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Begin with the End in Mind (Part #3): What Are You Trying to Build…and WHY?!

Posted by Kevin Cumbus on Feb 26, 2019 4:00:00 AM

In our last two blog posts, we talked about having “the End in Mind," more specifically being financially-oriented as related to an exit strategy, and then delved into personal objectives - contrasting topics of lifestyle and income versus effort and wealth. 

If those two blogs gave you some clarity around financial outcomes, time frames, and effort, then hopefully this one will be equally beneficial in the areas of “the WHAT” and “the WHY.”

As I said before, we have far too many clients come through our office who haven’t given enough consideration to what they’re actually trying to build from the following contexts:

  1. Personal – contrasting objectives of lifestyle and income versus effort and wealth
  2. Operational – scope, scale, and structure of the business itself
  3. Philosophical – internal and external value-drivers

shutterstock_1202342143All too often people are only focused on the “pot of gold at the end of the rainbow” and they tend to gloss over or outright ignore the journey it takes to get there. That journey is all about building the business itself, so it’s prudent to consider what you’re wanting to build and the reasons behind wanting to build it in the first place.

The reason to pump the brakes and consider this very early on should be pretty obvious: if you build a mess, no one’s going to buy your mess.  It’s going to be your mess…and your mess for a long, long time.

Since we’ve already covered the “Personal” context, let’s spend a few minutes digging into the “Operational” area of what the actual business should become. We’ll tackle the “Philosophical” area of how to differentiate yourself from the market in the next blog post. 

Structure Determines Strategy

There’s a ton to consider when it comes to structure, but let’s focus on a few key areas that you should consider all but immediately. 

Operational: Scope & Scale

If you’ve already determined your goal (“build and operate” or “scale and sell”), then you probably have some big picture revenue numbers in mind. Have you worked this revenue number backwards to determine what the individual practices will look like to achieve this outcome? For example, if your goal is to generate $15,000,000 in revenue, have you decided whether or not you want 10 six-operatory practices or 3 twenty-operatory locations? Those are pretty different businesses to operate, but they can both achieve the intended outcome. And if your desire is to build and sell, then those two footprints could create some differences around who the actual buyer of the business would likely be. 

One of the best ways to maximize revenue in a general dentistry group is to include specialty services because it makes things easier and more convenient on the patient. So, are you going to become a multi-specialty group?  If so, are those specialists going to rotate between all of the locations? Or are they going to be housed in a central location fed by a “hub-and-spoke” model? 

Functional support of the business is obviously critical, and everyone seems to be interested in building out a call center. Call centers can certainly generate operational efficiencies in a multitude of areas, but they can be costly to set up and operate. If you’re going to build and operate a group of less than 3 to 5 average sized locations, you don’t need a call center. On the other hand, if you’re at 6 to 8 locations and you decide to invest in any sort of centralized infrastructure, then you need to be committed to “go the distance” to ensure that the investment truly pays off. 

It’s worth noting that a financial buyer will often pay a premium for a business with centralized infrastructure because they believe the platform can be the key catalyst to future growth through acquisitions. That being said, there are a lot of smaller groups with under-performing centralized functions, so financial buyers are becoming more and more skeptical of the upside potential found therein. Put another way: a private equity group isn’t going to pay a premium for your business with centralized infrastructure if they have to come back in a year down the road only to have to tear it down and then rebuild it from the ground up done the right way. 

Legal: Groups, DSOs and Regulatory-Compliant DSOs

These terms get thrown around interchangeably – and they shouldn’t. There’s a “significant difference” in each of them.

If you’re going to build and operate a lifestyle business of 3 or 4 dental practices, then that’s a “group dental practice.” Pretty self-explanatory, right? You might own all of it or you might have a few partners in it. Each of you gets paid some sort of clinical compensation rate according to your production (or collections), then you split distributions according to your ownership in the business. Nothing complicated about any of that. Strategic buyers love picking up small groups that they can integrate fairly easily because it helps them aggregate market share. 

shutterstock_586897430DSO stands for “Dental Service Organization” and the questions that arise are: what services? And serving whom? A DSO is that centralized infrastructure we mentioned earlier and could encompass any of the following areas: marketing; legal; financial (controller); payroll and HR; insurance and AR; appointment confirmations; etc. All of that is most likely housed in some sort of corporate office and the costs of these services are paid by the individual practices. As long as there are licensed dentists that own all aspects of the business, then everything is pretty straight-forward.

However, when you have non-clinical ownership in the DSO level, things become much more complicated in a hurry. 

Every state dental board looks at DSOs slightly differently and they all have to grant approval when it comes to non-clinical ownership. So, if your plan is to build a business and get your rich uncle to fund some of the start-up costs in exchange for an equity stake in it or if you intend to hire a CFO and grant him or her the opportunity to own part of the business, then you need to talk with an experienced law firm about the legal requirements mandated by your state dental board. 

Equity: Owning, Attracting and Retaining

We touched on non-clinical ownership above as it relates to legal structure, but the concept of equity is one that a Founder needs to think long and hard about – and the earlier the better. 

There’s a “balancing act” of sorts when it comes to equity because your ownership relates directly to your potential exit payoff. But less equity doesn’t necessarily have to mean a lower payoff. 

Turnover of key Associates can be incredibly disruptive and dark revenue days can reduce the profitability (and valuation) of a business. Allowing Associates to either earn or buy equity can be a tremendous way to attract a higher level of talent and ensure that they stay for the long run. We often ask out clients: “Would you rather be 100% owner of a business valued at $2,000,000 or an 80% owner of a business valued at $10,000,000?”

The next question around equity is: “At what level – PC or DSO?” If you are going to build a legitimate DSO, then the DSO is what a financial buyer will actually purchase and the value of equity at the DSO level typically trades at a premium to equity at the PC level. Understandably most Founders want to hold on to the most valuable equity, which is at the DSO level. However, it’s worth considering the behavior you’re trying to incentivize. An Associate that owns equity at the PC level is only going to be interested in maximizing the value of their equity in that particular practice. On the other hand, an Associate that owns equity at the corporate level will be more concerned about the business overall, regardless of where they’re working. 

Concluding Thoughts…For Now

We could probably write a blog every week on different aspects around operational, legal and ownership structures, but hopefully this should give you a decent start in terms of things to think about. By now, you can probably understand why we spend so much time digging into a Founder’s business plan and challenging their assumptions. All of this is easier to deal with – and far less complicated – when you’re in the early stages of starting a group or DSO versus when you’re in rapid growth mode.   

In the final installment in this blog series, we’ll tackle the philosophical aspects of building a successful group. Suffice to say, we see too many “me too” groups and DSOs these days. Vision, philosophy and culture matter a tremendous amount in today’s world and all too often they create a quantifiable impact on the business.

If you’re interested in digging into your business at a granular level, then you might be ready to join us in our Charlotte office for a Full Day Deep Dive. The day is tailored to the needs of the client, but we teach some basic concepts out of about a 120-page deck that mirrors the agenda you can download here.

Download the Agenda HERE! 

And if you’d like to discuss any other topics related to trends in our industry, please feel free to contact me at Perrin@TUSK-Partners.com. TUSK provides industry-leading resources for Group Dental Practices and DSOs. We help our clients START, GROW and SELL their Group Dental Practice or DSO. For more details, visit our website  or feel free to download our Overview of Services.


Tags: Growing Your Dental Practice or DSO, Selling your dental practice DSO

TUSK Partners

TUSK provides Industry-Leading Resources to Group Dental Practices and DSOs, such as:

  • Full Day Deep Dive - Built to Sell
  • M&A Advisory Services 

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