We interview Timothy Brown, CEO of ROI Corporation one of Canada’s largest dental brokerages and get some down-to-earth advice on what dentists need to consider when buying or selling a practice, questions and answers below:

COVID and Dentistry– Is It a Good Time to Buy or Sell A Dental Practice? 

Nick: So, Tim, right now with COVID everything’s up in the air. Is it a good time to buy a practice or a good time to sell? What’s going on with the dental market in Canada?

Timothy: Nick, I work with sellers, and now is a great time to sell because we’ve had an incredible surge in the number of buyers entering the purchase marketplace. We have persistently low interest rates and most experts predict that they’re not going up for a year or two because the government wants to stimulate the economy. 

So, from a seller’s perspective, it’s a great time to sell because we have more buyers than ever, including corporate buyers, and hands-on owner-operators– buyers with access to very, very low cost of money. And when the number of purchasers in any marketplace increases, values usually increase as well. The residential real estate market is a perfect example of that. 

For the buyers, it’s also a great time to buy a practice because you can be an owner. Many associate dentists in Canada have not been called back to their previous schedules pre-COVID because the owners are working more hours. So, there are a lot of young dentists in Canada who are a little frustrated because they’re not getting as many new patients as they used to receive, and they’re not getting the same hours from the principal. So they’re saying, “Look, I have two choices here: I can set up a brand new practice in a highly competitive, oversaturated market, or I can go buy a practice. Yes, I may have to pay a premium compared to what values were a year ago, but I’ll be an owner and the banks will give me ten-year financing.”

So it’s a great time to sell and it still is a good time to buy because at least you can be an owner and be in charge of the destiny of your dental career.

Should You Buy A Dental Practice in a Small Town or a Big City?

Nick: If I’m a young dentist and I’m trying to buy my first practice, what are your thoughts about buying in a big city versus buying in a small town that has less competition?

Timothy: The primary motive for most purchasers is to practice close to home. If you live in downtown Toronto or Vancouver, for example, you’ll probably want to buy a practice there so you’ll have a short commute and you can be at the ready when patients need you for emergencies. The problem right now is that a lot of the downtown cores are ghost towns because a lot of the patients that were attending those practices were office workers. If they’re working from home, Canadians are voting with their feet and saying, “I don’t want to drive downtown and pay for parking just to see the dentist.” And it looks like the work-from-home phenomenon is here to stay for upwards of 50% to 60% of Canadians.

So, downtown is great, it’s dynamic, but if there’s not enough patient flow because of the migration back to the suburbs, I think that the suburban dental practice is probably a better investment. You’re still close to the city, but you have patients. 

When it comes to buying in rural and remote Canada, setting up a brand new practice is a risky proposition because there are so many people in those communities who are probably loyal to the existing dental practices. Instead, I would recommend buying an existing practice in a small town. 

Rural Canada is a wonderful place to raise a family. It’s a simpler lifestyle. I live 3 hours north of Toronto right now in a very small town. I love it here. I’ve got to know everybody in six months. It’s peaceful, it’s safe, and the kids are running around. So, from a business perspective, I think rural Canada is a better investment overall. Also, if you don’t own the building, you generally have slightly lower wages because people in rural and remote Canada don’t earn as much as people do in more urban areas. If you buy an established practice, you probably have a lower overhead. 

I’m quite worried about the big downtown core locations in the long term. I just don’t think that’s the place to buy right now. 

How Do You Improve Practice Value Before Selling It? 

Nick: If I’m planning to sell a practice in the next five or ten years, what are some metrics I should focus on as a dentist? What are some improvements I should make to my practice that a buyer would care about? And consequently, what are some things that buyers don’t really care about?

Timothy: First, let’s first talk about financial metrics. The most important metric of all is bottom-line profitability. That’s what drives value in any business. And any business appraiser, like our company, focuses primarily on the bottom line. There are many other factors, of course, such as managing your overhead, keeping your wages in line with provincial standards and norms, and managing your dental supplies. But you should always pay attention to the bottom line. A metric that will impress buyers today is the total revenue produced by the prevention programs in the practice. They like to see the hygiene department producing 30% to 40% of total revenue. That’s good recurring revenue. That indicates a loyal, educated patient base, and people are always impressed by higher hygiene numbers compared to the practice’s total production.

Another thing that matters significantly in dental practice appraisal is collection policies and accounts receivable analysis. Some practices accept assignment; that’s fine, there’s nothing wrong with it. Some practices are paid a fee for service at the time of treatment. But we have seen practices where the accounts receivable are, quite frankly, out of control. I think that’s a function of educating the person doing the collections, which is almost always the receptionist.

Purchasers are turned off by receivables that are out of line with the industry norms. The industry norm for the production of receivables is 30 days or less. When we see receivables down to 1 to 2 weeks for production, that impresses us. We factor that into our appraisal and that impresses the buyer, the buyer’s accountants, the buyer’s banker, and, of course, the ever-critical new patient count.

The new patient count refers to the number of new patients appointed to the practice. And that’s a function of marketing, social media, and search engine optimization. Various reports suggest that up to 80% of new patients are being driven to your practice by existing satisfied patients. And I think the practice of focusing on encouraging satisfied patients to refer friends and family will yield a good quality patient flow.

Patient flow isn’t just a head count. Yes, new patients matter, but what kind of new patients are they? Are they coming to receive treatment planning? Are they capable of paying their bills through insurance or private pay? Those are some of the key financial metrics. 

I’ll talk very quickly about plant and facility– the office itself. There is a concept in real estate I call the kitchen and bathroom conspiracy. Many homeowners preparing a home for sale will invest in a new custom kitchen and upgrade the bathrooms and other features. But the National Association of Realtors in the States has done a very thorough survey of this and has found that you don’t make any money off of that. 

Of course, if you invest 100,000 in kitchens and bathrooms, that should raise the value of the house by at least 100,000 and make it more attractive and salable– I get that. But, after you pay commissions and factor in all of the grief you have to go through, I just don’t think that’s worth it. 

The same thing applies to a dental practice. Be careful about technology and toys and improvements. Buyers are more focused on profitability than they are shiny dental practices. There’s nothing wrong with having a beautiful dental practice. And if you’re going to work there another 5 to 10 years, by all means, you deserved to have the equipment that you desire. But slow down on the toys and the things that you think will impress a buyer. If they don’t generate revenue and they don’t generate profitability, you don’t need the gadgetry and the technology. Focus on profitability and the quality of new patient flow.

Should I Buy an Existing Practice With Patients or Build a Startup Practice?

Nick: I’ve been to events where I’ve met young dentists who are thinking about buying a practice. Some of them want to buy a practice without patients, thinking it’s a little bit cheaper. Others think, “Hey, maybe it’s better to just do a startup.” So, what are the pros and cons of buying a practice with patients, buying a practice without patients, or doing a brand-new start-up?

Timothy: Whenever I’ve had the opportunity to give some consultation to a young dentist in this regard, one of the first things I ask them is: “What are your personal lifestyle expenses?” Some have student loans, mortgages, families, or other obligations. Those dentists need cash and they need immediate cash flow. For them, it’s probably best to buy an established practice. Even after paying the bank loan and the additional cost of purchasing established practice, you’ll have an income, you’ll be busy the first day you go in there, you’ll have a full book, and you’ll have the cash flow you’ll need to support your lifestyle. 

Meanwhile, other dentists in Canada have no student loans. They might be single and live alone, they don’t have children. So, they’re in a better position to buy that same brand-new practice that was built by someone else with very few patients because they have time on their side. They can afford to subsidize their lifestyle while waiting for the practice to grow.

And that’s a very similar calculation to the brand new start-from-scratch practice. When you get the design, you get to pick the paint colors, the cost, and the equipment. Building from new is fun, but people need to look at their personal financial needs more than anything.

If you have to pay more to buy a practice with 1000 or 2000 patients, there will be an additional cost to buy that patient list. But you’ll have cash flow and you’ll be busy and you’ll be able to perfect your competency and take on challenging cases. And, in your first six months, you get to meet a thousand or 1500 people who are all basically new patients to you. They’re not new patients of the practice, but you might uncover treatments the previous owner didn’t recommend or was not comfortable performing. Maybe you have a skill set the previous owner didn’t, and you can probably grow the practice. 

Surveys show that one year after buying an established practice with a patient list, most of the purchasers generate more money because they’re younger, they have debt, they have energy, they work through their lunch hours, they come in early, they stay late, they take emergencies on the weekends, and they generally grow in the business because the previous owner was perhaps a little more set in their ways. 

They didn’t want to do the evenings and weekends, and maybe they were starting to refer out complex cases that they might have performed when they were younger. It’s about cash flow, and this is where you as a dentist start from scratch or buy a turnkey practice for very few patients or buy the larger, more expensive practice for, say, 1000 or 2000 patients.

A lot of dentists will build a brand new dental practice, but they’ll go associate someplace else to subsidize their income. There’s nothing worse than having a practice without a doctor when a patient walks in out of the blue. Maybe it’s an emergency. I always use the analogy of a mother with five kids in the car. She walks in and the doctor isn’t there that day. There goes a minivan of five people right back out of the parking lot. They’re going down the road to the next practice. 

That’s a bit of an exaggeration perhaps, but if you open a practice from scratch, you need to be there. And sometimes you’re going to be sitting on your hands because you don’t have enough patients in the beginning. And most dentists are not happy not making any money, using their line of credit on their Visa card to subsidize their household expenses. I think cash flow is king, and we all want to be busy and make a living right away. That’s why people buy established practices.

What Improvements to a Dental Practice Increase Value?

Nick: In your experience of auditing you’ve seen countless different practices, what were the practices that increased their value doing differently? Were they focusing on events, or focusing on existing patients? Did they buy new equipment or are they spending money on marketing? What are some effective strategies that you’ve seen used to ramp up the value of a practice a few years before they plan to sell?

Timothy: There are a couple of key leading indicators of the top 20% of dental practices. When we’re appraising, we look back 3 to 5 years, and sometimes we see phenomenal growth, great revenue trajectories, and higher and higher profitability. So we ask the doctor, “What did you do to accomplish this? You’re doing better than the rest.”

One of the things that many of these dentists did is invest in continuing education for procedures that they were not comfortable performing. They took the courses and invested in proper training. The doctor is improving his or her skill set and they’re taking proper courses from the most respected training institutions, so they’re able to perform more procedures. And that grows the revenue. 

The second thing that we see is when revenue is growing, it probably means you’re not just performing more treatments on patients, but you’re receiving more patients. That new patient count is growing steadily and consistently. And it’s not just a couple of good months with some extra patients. It’s a very solid, steady lot. And 80% of those new patients are probably coming from existing patients. What these practices are doing is giving those patients an exceptional experience. 

The dental experience needs to be viewed like going to Tiffany’s or a Mercedes-Benz dealership or staying at the Ritz Hotel. We have to think that way as business owners so that when that patient is appointed, when they’re received, when they’re treated, when they’re released from the practice, or when they’re reminded of the next appointment, it’s a smooth, elegant process. But some dental offices are just too busy to stop and provide good customer service.

Dental offices can be stressful environments. And with all of the donning and doffing of gowns and the current sterilization and COVID protocols, it adds a whole extra layer of responsibility which prevents dentists from spending time with staff. Some very successful dentists have purposely taken 10 to 15 minutes every hour or two a day to stop.

You don’t always have to be in the operatory treating a patient. You can stop and call a patient. “Hi. We did a procedure yesterday. How are you feeling? Is everything okay?” I know most doctors try to do that, but you can always do better. I can do better about calling and following up with our existing clients to say, “How did we do today? Did you have any great experiences you want to share and maybe put a post on our Facebook page or give us a Google review? Did you have a bad experience that you want to share with me as the owner responsible for everything that happens here? Did we let you down? Did we just support you? Tell me, please. I want to improve my business.”

This is what great companies do and we as consumers experience that. And there are other great companies out there where we appoint as a customer or client or a patient, and we leave and say, “Wow, I just felt good. I spent my money on whatever the product or service was, and I feel good about it. I got an elegant, handwritten note with a first-class postage stamp” Oh, my God, does that go a long way! A telephone call from somebody in the office also goes a long way. It doesn’t have to be the doctor, it could be any staff member. “How are you feeling? Is everything okay? Do you happen to know a friend or family member that might benefit from the experience you just had with us here?”

You have to ask for a referral. So those are the two things that I think are making the exceptional practices exceptional and very valuable: increased treatment skills by the doctor and increased patient flow from a referral from existing patients.

What’s the difference between average vs. exceptional practices?

Nick: We work with some practices that bring in $500,000 in revenue, while others bring in over $5 million in revenue. I’ve got some opinions on what I think differentiates these two types of practices. But I want to hear from you– what are the key differentiators between a practice that brings in $500K and one that may bring in five or ten times as much revenue?

Timothy: I think it comes down to leadership and the principal dentist, or dentists. If they’re great people to work for, they always show up with a positive attitude, and they’re great at recruiting, rewarding, and retaining excellent staff– those factors make a huge difference. 

Two of the key things that cause dental practices to struggle are culture and staff turnover. Patients pick up on that. They are aware of that. They think, “Oh, they got another new receptionist there. I don’t even know this person. I can’t remember her name.” 

Some of these practices have several associates working in them, but some of these practices don’t have great leadership and they have associate turnover. They come in, work there for a bit, then decide to get another job someplace else. So culture, leadership, and preventing employee turnover are critical. 

Steve Jobs said, “The customer is not number one. Your employee is number one because your employee will help you look after the customer.” That quote goes around on LinkedIn and Facebook quite often, and I happen to believe that it’s true. What we try to do at our company is focus on culture and morale. Sometimes it’s high, and sometimes it gets low. And quite often the analysis will show that there’s one toxic employee that’s dragging that whole place into negativity because they’re just having a bad time in life or a bad time with family or marital situations, etc.

I get that sometimes people have a tough time in life, but they can’t bring it to the office. You have to leave that at the door. Every single team member needs to walk in with a bright, sunny smile and give patients an exceptional experience. And it’s not about the dentistry at that point; it’s about creating a place where people like to go. They get their treatment and they go tell their friends and family and colleagues about it. Those are the exceptional practices. Great leadership. I own a small personnel agency that does some temping and some full-time employee recruiting and our model is very simple: Great staff, great day.