We’ve noticed a recent spike in low billing surgeries coming to market and we suspect this trend to continue over at least the next 6 months as costs increase. We define a low billing surgery as one that does less than 600K per year in billings. This is the approximate point at which most dental practices will achieve business profitability as long as expenses are kept roughly within industry benchmarks (this is after paying the practioners market wage but before interest and loan repayments).
The sale price of these practices is typically low and well below what the vendor would have paid to fit out an equip the surgery initially. It may seem appealing given the recent rise in fit out costs and indeed if you can identify growth opportunities and increase billings these types of surgeries can be a treasure trove!
However, you need to be weary of the dud practices!
Be suspicious of practices where there is a considerable marketing spend (>40K/year) with little uplift in billings and new patient numbers. As a guide, >50 new patients per month are needed for growth (less in high SES areas and more in lower SES areas) anything less with a considerable marketing outlay could suggest the marketing medium being used is not working. However, it likely indicates the area is significantly saturated with dentists and/or has its dental demands being met. Doing your competition and demographic analysis is important. When these types of practices come up for sale, we have the benefit of hindsight, unlike a start-up. We know that no matter how much marketing is done the practice will always struggle to increase billings. Further, generally as practices mature the marketing spend should decrease as a portion of turnover and word of mouth referrals become much more dominant. Unfortunately, if the marketing spend is high without a noticeable increase in billings and new patients the practice will never reach this maturity and will struggle to achieve any business profitability.
Likewise, be weary of practices with the rent being high as a portion of turnover. This is typical in these low billing surgeries. Dental industry benchmarks for rent depend on turnover. Generally, for rent anything under 10% of total turnover is acceptable. When we purchase a practice, we can control most things except high rent. If the rent is well above industry benchmarks at the turnover we think we can get the practice to we won’t buy that practice. Location and competition analysis are important to get an idea of the growth potential. As cheap as a practice may appear, if the rent is high with minimal growth opportunities – walk away! It will be a constant uphill battle to produce any business profitability.
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