Looking to sell your DSO or dental practice?
Here’s where to start.
The dental industry is evolving fast, and both dental service organizations (DSOs) and standalone practices are looking to outside investors to give them the resources they need to grow faster and reach higher.
There’s certainly plenty of interest: private equity groups and other investors are eagerly looking for new opportunities in the dental sector. Major DSOs including Heartland Dental and Aspen Dental are owned by private equity firms.
To win over investors, though, dental industry players need to pay attention to the basics, and make sure they’ve done everything they can to make their business an attractive proposition for potential buyers or investors. Here are the four key things every practice or DSO can do today to ensure they’re well-placed for future growth and investment opportunities.
1) Lower your overhead
Okay, this one might sound obvious: if you’re looking to raise capital or sell your business outright, you need to show that you’re running a tight ship. Investors like to buy lean businesses, and they’ll see low operating expenses as a sign that you’re doing something right.
Most dental practices operate with remarkably high overheads: the industry average is almost 75%, so shaving a few percentage points off your expenses can be a good way to catch the eye of potential investors. Still, be cautious: you shouldn’t start making cuts for no good reason. Firms will be looking at patient reviews online, so you’ll need to retain your best employees and show staff consistency with a stable employee base. Most equity firms or DSOs will also prefer that the selling doctor stays on staff.
Many “standard” dental business practices have been handed down from when doctors were charting on paper. Re-imagining antiquated workflows is the first step to introducing efficiencies to an office. Are you still using paper forms? How are appointment reminders being managed? What does your billing team look like? Do you have a strong appeals process? How much are you spending on marketing? A simple S.W.O.T analysis will help you identify easy process changes that lead to effective results. The goal is to find and eliminate waste, not to slash away the things that make your business great.
2) Keep on collecting
Another no-brainer: your business is only valuable if you’re actually bringing money in, so you’ll need to stay on top of collections in order to attract potential buyers. You can expect any investor to go over your finances with a fine-toothed comb, and cash flow will be one of the main areas where you’ll come under scrutiny.
“Having your financials in good order and strong collection rates will help optimize the value of your practice. Ideally, a dental practice seller should have a clear view of their EBITDA (earnings before interest, taxes, depreciation and amortization) as well as any opportunities to improve performance. We’ll want to see financial and operational metrics including recare rates, procedure and payor mix, collections, and expense ratios. The stronger the performance and health of the business, the higher the valuation.” – Mary Rachide, Managing Director, Portfolio Operations at ICV Partners, the private equity sponsor for Cherry Tree Dental, a multistate DSO based in Madison, Wisconsin.
You need to understand exactly when you’re getting paid. Production and collections reports are often bloated in dental and don’t reflect the actual numbers being collected. Understand where and why every adjustment/ write-off occurs. If you aren’t locking down your month then your collection actually could be all over the map.
There are plenty of ways to improve collections, of course. Asking for co-pays or deposits when patients are actually in your office is always a good place to start. Membership plans allow you to create a recurring revenue channel and might attract patients who would otherwise not go to the dentist. In fact, 60% of Americans don’t go to the dentist, which leaves a lot of opportunity for growth.
It’s also worth considering using an online system to collect insurance info before a patient’s visit, so you can check coverage and pre-authorize claims. Mobile payment solutions can make a big difference, too, enabling you to collect same-day payments quickly and easily.
3) Mind the GAAP
If your costs are low and your collections are high, your business is in good shape, right? Well, sure — but convincing your investors that that’s the case is a whole other story. To line up new investments, DSOs and practices don’t just need to be in sound financial health — they need to be able to clearly document the state of their finances. That starts with using Generally Accepted Accounting Principles (GAAP) to organize your books, which are essential to making sure your financial documents are written in the preferred language of your investors.
Some buyers will prefer to see your books on an accrual accounting basis, instead of the cash-based system most dental practices use early on. For IVC Partners, Rachide says it’s possible for a practice to make this transition down the line, as long as your cash-based accounting books are in good shape. “We don’t require accrual-based books upfront. Once we partner with a group, we’ll guide them in the transition to accrual accounting,” she explains. Still, switching to accrual is a good idea if you can manage it, because it effectively means that the money you’re owed (from patients on payment plans, for example) is counted as an asset for the purpose of valuing your company. That makes it easier to predict cash flow, and ultimately means your investors will view your company as being worth more — and write their checks accordingly.
4) Tune up your tech stack
Finally, in order to win over investors, you’ll need to make sure your organization is using the right tech tools — and that you lay the right groundwork early on, before your organization gets too big. That’s important because tech is the single biggest factor that makes it possible to coordinate new policies to drive efficiencies, increase collection rates, and implement smart accounting processes across a network of practices.
For instance, proper digital communication tools and patient record systems can make it easier for practices to coordinate treatment and provide better care for patients. Automated e-statement tools and online payment tools can go a long way toward improving collection percentages. A synchronized patient record and billing system makes it easier to manage the switch to accrual-based accounting, gain full visibility into your accounts, and document your organization’s financial health.
This is an area many early-stage dental organizations neglect, in part because outside investors don’t always fully understand the complexities of running a dental practice, and don’t pay much attention to IT infrastructure when they’re kicking the tires on a potential acquisition. But investors do care about the things that a solid tech stack can enable — so make sure you invest early on in the connected, cloud-based tech tools you need to drive scalable growth for your business.
These four tips might sound pretty simple, and the truth is that they are — if you implement them early enough in your company’s trajectory. Managing change is far easier when you’re running a solo practice, or a small DSO with five or ten practices, than when you’re running a major regional organization with 20 or 100 practices. Fail to lock in the right systems early on, and you could wind up struggling to get integrations done effectively once your practices have their own individual systems in place.
That’s not to say you can’t change once you’ve gotten big, of course. But it’s way easier to manage while you’re small and nimble. Wherever you are on your growth curve, the best time to prepare for investments is a year ago — and the next best time is today.
So if these tips sound straightforward, that’s all the more reason to act now, and make sure you’re getting them right. Dental practices that put their best foot forward, and show investors they know how to manage a business effectively, will be more likely to land the investments they need — and to secure a good valuation when it’s time to sell.
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Written by Melissa LuVisi, Chief Strategic Officer at tab32, the dental industry’s #1 cloud-based, full-service technology platform.