For many dentists, practice ownership is a lifelong professional dream. If you are fortunate to own one or two locations that generate strong revenue and command a sizeable, loyal patient base, then you may be dreaming about opening additional locations. The good news? Successful multi-practice ownership is attainable when you are equipped with a solid plan and a clear direction.
Whether you have two locations and want to expand to three, or you have three locations and aspire to expand to five, here are some best practices to consider as you think about your next steps.
First: Don’t Overlook the Importance of Operational Consistency
When you decide to take the leap into multi-practice ownership, you should start from the 30,000-foot view. It is difficult to scale and preserve the value of your practice(s) without creating an aligned, consistent business model that can be easily repeated across every location.
Start by outlining your goals for expansion. Are you planning to practice the same type of dentistry at each office? What brand are you building, both internally and externally? From an internal perspective, spend time designing scalable processes, such as similar purchasing techniques, human resources manuals, patient management approaches and payor mixes that your employees can apply consistently, regardless of where they work. When these aspects of your practice are aligned, your business will become more appealing in the eyes of lenders, future employees, vendors, potential investors and buyers, and even patients.
Aside from big-picture consistency, you also need to contemplate what risks and opportunities will arise from increasing the volume of your work. For instance, once you open your second and third locations, you will see an uptick in credit card payments and patient data, which may have different cybersecurity and privacy implications. You need to make sure your operational processes, procedures and systems can manage those changes, and that you make new investments as needed.
Better Position Yourself for Practice Financing
Before you dive into the financing process, you need to clearly communicate your expansion goals and approach to your team of advisors, including your dental-specific accountant, lawyer and lender. The more you communicate with your lending, tax and legal teams, the more prepared you will be to identify the metrics and benchmarks you’ll need to achieve to qualify for future practice financing.
Before they approve your loan for expansion into additional locations, banks want to look at your practice’s historical performance and then gauge it against the new opportunities you have in the market. When you are communicating with a lender, you need to be prepared with a strategy and reasoning behind your expansion goals — because the more offices you open, the more the bank will inquire about your qualitative and quantitative reasons for expanding.
So, what is your “why?” Do you need to open new operatories to meet additional patients’ needs? Are you trying to tap into a historically underserved market? Be prepared to fully articulate what you need and why potential lenders should take a risk on you.
Make a personal connection
It is essential to build a solid, trusted relationship with your lender, particularly as you embark on the path toward becoming a multi-location practice owner. Ideally, you could collaborate with your lender to set performance benchmarks that will justify why they should start and continue lending to you. For instance, some lenders may want you to hit specific cash flow markers at your existing office location before you open a new one. They want to make sure that your first practice has enough liquid cash on hand (and positive trending cash flow) to absorb debt without pulling cash from the practice. Your lender may also want you to hit X amount of profit per chair or a specific revenue amount before allowing you to borrow additional funds for expansion projects.
Regardless of what metrics you establish, the key is to clearly communicate with your lenders to understand what it will take for them to be comfortable with you opening a second, third or fourth location. Setting the right expectations at the outset will help you plan strategically for the future. It is also essential to ensure that your tax, legal and advisory teams are looped into your communications with lenders. This allows your team to position you to snap up opportunities when they present themselves, such as tax benefits and incentives, or whether to buy or lease properties to house your offices.
Plan for the long game
Before you walk into a meeting with a lender, make sure you have a completed business plan that not only covers your short-term goals, but also explores where you want to go, as you cement your status as a multi-location owner. Let’s say that you own a single-office practice in Dallas, and you are hoping to borrow funds to open second and third locations in San Antonio and Austin, respectively. However, your parents live in Atlanta, and you intend on expanding your footprint to the Southeastern US in the next 10 years to be nearer to them as they age.
If you don’t share these detailed plans (and the purpose behind them) with potential lenders, they will be hesitant to absorb the risk of lending to you. Think about the questions they may ask: How will you split your time between your offices in other geographic markets? What will your schedule look like? What are your hiring and transition plans for your Texas-based offices when you pivot to grow your business further east? Develop a detailed, strategic plan and stick to it — and above all, remember that consistency is key.
Practice due diligence when researching lenders
If you have worked in dentistry for a while, you may have historically relied on your professional network to find resources to support your practice. However, exhibit caution when seeking lending advice. The option that worked for the dentist next door may not be applicable to your situation. Each banking institution has its own lending and prequalification requirements, products, and credit and underwriting terms. Perform ample due diligence and research lenders’ experience in serving situations like yours.
For instance, if you are looking to build a portfolio of new real estate, you may choose a lender that has experience in that arena, versus a lender who strictly has experience with practice acquisitions. Find a lending partner that has the same vision and goals as you do, plus the right capabilities to help you hit your personal and professional benchmarks.
Seek Opportunities to Increase Value
When we meet with dental clients, one of the first questions we ask is: “What drives value in your organization?” Is it your practice’s brand? Is it consistent staffing? Your unique value drivers are essential to growing your existing practice and they are also critical to your success as a multi-practice owner.
The first step toward increasing the value of your practice is to have clean numbers. Make sure that you have separate charts of accounts, legal documents (think building leases, for example) and financial statements for each location so that you can easily segregate the value of one office from the others in your portfolio. This exercise also puts you in the best-possible position for a future sale if that is your ultimate goal.
It is also vital to know what value means in the eyes of your patients. For instance, do you have tenured staff members that have established a strong rapport with your patients? Do they intend to stay with your practice through its expansion to multiple locations? If not, how long will they stay on throughout the transition? Are those terms written in their contracts? These details may seem minor, but they are pivotal to understanding your practice’s value and how to maintain it through your growth trajectory.
Aside from internal operations, it is also important to seek opportunities to increase value through practice tools and technology. Examples of technical value drivers include the absence of paper charts, digital radiography or modern practice management software that integrates with other key systems in your practice.
Remember that professional valuators (like our team members at Aprio) aren’t looking for single characteristics when assessing practice value; we objectively look for a culmination of attributes that can give us a clear picture of what your practice is worth at fair market value. Get an objective, independent opinion to ensure you have appropriate measurements of value for each of your practice locations.
Preparing to Expand in 2024?
Aprio is the single-source growth partner for dental practices of all sizes. Our team provides deep industry expertise and comprehensive advisory services across accounting, tax, practice transitions and wealth management. If you are interested in partnering with Aprio on your multi-practice ownership journey, reach out to your Patterson territory representative to start the conversation or visit pattersondental.com/practice-transitions.
Originally published in Advantage by Patterson Dental in Winter 2024.
Trent Watrous, CPA, CVA, CFE, CEPA is the leader of Aprio’s National Dental Practice, where he oversees a team of experienced dental accountants and business advisors who help dental practice owners make informed, sound business decisions. Leveraging his extensive experience as a tax advisor, auditor, forensic accountant and expert witness, Trent educates and coaches his clients to navigate the complex financial challenges that come with being a practice owner in today’s rapidly changing and competitive business environment.
Kelli Henley, CPA, CVA®, specializes in advising multi-location practice owners on transition planning and practice sales, valuations, and purchases. She brings to her role extensive knowledge and experience in complex income tax strategy, structuring and compliance as well as business valuations specific to the dental industry. When working with practice owners, Kelli strives to build lasting relationships and coaches her clients on accounting and financial matters so they can manage their practices and navigate transitions in ownership with confidence.