Generate recurring revenue to increase your practice’s valuation
Owning your own practice is a tremendous asset. But unfortunately, it’s not always clear how to increase its value.
What increases the value of a business? The short answer is security. That’s because buyers like stability and tend to avoid risk. You can make your practice more stable by implementing the following strategies:
- Creating a membership plan
- Having a cash flow strategy
- Cutting out PPOs
- Investing in great lead generation
- Documenting your processes
Let’s look at these individually to see how they help raise the valuation of your business. But before we begin, it’s worth pointing out that the first item in the list, creating a membership plan, can go a long way to helping with the others, as we’ll see.
Creating a membership program
A dental membership program is a great alternative to dental insurance. With a membership plan, your patients pay a monthly or yearly subscription fee to get access to benefits and savings in your practice.
Implementing a membership plan is a smart strategy for a number of reasons:
- It helps your marketing team offer a simple and effective solution to patients.
- It helps you reduce or eliminate dependence on PPOs.
- It creates loyal patients.
- It generates recurring revenue.
Table 1 is an example of a great membership plan you could offer patients. But you can decide to structure your own membership program any way you like. You don’t need to rely on a third party to create this type of offer.
The greatest benefit of creating a membership program is this: The more patients you sign up, the more recurring revenue starts to compound. For example, if you sign up 1,500 patients at $35 per month, that is $52,500 per month in predictable recurring revenue. You can and should continue building this revenue stream, as stability will increase the value of your practice.
Creating recurring revenue should be one of your top goals moving forward. The importance of recurring revenue is more obvious today than ever before. It can protect you during economic slowdowns, potential shutdowns, and even slowdowns within your own practice.
Recurring revenue gives you the stability to continue managing your practice and pay your expenses. That’s because it allows you to start each month with new revenue already in the bank. Most dental practices close out each month and start the next month at $0 in collections. The great thing about a membership plan is it puts you ahead of the curve. You know you’re going to have costs related to payroll, supplies, marketing, lab fees, and your building (renting, leasing, etc.). Why not create a revenue model that allows you to automatically cover these costs each month?
I recommend you read a book called The Automatic Customer by John Warrillow. It’s about the subscription business model, and it will educate you on how this type of revenue stream can increase the value of your business. Warrillow says that when you have monthly recurring revenue, it can increase the value of that revenue stream by 24 to 60 times the monthly recurring revenue amount.1 How would you feel if you were buying a dental practice and you knew that every month there was $10,000 per month, $20,000 per month, or even $50,000 per month coming in whether you did dentistry or not?
In addition to the monthly revenue stream, it’s estimated that patients using a membership plan spend 2.4-times more than nonmembers.2 This means that you generate your patients’ monthly subscription revenue plus your patients spend more on average.
Think of it this way: Are you an Amazon Prime member? If you are, once you became a Prime member, did you notice that you started spending more with Amazon? That’s true of most people I know, and I know I did. I get a package on the porch almost every day. The same will be true with your patients—and you will benefit just like Jeff Bezos!
To sum it up: Potential buyers always look to minimize risk, and recurring revenue helps reduce the risk of running your practice by creating recurring revenue.
Having a cash flow strategy
Cash is king no matter what business you are running, and cash flow is the timing of revenue. To increase the value of your practice, you need to have a cash flow strategy.
Let’s look at cash flow in the context of membership plans. If you create a membership plan, you want to be sure to collect the membership revenue automatically on either the first of the month or on both the first and the fifteenth of the month. Once you get your program big enough, you will be able to have cash infusions right before payroll, rent/lease payments, and other necessary business expenses. When you can structure a system like this, you create less risk for yourself and a potential buyer. You create a cash flow system—a better way to manage your revenue each month.
Cutting out PPOs
I am going to say it: I think PPOs are the worst deal possible! They attack two sacred business functions: profit margin and cash flow. They force you to discount your fees, complicate the administrative tasks, and delay or flat out deny payments. If an employee or business partner did this to your business, you would probably get rid of them as quickly as possible!
Remember, insurance companies are worried about their bottom lines and couldn’t care less about your profit margins. To increase your business’s value, you need to increase your profit margins. This can be done by strategically reducing your business’s dependence on insurance.
Getting rid of PPOs should not be done overnight, and you need to have a cash flow plan (such as recurring revenue), a retention plan, and a marketing/communications plan to be successful in this type of transition. But it can be done, and I would encourage you to start the process.
Investing in great lead generation
Many people talk about the importance of marketing, which is great, but what I think they really mean is lead generation. This is the process of attracting potential new patients and using email and other methods to get them to schedule. Every business—including your practice—has attrition. You need new leads and new patients each month or your business will die. You also need to figure out how to retain existing patients.
To increase value you need to have a lead generation machine by giving valuable offers to potential patients, such free whitening or other low-cost, high-value offers. A membership program is also an excellent tool. Promote your membership plan to new, uninsured patients, and use it to retain your existing patients.
Documenting your processes
Every business needs systems. Systems help you manage employees better. Systems help you scale. If an employee leaves or gets fired, the systems and processes in your practice will help you train and hire new team members. Invest in your team and in system creation. (For more on this, I recommend reading The E Myth Revisited by Michael E. Gerber.3) If you are wanting to sell your practice, the next owner will need to rely on systems and processes to manage your practice. Developing a comprehensive process to do certain tasks in your practice is crucial and reduces the risk of running the practice.
Conclusion
I hope you enjoyed this article and that it inspires you to start investing in your greatest business asset—your practice. At the end of your career, you can keep your practice and hire someone to manage it or sell it for a higher valuation. Either way, it’s a win-win.
References
1. Warrillow J. The Automatic Customer: Creating a Subscription Business in Any Industry. Penguin Publishing Group; 2015.
2. The true value of a membership patient. Navigating Dental Insurance. January 30, 2019. Accessed August 20, 2020. http://saynotoppos.com/2019/01/30/the-true-value-of-a-membership-patient/
3. Gerber M. The E Myth Revisited. HarperCollins Publishers; 2001.
JORDON COMSTOCK is the founder of BoomCloud Apps, a software company that allows dental offices to easily create and automate in-house membership programs. Contact him at [email protected] and download a free book about membership plans at boomcloudapps.com.
