Practice Mergers

November 4, 2013

Interested in a safe investment with a minimum 17% rate of return?

After the devastation to many dentists’ portfolios in 2008, it is now very common to see these practitioners take defensive positions in order to preserve what remains in their retirement and investment funds, rather than the gamble of even greater losses. The stock market no longer provides the predictable returns that had been common in years past, and the bond market has continued to significantly underperform. Can we do anything at all to regain our losses? Is there any “safe” market remaining? Where do dentists turn for their investments?

Fortunately, we still have an option to obtain returns of 17% or more! We even have the option to do this without investing any money of our own! We also have the ability to thoroughly understand the industry in which we are investing without going through a prospectus which nobody understands or cares about. Are we talking options, leveraged buy-outs, lotteries? No, in fact we are talking dental practices!

Yes, you can purchase another dental practice, merge it into your own practice, and return 17% or more, investing in what you know best (dentistry) and using 100% of somebody else’s money. Interested in learning more? Interested in earning more? If so, read on.

Let’s start with the basics. Each of you has two basic categories of expenses in your practices – fixed and variable. Fixed expenses are those that remain relatively constant whether you produce $100K a month or $100K a year. These include categories such as rent, utilities, insurances, accounting fees, software support, equipment leases, and to a degree, staff. Variable expenses, however, are those which remain relatively constant in terms of percentages, but will have total dollar amounts very different for a $100K/month practice than those of a $100K per year practice. These include expenses such as dental supplies, office supplies, staff salaries to a degree, and some miscellaneous expenses. Although there is a range for each category, for purposes of illustration, we will assume that dental supplies average about 7% of your annual income, office supplies about 3%, and miscellaneous expenses about 3%. We will also assume an additional 15% of annual income for additional staff expenses as the practice grows. If you add all of these percentages together, we come up with 28% for variable expenses. We will use this 28% going forward.

Therefore, if we have an “average” practice grossing $800K, for every additional dollar earned, we will net 72 cents profit. We came up with this number by subtracting 100% - 28% (our total variable expense percentage). This scenario assumes that we can do all the additional production ourselves. Thus, if we add $400K in revenues, our additional net income increases by almost $288K ($400K x 72%). However, if you do not have the patient base to increase your gross receipts by $400K, you will need to consider a practice merger. Now, you have two additional expenses to consider – the debt service and paying somebody to do the dentistry if you are unable or unwilling to assume the additional production. Debt service will typically range from 10-15% of the annual production. In order to pay somebody to do the added production, you will need to add an additional 40% or so for provider compensation.

Therefore, if you purchase a practice, merge it into your own, and you do all of the dentistry, your return is 57% (100% - 28% for variable expenses – 15% for debt service). Now for every dollar added to your current production, you will net about 57 cents profit. Therefore, if you merge a $400K practice into your own and do all the dentistry yourself, your additional net income will be almost $228K ($400K x 57%). If you elect or need to pay somebody to do the additional dentistry, your return is reduced by 40% for “provider compensation”, resulting in about a 17% return (57% - 40%) – all without ever treating a patient! In other words, by merging a $400K practice into your own, leveraging the buyout 100%, and never treating a patient, your potential return is close to $70,000.

Now you can see one more reason why dentistry is such a wonderful profession. We do not need to invest in the risks associated with stocks, bonds, real estate, precious metals, etc. Instead, we can invest in that which we know best, that which we enjoy the most, that which provides benefits to our patients – dentistry. If you are interested in obtaining potential returns of 17% and potentially even more than 50% using somebody else’s money, we suggest that you consider a practice merger.

Contact Phase II Associates, LLC for further information regarding practice mergers and creative practice transition planning. We are a nationwide full service practice transition consultancy that works exclusively with dental specialists. Our services include creative exit planning, practice appraisals, practice sales and purchases, legal documentation, and loan procurement. Phase II Associates is a member of the National Association of Practice Brokers, an organization whose members are some of the most respected and successful dental practice transition experts in America.

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