• What Buyers Miss
Aug 5 2021 - Simon Palmer - Buyer: buying

Last year, we had a practice for sale in a good suburban area of Brisbane. The principal dentist/vendor was in his mid-60s and had been practicing in the same spot for 30 years. The practice’s aesthetic was very functional but needed some reinvestment (both inside and out – let’s say $50k); it was in a great position on a busy street, surrounded by busy retail businesses. The principal was willing to contractually commit to working part time post sale and had a solid history of producing approx. $750k p.a., working 4 days per week (no extended hours), offering limited clinical choices with average fee levels, no website and $0 spent on advertising.

Time after time, buyers looked at the practice and dismissed it as “not for them”.

Why?

No one ever said that the price was too high or didn’t factor in the reinvestment needed. No one said that the lease on the premises was unreasonable. Comments included:

  • The area is “a hornet’s nest” of dentists.
  • “You could stand at the front door, throw a rock and hit four other dental practices”
  • “I have done my research, there are X dentists working in a Y km radius of the practice and the population simply cannot support that many”.

To me, this campaign exposed some of the fundamental problems many buyers have with assessing practices.

Problem 1. Looking at competition the wrong way

Getting an accurate dentist-to-population ratio is very difficult.

For most dentist buyers, doing competitive analysis begins and ends at a Google search. Using Google in this way to provide the number of dentists in the area is very unreliable. Google searches don’t just show the names of dentists that work in the area, but also the names of dentists that have worked in the area in the past. Often, dental practice “about us” web pages are full of dentists who work part time, clinically restrict themselves to certain work, have left the practice (and the owners have not updated the website) or have retired (and the new owners want to keep them on the web page for marketing purposes).

Even if you know the dentists on the website do work there, it is hard to know how many hours per week each works or their clinical range. Many of the dentists could be part-time dentists or dentists that just come in once a month to do specialised work.

Even if it were possible to have an accurate dentist to population ratio… Competition should be judged by quality, NOT quantity.

The sheer number of dentists in an area doesn’t mean that they are effective at getting and keeping patients.

The impact of existing competition has already been felt.

Why would you be worried about the established competition if, in this case, it allows the vendor to produce $750k per annum under their noses with no advertising, no website, poor clinical choices and service hours? These are not competitors that I would be concerned about.

Looks for gaps in marketing. Look for poor customer experience by reviews. Look for “soft” or “weak” marketing of:

  • Extended hours worked
  • Extended clinical choices
  • Ethnicity/languages offered
  • Quality

All too often, I have seen dentists take over a practice in a crowded marketplace and be able to grow it exponentially, simply by understanding marketing better than their peers and offering the market something that their competitors were not (in any effective way).

Problem 2. Not putting any value on opportunity.

Most buyers’ analysis of a practice is very superficial. Buyers have been told to use formulas alone to judge value - and revenue and profit are usually the only inputs in those formulas.

While revenue, profit and equipment are of course important…Not all practices doing the same gross and profit are equal!

If a buyer ends their analysis at revenue and profit, few will realise that, for a practice doing $750k p.a.:

- Working 4 days per week, business hours only, with 6 weeks of holidays per year… What would happen if a new owner opened the practice 5 or 6 days per week or offered some evenings to their patients? Or didn’t close the practice 6 weeks a year?
- With $0 spent on advertising, poor signage or no website… What would happen if it DID spend some money on advertising?
- With limited clinical choices and referring everything else out… What would happen if someone offered extended clinical choices?
- With a very poor recall rate for 6-monthly check-ups… What would happen if someone introduced some strategies to improve this?

There is value in what the practice isn’t doing!

I am not saying that each of these bullet points is necessarily a goldmine waiting to be explored… any one of these points may lead to nothing...but all four of them together point to a very good chance that there are some seriously underdeveloped parts of the practice. New ownership should be able to capitalise on these to create some fast growth.

Conclusion

A buyer looking for a practice with little competition, who judges it by existing revenue and profit alone, without regard for opportunity, may find some great practices…but the practices they are interested in will probably also have a lot of competition from other buyers who look at things the same way.

A buyer who is able to tweak their selection criteria to look at a practice, not just for what is there now but for what could be added under their ownership, will be able to find good, underappreciated practices whose virtues just need to be uncovered.

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