Strategies for multilocation ownership
As a dental CPA, many of my clients ask, “What does it take for a dentist to be an owner of multi locations”? My response is, “It is not as easy as it seems. It is hard.” Many clients are shocked by my response. You may ask why. Think about when you were a dental school student and your school’s curriculum. Most US dental schools do not offer business courses for students to learn the professional skills necessary to prepare them for single-location ownership, let alone multilocation ownership. Practice ownership of one location has its challenges; can you imagine owning more than one location, such as three, five, or even more, all at the same time?
Here I will address those challenges as well as the key performance indicators (KPIs) needed to sustain a multilocation practice concept. I will also share my views on other items such as hiring senior management, determining if you’re really an entrepreneur, determining a taxing entity, purchasing power, failure versus success, and finally, cashing out to either a dental service organization (DSO) or another multilocation buyer.
At the Academy of Dental CPAs, we have developed class curriculum for more than 50% of the US dental schools whereby we teach entrepreneurship. The classes are an introduction about financial concepts such as cash flow and business plan preparation, as well as understanding KPIs. We share with students that obtaining financing to acquire their own practice or start their own practice from scratch is easy, as long as they are post-18 months from graduating dental school and their credit score exceeds 680.
We educate students on how to obtain financing for their practice start-up or acquisition. Despite having student loans, credit card debt, auto loans and/or mortgages, we as dental CPAs can help them obtain 100% financing for their practice acquisition or start-up along with an additional $50,000 in working capital! Take a second and think about your friends or family members in other industries. They cannot obtain 100% financing for their respective businesses, whereas in dentistry we can. This is what makes dentistry so exciting, fun, and unique!
Key performance indicators
As you know, all general dental practices have various KPIs. If you’re able to maintain these KPIs, you will have a successful and profitable practice. Here is a quick reference guide of the top 10 KPIs, all based on your annual collections:
- Dental supplies–5.5% to 6%
- Lab fees–7% to 8%
- Rent–5% to 6%
- Salaries–clerical, 7% to 8%
- Salaries–chairside, 7% to 8%
- Salaries–hygiene, 9% to 10%
- Employee fringe benefits–1% to 2%
- Credit card fees–1%
- Office supplies–1%
- Legal and accounting–1.5% to 2%
While you are maintaining your KPIs, you’re also thinking about your overall overhead set at a benchmark of 60% of your total annual collections. So, if your annual collections are $1,000,000, you are looking at overhead of $600,000, while obtaining $400,000 in profitability. Profitability is defined as the excess cash flow within the practice that is available for you to pay your practice debt as well as your compensation along with your related fringe benefits, such as health insurance, life insurance, disability insurance, and retirement plan contributions.
The challenges of multilocation ownership are worth it, but you need all parts of the wheel in place to obtain the financial benefits. There are no practices that are identical. However, if you work hard plus have excellent senior management, the challenges of multilocation ownership become fewer and the chances of success are much greater.
Senior management
It is imperative to have excellent senior management in place to assist you while you set up a multilocation group practice. This is critical to your financial success. As part of your senior management team, you should consider hiring some if not all of the following: human resources director, operations director, marketing director, and chief financial officer/controller.
Each of these positions could call for an annual salary of $80,000 to $100,000, plus or minus. You may get lucky and various positions may be served by one person, thereby combining them into one job description. An extraordinary senior management team will not only help you become a successful multilocation entrepreneur, but will also share with you the additional overhead that comes with multilocation ownership. In order to offset these additional costs, you may want to consider charging a management fee for each location. This could range from 5% to 15% of collections by location.
Are you a dentist or an entrepreneur?
As you explore the concept of multilocation ownership, consider looking at yourself. Are you a dentist or an entrepreneur or both? Are you prepared for the challenges associated with multilocation ownership? You may have to give up chairside dentistry and become a manager/entrepreneur. This may seem scary or you may welcome the new challenges. If this seems overwhelming, you may want to stay away from multilocation ownership and stick with chairside dentistry.
Taxing entity
As you begin this journey, consider operating each location as a separate entity as an LLC (limited liability company). This assumes your state recognizes an LLC. If it does not, then you may want to incorporate and be taxed as an S corporation. Consult with your dental CPA for valuable input in your decision making at this critical stage of development. You certainly want to start off on the right foot!
You maybe asking, “Why a separate entity for each location?” The reason is you may want to liquidate a location without disrupting your entire organization. If you choose to liquate that identifiable location, it would be best to have a separate set of books and records for that location so that the prospective buyer can make an informed decision about the acquisition of that location coupled with its overhead. If you comingle operations, it becomes harder to sell a single location within your enterprise.
Franchise concept–minority ownership
Another consideration as you build your multilocation enterprise is ownership. Think about who will own location two, location three, location four, and so on. You may want to consider a franchise concept whereby each location is owned by you and an owner-operator. You could own, for example, 80% of such while the owner operator could own 20%. By doing so, you’re creating entrepreneurship in your own enterprise, whereby each location has a minority interest owner where they take a sincere interest in that location and its financial performance. The minority owner starts to think like an entrepreneur as opposed to having an associate mentality.
Negotiating insurance, supplier contracts, and more
As you build your enterprise, your purchasing power will increase and become more apparent to you. Consider meeting with any if not all of the following vendors: equipment vendors, dental suppliers, labs, technology support, office supplies, merchant processing, payroll processing, and build-out and construction.
Also meet with dental insurance companies. This is an opportunity for you to negotiate your contractual reimbursement rates due to the size of your enterprise. Many dental insurance companies will not negotiate; however, this will change when you have a successful multilocation enterprise.
Failure versus success
A number of my clients aspire to become multilocation owners, only to find themselves back to owning one practice down from the three they once had. Why did they fail? There is commonality about each. Each doctor failed to place senior management, hired associates who lacked the desire to be a practice owner, and they had no entrepreneurship. Many of them did not reach the stage of purchasing power, so they also lost this benefit.
Future to cash out to a DSO
Many dentists strive for the big cash-out whereby they sell their multilocation practices to a dental service organization or another multilocation owner. While the concept seems simple, it is in fact very challenging and hard to obtain. I’ve discussed many of the reasons, but there are competitors out there trying to accomplish exactly what you’re doing. DSOs are obviously looking for multi locations that have significant cash flow.
If you’re able to sell to a DSO and gain the big cash-out, that’s awesome! If not, consider selling off locations one by one to the associate you have in place, assuming the person would like to experience practice ownership. One final suggestion: you may want to consider creating separate tax entities for all locations. By doing so, the sale of that specific location becomes easier to carry out. In closing, consult with your dental CPA. You’ll be happy you did! Good luck with building your multilocation enterprise. You got this!
Editor's note: This article appeared in the October 2021 print edition of Dental Economics.
Allen M. Schiff, CPA, CFE, is a founding member of the Academy of Dental CPAs. This group of very knowledgeable CPA firms specializes in practice management services for the dental industry. He serves on the ADCPA executive committee and is the current president of the ADCPA. Reach him at (410) 321-7707 or [email protected].
