Why corporations and DSO are booming in dentistry
"Opportunities are usually disguised as hard work, so very few people recognize them..."
I have been involved in "the business of dentistry" since before I ever graduated from High School and started working in the family Dental Supply Business.
My background of running a family business and recognizing the opportunities as an entrepreneur have helped me start up my own small businesses over the years and helped me understand investing in business and equities.....
I have also learned a lot about personalities and what truly helps create the wealth (I don't equate wealth with success FYI). The people who are willing to take RISK and then WORK HARD are the entrepreneurs that drive our economy and generate great cash flow for themselves. They are also among the poorest (cash flow wise) as many of these risk takers have too much ego to ask the right questions. Or maybe they lack the talent for the opportunity they are trying to seize. Often they put everything they have into the venture, lose it and will never get up - dust off - and try again.
For myself, and many of the every day entrepreneurs I work with, success isn't measured only in cash flow. It is measured in lifestyle.
Being able to take a smartly measured risk can slowly get you that goal of a lifestyle. One that helps you live "Success in Dentistry AND Life."
The 10X factor of wealthy people
The smartest thing you could actually ever do if you want real security and wealth is to take smart risks. Invest in the things you know well, so that there are no surprises. continue to educate yourself and push the limits. This is not easy. It means there is little downtime - as life has a limited amount of time allotted.
Some people realize this and get up and just start running. Realizing it's going to hurt when they fall down - but that if they walk or crawl that the destination may never be reached.
The Corporations making their way into dentistry are a result of someone getting up and running......
The opportunity has been there for years.
It's not just some casual investor that decided to start buying dental clinics and forming organizations that have become dental service providers on a large scale.
It was a dentist. It was an accountant.
You are a dentist. You have an accountant.
The difference is whether or not you recognize the opportunity and what you wanted to do with this opportunity.
There are millions of small businesses. To quote an article from Investopedia
" It's often said that more than half of new businesses fail during the first year. According to the Small Business Association (SBA), this isn't necessarily true. The SBA states that only 30% of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first 10."
What is the statistic on dental clinics? In all my years of business, involvement with several hundred clinics, I have only experienced a couple of "failures". More interesting is these "failed" clinics are actually still opened - but purchased by new operators who have since helped them "succeed".
My opinion is that 99% of dental clinics, as a small business succeed....this is a pretty good statistic.
Some entrepreneur recognized this. Together with an accountant they started to crunch numbers and came up with a formula that would guarantee private equity investors a great ROI. Some of it from "dividends" and most of it from "growth".
It's interesting that if you have growth north of 30% in your gross income numbers how much of a multiple investors will reward you. At first you may be relatively small to consider from private equity. However, if you can go from $10Million to $100 Million in gross income in just a couple years...then to $250 Million another year later, you may get some interest that you are on to something.
Profit needs to be there. So many small business owners never understood how to properly value the business they operate. Most small businesses take ALL CASH as profit. Many forget that there is equity in the growth, just like the equity gleamed from your home. It CAN and DOES go up in value. Especially when you are in a market like ours...
The reality of health care and values
What other business has such ominous restrictions and oversight on advertising and marketing? This makes it very difficult for ANY start up competitor to gain an advantage over an existing business. You can't just enter the market and them bombard social media with how much better your product is and watch as the market shifts....nope, not in our business.
The entrepreneur who recognized this, recognizes the value of the 78% of the market that is ALREADY seeing a dentist on a regular basis. Recognizing that the MAJORITY of opportunity lies not in marketing - rather in valuing the current market, and making sure that NOTHING changes! Keep the business operating "AS IS" and try hard to add services, which is opportunity within the existing client base.
They also recognize that there are small percentage of profit to be gleaned from efficiency. Helping teach the businesses they buy how to become more profitable with labour, and materials. Adding new procedures via a younger new generation of associates that have been offered great resources of continued education....
Imagine having an exclusive labour force that is well educated that generates high gross income to begin and you only have to pay for production? Imagine providing that business with a fantastic, but well structured and well run pool of cash to expand and grow? Competition will have trouble gaining traction - as the majority of competition is small, self funded business that requires the capital generated in order to pay personal expenses rather than re-invest in the business that actually generates the cash flow to begin.
The competition is not trained on business. They often don't understand the return on investments and make decisions that aren't sound and profitable. Adding technology for example that actually hurts cash flow rather than enhances it. Forgetting to continually improve, or invest in constant improvement and growth. The business tries to save itself to profit rather than grow the top line.
The trouble in the future.
In Saskatchewan it now costs $60,000 per year tuition for 4 years - or $240,000 to attend University of Saskatchewan College of Dentistry. Adding in cost of living expenses and a couple more years of education - you can easily rack up north of $300,000 of debt!
Upon graduation, the market is saturated and competitive for jobs - but there are still good opportunities! Regardless, so many have spent the last 6 years or more getting an education and getting into debt - they look forward to just getting a good paying position and getting themselves out of debt.....
But also they want to start a life! Have a family! Buy a car, a house, have kids.....
The first position they are offered that actually has any kind of patient base is at an established clinic (hmmmm....who owns most of these and valued most of these with this thought in mind???).
These associates start working, start paying off some debt....but start to accumulate personal debt. The positions they started to work at are strong and they can earn. These positions are likely owned by a corporation, or a STRONGLY VALUED business.
The graduating student, with no foresight, continues to rack up personal debt and once they get comfortable start to consider ownership.....
Why it's so tough to buy a clinic and compete with the Corporation
First the valuations.
The accountant tells you not to invest, because they are trying to preserve the cash flow you are already generating as an associate. You are able to service your loans and have a decent lifestyle. Once you look at ownership, and consider the "profit" left over after you service the new debt - you will be taking home less "cash" and you may have problems with that!
The values of clinics, where I live, is about 1.2 - 1.5X gross income (the easy math) or 7-8X profit. The most profitable clinics are the larger clinics that have a large base of clients to draw upon and often offer specialist types of services as well. These are the same clinics newly graduating dentists may have the best "opportunity" to work at and actually generate an income from day one.
Its pretty hard to go from living a "lifestyle" with weekends off, working 30-35 hours a week and taking home 40% (where I live in Canada this is the going associate rate...for now). The income is paying all the personal debt and your accountant says to just keep doing that. If you are to buy a business - it's much like a house - a lot of your "cash flow" goes towards interest and equity.
The lifestyle has to change. You can't take the holidays. Maybe have to delay having kids. Start working weekends and dealing with trying to find team members....and you MUST learn business to understand the numbers!! On top of that, you MUST find a niche, a way to keep patients coming in YOUR door instead of heading across the street.
For all this - you may gain a 10-15% advantage compared to what you earned as an associate. It will not come up front but may take a decade. In that decade, however, you will likely have paid off and grown a business into a very desirable business that you can leverage for other smart business moves....
Corporations versus owners....
It's my opinion that dental businesses that recognize the opportunity of a large, well educated, healthy patient base will thrive. The entrepreneurs that will succeed will recognize the niche of providing a higher level of service in a market that is driven by referral. One that requires EXPERIENCE and EDUCATION and continual improvement to provide a unique and desired patient experience.
Those that give the customers what they want and deserve in a business that is driven by referrals will get those referrals. The challenge for large businesses is to be able to create enough incentive to keep the most talented teams that drive this type of business....but will the public ever care?
There will always be a market for fast food, they will learn to compete with fast casual, and there will always be a market for mom and pop restaurants. We will also all still enjoy finding that special place to eat that has a creative and unique menu and recommend it to all our friends....
No matter what stage you are at in this dental career - are you ready for the future?