Several times a week we are approached by a doctor who has been contacted by a corporation interested in acquiring their practice or by an investor group looking to purchase practices (yes, multiple). Corporate dentistry is growing throughout most of the country and it is expected to continue growing for some time. Let’s be clear, the growth is typically not in “de novo” or start-up practices but instead through the acquisition of existing practice purchases. We believe in keeping you as fully informed as possible, so let’s take a closer look at corporate dentistry.
The Role of Corporate Dentistry
To be clear, there is a place for corporate dentistry or small group practice networks (SGN). These offices can provide a training ground for new dentists and may be a good fit for dentists with no interest in owning a practice of their own. They also provide vital care to many patients who may not have insurance plans that are conducive to fee for service private practices. Corporate groups or SGNs can function well with a heavy pay or mix of PPOs because of their ability to function within the economies of scale these groups can achieve. In some instances, access to care for patients can be enhanced as these practices may function well in an underserved area where many private practitioners may not be interested in locating.
Private vs. Corporate
If your practice has gross revenue of $750,000 or less, and you have no more than four (4) treatment rooms, chances are that you are not a candidate for acquisition by a corporate group or SGN. So, if your plan is to sell your practice as a going concern (at current location including equipment, etc.) your options may be limited to a sale to another practitioner or possibly to someone seeking a second location.
Corporate groups or SGNs seek practices with five (5) or more treatment rooms and usually collecting in excess of $750,000. Further, they are not interested in non (or barely) profitable businesses – they require overhead to be in line with range norms, if not lower.
There may be a feeling, or you may be told that your practice is “too large” to transition outside of “corporate”, but this is only true for a small number of practices. In many cases, we see that some successful dentists want to ‘slow down’ from the constant churn of production and apply their successful management skills to another dental practice or two hoping to replicate their success. This puts your practice right in their sweet spot. As such, your transition options are not restricted solely to a sale to a corporate entity – you most certainly have the path available to sell to a private practitioner or group practice and, if you so desire, possibly even stay to work on a limited to full basis after selling (depending on the practice).
Many corporate groups and SGNs are able and happy to pay an above average price for a practice, especially in markets where demand is high. We have seen instances where corporations have paid multiples of net income (3x-8x), much more than the ‘typical’ percentages of gross. It is important to note that in these sales, a seller will have to understand that, most often, 15% (or more) is held back to ensure compliance with post-sale employment requirements.
Some groups compensate their doctors with a combination of commission plus a profit share. In that, it must be remembered that many groups factor in a management fee and other certain expenses that may reduce the potential profit to be shared. It is vital to have a clear understanding of post-sale compensation. Corporate groups and SGNs nearly always require the seller to stay and work for a period of time. Usually, if the seller doesn’t stay for at least two years, the offered price will be severely discounted or there will be no offer at all. Should the seller leave early, the purchase price held back will not be paid. When staying, post-sale, sellers should expect to make somewhere between 25% to 30% of the their collections (not production
and not including hygiene collections). While we know of some corporations that will pay possibly even 33% percent of generated income, it is important to look closely at any compensation agreement to see who pays for, and who makes choices on, lab, supplies, instruments, etc.
If you have been approached by a corporation or are considering this as a transition option, contact your local Henry Schein PPT representative before taking the next step. While there are several instances where a corporate purchaser or SGN may be the right purchaser, we feel that every seller should enter a transaction with their eyes open, and with the best understanding of their future, as possible. Our team has, at one point, worked with just about every single large and small multi-office purchaser out there. As such, please use us, we are a resource regarding this option and have developed models to give doctors a good idea of how a potential sale may work out. To find your local representative, go to HenryScheinPPT.com or call 800-988-5674.