It is clear that whatever stage of growth and development one’s dental group is in, securing funding is the driving force behind leveraged scaling. Working to support emerging dental groups, one area that could use attention is a clear understanding of what it takes to fund rapid growth with term debt financing. Forget that banks are naturally hesitant to fund rapid growth. Or that the Covid shutdown leaves nearly all practices showing declined revenue in 2020. Too big – too fast is a challenge on many levels. You must demonstrate you are prepared for it.
Are you growing De Novo, Acquisition, or both? Each has a list of considerations lenders want to know were addressed effectively. There are too many to list them all. Consider:
- What is one’s site selection methodology with de novos?
- What is driving patient population?
- What does the income mix look like to drive the projected revenue? Fee for Service, PPO, Managed Care, Capitation, or a blend?
In 30 years of lending, I have never seen a cash flow projection that didn’t show a successful start-up. Unfortunately, I have seen my share of failures. In nearly all, ineffective examination of all aspects of the project was at the core of the demise.
With the acquisition model, one has historic cash flow to shape expectations. How does the target fit with your other offices? Is the seller working back? This is considered ideal, but what happens if the seller does not stay post sale? This occurrence is at the center of the increasing seller holdback provision along with maintaining production post-sale. Does the transaction provide global cash flow across all units? If not, it is the wrong office, or your organization is not prepared for growth at this point. Evaluate the following:
- Team Culture: Everyone knows the mission. All team members are fully committed
- Offices are at Maximum Utilization or growing strong month over month
- KPIs for your model are identified, understood by your team, and constantly reviewed
- Office profitability is in the top 5% nationally based on income mix
- Compliance protocols are understood and followed
- Revenue oversight is secure. No gaps for embezzlement
- AR is consistent. You are collecting what you are producing at the expected levels.
You’ll need to define your vision forward. Cash flow is the clearly established baseline. You are growing to increase income. Each office should follow a similar revenue trajectory. I call it the check mark challenge. It is a slight dip at onboarding, followed by a steady rise upward . If you do not pass this assessment in every office, consider a pause in growth. If you do not demonstrate a refined, duplicatable process, your “secret sauce,” your lender will struggle to support your growth. There must be maximized office utilization or steady revenue growth across all units, or your process needs refinement. If this is the case, NOW is the time to address it. It will only be more costly in all areas as you expand.
Dentistry can produce profits that create an illusion that you are doing things right. Look at the numbers. How does your organization stack up against same type operations nationally? A good starting point may be the ADA. They produce statistics, usually dated a few years, that may prove extremely helpful in measuring how you rate from an income perspective to similar practices. Same with the ADSO or NADP. If you are convinced you are there, it should be simple enough to convince your lender. However, do not be too disappointed if they share a differing perspective. Often what “you don’t know-you don’t know” is an eye opener when it is revealed.
Written by Frank Balkum. Frank is managing director of Xprt DSO Advisory Group. He has more than 25 years as an owner of a national dental finance company. He has spent the last 10 primarily in the M&A space for emerging dental groups and DSOs of various sizes. He can be reached at 551-202-9944 or Frank@xprtdso.com.
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