<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=356276288176327&amp;ev=PageView&amp;noscript=1">

Begin with the End in Mind (Part #2): What Are You Trying to Build…and WHY?!

Posted by Perrin DesPortes on Feb 7, 2019 2:00:00 PM

In our last blog post, we talked about “the End in Mind” being more financially-oriented as it related to exit strategy and deal structure, specifically around the aspects of: transaction value and actual structure of the sale; requirements post-sale; and strategy necessary to achieve the intended outcome. 

All of those considerations were focused on the actual sale or exit of the business, which ignored something pretty critical to actually getting to that point…

Namely, what’s the actual business itself that you’ve built?! 

We have far too many clients come through our office who haven’t given enough consideration to what they’re actually trying to build from the following contexts:

  1. Personal – contrasting objectives of lifestyle and income versus effort and wealth
  2. Operational – scope, scale and structure of the business itself
  3. Philosophical – internal and external value-drivers

shutterstock_790857418All too often people are only focused on the “pot of gold at the end of the rainbow” and they tend to gloss over or outright ignore the journey it takes to get there.  That journey is all about building the business itself, so it’s prudent to consider what you’re wanting to build and the reasons behind wanting to build it in the first place.

The reason to pump the brakes and consider this very early on should be pretty obvious: if you build a mess, no one’s going to buy your mess.  It’s going to be your mess…and your mess for a long, long time.

Let’s spend a few minutes digging into the “Personal” area we mentioned above in an effort to help you build something worthy of your time and your effort.  We’ll tackle the “Operational” and “Philosophical” aspects in our next post. 

The Face in the Mirror Test

This is harsh, but you have to seriously ask yourself: “Who am I?  And how committed am I to taking the risk and suffering through the burdens of building this business?”  Be honest with yourself because building, owning and operating a group dental practice isn’t for the faint of heart.  

You also need to compare and contrast the aspects of building a larger-scale group practice with “keeping it all and keeping it small.”  What I’m talking about here is found in the difference of owning and operating a lifestyle business that generates tremendous income versus building and scaling a group practice that could create the opportunity for tremendous wealth. 

Considerations for Building a Lifestyle Business

Many founders of group practices got their start by owning and operating an extremely successful single-location practice.  “Extremely successful” can be categorized in many ways, but one aspect is always in the amount of personal income the founder generated through their clinical dentistry.  Understandably the founder probably created a lifestyle that was based on and supported by their clinical income.  There’s absolutely nothing wrong with owning two or three dental practices and still practicing three to four days per week.  A founder’s income from clinical production as well as his or her distributions from owning the collective business can be substantial, and the stresses of ownership can be manageable.  That being said, the business might one day sell for a nice number, but the sale amount would be far from life-changing. 

The objectives of building a lifestyle business are:

  1. Maximizing personal income
  2. Minimizing risk factors
  3. Maintaining a sense of control
  4. Managing a level of stress or anxiety

Considerations for Building a Scalable Business

shutterstock_654721882Many dentists by nature are entrepreneurs, which accounts for the primary reason why solo location dental practices still make up the vast majority of the industry.  Having said that, there are a lot who are now interested in building a group practice that can be scaled and ultimately sold.  The industry is now littered with successful transactions that have high seven and even eight-figure values.  Let’s face it – selling a business of any kind for $10,000,000+ can be life-changing and could create generational wealth for a lot of people. 

However, that potential outcome is all but 100% contrary to the four aspects of building the lifestyle business we noted above.  If your goal is to create generational wealth through the sale of your group dental practice, then you have to think about those factors differently and clearly. 

Generating Income versus Building Wealth

The personal income you generated as the largest clinical producer in a solo location or small group will be less during the building phase for two primary reasons: one, the group needs a full-time CEO and the CEO of a 4-10 location group won’t command as much in market-based salary as a top-producing dentist would; and, two, the bank that’s funding all of your growth wants to see you plowing as much back into the growth and operation of the business as possible.  Put another way: your bank doesn’t want to fund your business while you fund your lavish lifestyle.  Align your risks accordingly and understand that creating generational wealth is a result of equity on your balance sheet – not how much income you earned each year. 

Debt Leverage and Risk

There’s risk inherent in any business, but if you’re going to build a group practice, you’re probably going to use bank funds (debt) to make acquisitions or startups.  Nobody funds the growth strategy of these businesses out of operating cash flow.  And banks won’t allow you to go to a corporate guarantor status until you hit around $4-5,000,000 in EBITDA, so count on personally guaranteeing the debt for quite a while.  If the business declines, you’ve still got to pay the bank.  And if the business fails, debt gets paid back before equity.  There are a lot of other risk factors at play in building a group, but the high degree of leverage we see in a lot of these businesses is the primary concern we often have.

 

Control Through Systems and Processes

Remember when you owned your first dental practice?  You knew everything that happened almost every hour of every day.  You knew all of the staff and what was happening in their personal lives.  You knew most of the patients by first name.  Everybody played off the same sheet of music and everything that needed to happen to keep the practice operating smoothly went according to plan.  There’s comfort in being in control, right? 

Well, a lot of that control was a result of the fact that you were there every hour of every day.  When you have two or three practices, you may rotate through each of them one to two days per week…and have some semblance of control.  But what happens when you’re the full-time CEO of a ten-location group?  That’s a big business that probably has 80 to 100 employees and 25,000 active patients.  Did someone remember to shut off the water control valve in location number eight on Thursday evening?  Nobody likes being the champion of systems or processes, but you’d better have good ones that are followed by all if you can’t be in control of everyone and everything. 

Anxious Moments Around Every Corner

Which brings me to stress and anxiety.  We all need more of that in our lives these days, don’t we?  Stress and anxiety comes along with the lonely aspect of leadership. Nobody understands it until they’ve worn the hat.  And no one’s prepared for it until they’re tested for the first time.  How do you compete with that 300+ location enterprise-level DSO that just came into your market?  That acquisition you just made is under-performing and you’re worried that you probably overpaid for it.  Three of your top ten associates have left in the last year – are those isolated incidents or are they part of a larger, systemic problem?  Your IT consultant just found a Trojan virus on your data server and there’s an email in your inbox explaining how to make payments in Bitcoin. Stress and anxiety come in reaction to things outside of our control or predictability, and they are more numerous the larger the business becomes. 

Concluding Thoughts…For Now

I realize you’re probably worn out by now in just reading this.  And I’m glad.  You should consider all of these aspects carefully with a pot of strong coffee and a legal pad.  Think through the opportunity at hand. Consider your family, your time and your priorities.  Does building a group dental practice fit with all of that? 

If you think there’s a high degree of congruency, then put the idea down and come back to it again in a week.  Reevaluate it.  The adventure begins and ends with you as the founder.  If you think you’re fully committed, then stay tuned for our next blog post when we’ll tackle some of the operational and philosophical aspects of building a successful group.

And if you’re interested in building a more quantifiable and realistic growth strategy or learning more about TUSK’s “Blueprints for Scale” strategic consulting program, feel free to connect with me directly.

Set Up a Call!

If you’d like our help in this area or to discuss any other topics related to trends in our industry, please feel free to contact me at Perrin@TUSK-Partners.com.  TUSK provides industry-leading resources for Group Dental Practices and DSOs.  We help our clients START, GROW and SELL their Group Dental Practice or DSO.  For more details, visit our website or feel free to download our Overview of Services.

 

Tags: Growing Your Dental Practice or DSO, Selling your dental practice DSO

TUSK Partners

We help you START, GROW and SELL your Group Dental Practice or DSO.

TUSK provides Industry-Leading Resources to Group Dental Practices and DSOs, such as:

  • Full Day Deep Dive
  • "2nd Stage" Financing
  • Modular & Strategic Consulting Services
  • Exit Strategy

Subscribe to Email Updates

Recent Posts