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Phone:  732-404-1860    
Fax:  732-404-1868

Three Common Pitfalls to Avoid for Emerging Group Dental Practices

Guest post from Perrin DesPortes, Jr., TUSK

We work with a lot of group dental practices and DSOs all over country.  Some are based around general dentistry and others are specialty-focused.  Some have three 20-operatory practices and others have ten 6-operatory facilities.  Some have centralized infrastructure (call centers, insurance processing, marketing services, etc.) and others have no centralization.  Each one is different, and they all have their own sets of “unique challenges.” 

All of that being said, these entrepreneurs seem to encounter three common challenges to building their business in the early stages:    

  1. Personal transition into leadership
  2. A diminishing relationship with their original lending source
  3. High turnover of key associates

It’s worth unpacking these in greater detail because every founder-owner is going to face each of them at some point in the early stages of their journey.  

Transitioning out of Your Comfort Zone

Dentists go to school to be, well…DENTISTS.  Every dentist I know laments how little formal business education they’re given in dental school.  They all talk openly about how much clinical confidence they have upon graduation, yet they’re often scared to death of the actual running of the business.  Inevitably, a lot of the aspects of management they end up learning through on-the-job training. 

But management is very different from leadership. 

You can manage a solo location dental practice. You have to lead a group of practices, and doing that remotely is difficult at best. 

Couple this with the fact that the founder-owner is usually also one of biggest clinical producers of the group and it creates a sense of double-jeopardy when they are forced to give up their primary strength (clinical role) to transition into an area of critical importance where they have little expertise or training (executive role).

At TUSK, we refer to this as the transition from Chief Clinical Officer to Chief Executive Officer, and it starts to happen somewhere around 3-5 locations (generally speaking). 

Are you ever truly ready for this?  Arguably no, but there are things you can do to prepare for it.  The first would be to actually recognize the reasons why it has to happen and that you cannot, in fact, continue to perform both roles indefinitely.  You need to prepare your associate(s) to be able to pick up the clinical production in your place.  You also need to prepare yourself and most likely work with a personal business coach to identify the skills you’re going to need to develop for the new role.  High-producing dentists also make more income than CEOs of small businesses do, so be aware of the possible income hit as you transition from a variable compensation structure to more of a salaried role. 

It’s important not to lose sight of why you’re making this transition in the first place.  YOU are the founder and visionary of the business.  YOU are the one that has to communicate that vision to all current and future stakeholders in the business.  It also becomes next to impossible to work ON the business if you’re still working IN the business. 

Leadership is ultimately about delivering results.  You may be able to manage the business successfully when it’s still small, but success on a larger scale ultimately comes down to someone being an effective leader. 

Gaining Clarity around Your Source of Debt Funding

Almost every group dental practice or DSO starts out using bank debt.  Banks typically love to lend to dentists because the default risk is so low. Low risk often translates into lower lending rates, which is incredibly beneficial to dentists buying their first or second practice.  However, that same risk profile starts to change around 3-5 locations and around $2,000,000 in total exposure.  The underwriting complications for the bank tend to change (increase) around that level, too. 

One of my partners, Kevin Arnold, wrote a great piece about all of the mechanics behind this recently, which you can access HERE.

Kevin is frankly a lot smarter than I am, so I’ll leave the glorious banking details to him, but I will encourage you to do two things:

  • Communicate your future intentions clearly to any banker you’re considering working with
  • Understand the parameters around which they will continue to lend – or stop lending

Your banker isn’t a mind-reader.  When you tell him or her that you want a loan to buy a dental practice, they give you A loan to buy A dental practice.  “A” means ONE.  And a loan is not an open line of credit.  If your intent is to buy one dental practice now and another one every three months until you hit 15-20 practices in five years, that’s a significantly different business proposition to your banker – and, more importantly, to his or her Senior Credit Officer. 

Being clear about your future intentions preserves your relationship with the right bank – and “the right bank” might not be the bank with the lowest rate.  If growth is your goal, you want to secure access to a larger amount of funding over some period of time, provided that you operate within their defined parameters of leverage and liquidity.  In short, you should have a basic understanding of whether or not your bank will fund the next deal you bring to them before you even ask. 

Scalable Businesses have Long-Term Employees

Turnover is a problem in any business, but the best businesses minimize it in multiple ways.  One of the most effective ways to minimize turnover of your key clinical providers is to figure out a way for them to earn equity in the business.  The “owner” of a business operates with a significantly different mindset than does an “employee.”   We’re all living proof of that.  Think a out a job you had and the way you cared about it and contrast that with the business you own. 

Associates that have the opportunity to either buy equity or earn equity – or both – don’t leave.  There are ways you can structure “earn ins” or “buy ins” at either the PC, DSO or Sub-DSO level that will reward them for building you a bigger pie.  These structures may be new to dentistry, but they’re long established in Corporate America.  I and my partners have all been the beneficiary of them and can tell first-hand that they work. 

We’ll have more to say on this topic in the future, but just start asking yourself the following: “Would I rather be the sole (100%) owner of a $1,000,000 business or the 80% majority owner of a $2,000,000 business?” 

Solving the problem of “associate churn” is critical to your ability to scale the business because it creates continuity of culture and team cohesion.  “Dark revenue days” and a general lack of engagement or commitment from key employees will age you quickly. 

Building for Scale

The founder-owner dentist that can “adapt and overcome” in these three key areas stands to build a wonderful business that can scale from 5 to 10 locations, and then from 10 to way beyond.  Leadership, continued access to growth capital, and committed employees are three cornerstones that will win a lot of battles in the emerging group practice and DSO space. 

This is a guest post from Perrin DesPortes, Jr., Co-Founder, TUSK. TUSK provides industry-leading resources for Group Dental Practices and DSOs. They help their clients START, GROW and SELL their Group Dental Practice or DSO.