impact on industry, finds TD Bank Survey [news release]. Cherry Hill, NJ: Cision PR Newswire; January 14, 2019. https://www.prnewswire.com/news-releases/medical-professionals-anticipate-revenue-growth-concerned-about-political-impact-on-industry-finds-td-bank-survey-300777629.html.

Dan Croft is the head of Healthcare Practice Solutions Group, TD Bank. In this role he oversees the bank’s practice finance segment, which specializes in working with dentists, optometrists, veterinarians, and physicians. He has 20 years’ experience working with medical, pharmaceutical, and CPA businesses. Croft holds a bachelor’s degree from the College of the Holy Cross and is based in Cherry Hill, New Jersey.