Farmers and Rock Star Dentists
“Be willing to step outside your comfort zone once in a while; take the risks in life that seem worth taking. The ride might not be as predictable if you'd just planted your feet and stayed put, but it will be a heck of a lot more interesting.”
Thanks to my step-son Billy once again for the inspiration this week.
We were discussing the value of farm land – and how finance companies view farm loans.
With good farmland fetching $1300 an acre – it got me thinking, once again, how relative this is to our business.
There are many older farmers that are looking toward retirement. The business of farming has changed over the many years – with those who understand the business being able to grow larger and larger.
The risk of owning a farm is much higher than our own business, and yet the multiples are similar.
It’s about cash flow (and earnings)
Here is where I started to think about what investors look for. They want something that is re-producible. They want something that can be scaled. The want security of tangible assets.
In the case of the farm, the land itself is somewhat predictable. In Dental Office Valuations, the highest value isn’t the leased property which is usually owned by someone else…the highest value isn’t the 20 year old used dental equipment….it’s the patient base. In order to get that high valuation, the patient base, you must be willing to invest in the land and equipment…..aka the leaseholds and the equipment. You must find GOOD PROPERTY and then use EFFICIENT EQUIPMENT. You MUST USE your SKILL and continue to improve your skill and knowledge to get the highest yields…..
The patient base that MUST be predictable and provide the same YIELD in order to provide predictable PROFIT. The ONLY way this can be tangible is by keeping the formula exactly as it was for the lifetime of the business…..Isn’t it nice dentistry is not really dependent on the weather!!
You can tell what the land was able to yield over a long term and come up with a value. That’s why SOME land is worth $1300 and acre and OTHER land in the same area may be worth $1000 an acre….perhaps there is opportunity!
They both look the same, but the yields are much different.
The smart farmers who know how to properly utilize efficiencies on the farm also see that value. They may be able to negotiate a price with an average farmer that is yielding 80% of the profit to a lower price. They know they can use their efficient equipment and techniques to grow a higher yield crop and thus the land is more valuable to them than the current owner.
My goal with dentistry.
The practices that have the highest valuations are not surprisingly well established, very efficient machines. They develop systems that can be replicated. They can duplicate patient results and experiences. They have associates that have mentored….
Being able to hire the same personalities, with the same skills. Train those systems to the same level.
THAT is what makes the land valuable. THAT is a tangible asset….
Here is where so many evaluators get things wrong in our evaluations. They only look at book and numbers. EVERYONE assumes that as soon as the practice is sold, it will continue to yield the same results….but the “tangible” is changing. The “tangible” asset – the current owner and team – may actually all leave. Then the “asset” value changes too in my opinion….but not for all practice evaluators! Not for all business evaluators!
To me, the smart ones understand what can be duplicated, replicated. They understand how to get the value out of that asset and predict the future outcomes…..I can do this with dentistry. Not by looking at books, but with practice analysis and a deep understanding of the personalities.
If you find a dental practice with a rock star dentist that can’t be duplicated. The team is all at retirement age and there is no particular process for hiring. There is not a system in place for recalls. No particular patient experience…or the entire experience is dependent on the rock star lyrics and dental team band….
As high of a value as you may think there is in that brand – it can’t be duplicated!!
If you were an investor – you would be willing to buy the Rolling Stones lock stock and barrel if they would sign a contract guaranteeing they will keep duplicating and replicating the previous results. The “Rolling Stones” have already proven for decades that they can make money. They want to retire, but the only way to guarantee the profit is to keep the “rock stars” involved. So you put MOST of the ONUS on the Rolling Stones with a variety of contracts that in order to realize the value of their franchise they must continue to duplicate and replicate what they have always done….
Then there are the “me too” investors. Trying to duplicate the success of the investors that have been buying up all the rock stars. The formula can be applied to any business. It’s a multiple of earnings. The more duplicable and replica-table the product is – the higher the value. The value is higher if the risk is reduced by taking on a partner willing to take the onus of the risk.
Then there are “rock stars” who have been mentoring young musicians. Teaching the music. They LOVE the independent and new ideas. How fresh the music sounds. They want the kids they are mentoring to take over the franchise. In order to realize the value of the brand they built they are willing to induct the young musician into the band. Work with them to maintain the sound. Show them how to keep profit during the tour with the many experienced and efficient “roadies” packing up the gear and getting it all set up for them in order to perform the next “show” in an on time, and efficient manner…..
The brand not only flourishes, it’s able to extend to a new level.
We all want the predictable in our business, it’s a good and safe investment. Without the new, fresh faces, however – will we be stuck listening to a skipping record?
How do we save the profession we have grown up in and take this to a whole new level? There are so many talented young “musicians” out there that are willing and able to share. We just need to hook them up with the people that understand how to do the business…..of making music.
Have a great Christmas!
Success in Dentistry and life