90: A Second Location: Should You Buy or Start Up One

Welcome back, everybody, to another episode of the Dental Boardroom podcast. So glad you are joining today. Today I'm going to talk about a subject that has come across my desk many times over the years from clients in our discussions about how they grow their dental practice. And the subject is, should I buy a second office? Should I open up a second location? Either open up or buy. So the subject of today is buying a second location as a practice owner. Now, my assumption here is that you are the only owner if you have another partner. So there's two of you as owners running two different locations. I'm going to have a different conclusion or a different analysis on that. This is you as a single doctor with a single tax id, a single entity, and you're running one practice, and you're running it quite well. And so now it feels like the next step is for you to replicate your success in another location. And we do so by having an associate sort of take over a lot of the production in location one, so we can go and do our thing successfully again in a new location. Now, I need to first start off by saying, this is really important. You're going to find that the hurdle of doing that successfully is quite high. And I'm going to explain why, and I'm going to use the numbers to tell the story of why many have done this and few have succeeded. And I'm not saying, if you're listening to me, I'm not saying you can't succeed. Maybe you have succeeded and you're listening to this. It is. This is a common outcome. It is not the only outcome. But if you're going to open up a second location, I absolutely want you to go into it eyes wide open with what the economics look like and why it's so hard and why many dentists have had to sort of back out after a number of years, a lot of stress and, and lower money. By having a second location, you can be successful. But I need to emphasize that running a second location requires that you don't just double your business management skills. You need to, like, quadruple your business management skills. And business management is about leadership, it's about hiring and team management, it's about culture, it's about processes, it's about technology, it's about assessing and understanding your financial context and your financial statements. All of that is a whole new talent. And many of you probably get excited by the concept of learning those things. You don't learn those in dental school. Some of you are thinking, you know, I'd rather just have my one practice and go home and be with my kids for dinner. And so I'm not going to say what's right or wrong, but I am going to say, to overcome this hurdle, I want you to understand the economics of what it means to open up a second location. So here I go. And if you are watching me on YouTube, I am sharing my screen. There are four main reasons to buy a second dental practice. Number one, twice the practice, twice the profits. Number two, you can have associates do all the hard work. Number three, great dentists are great business managers. Number four, everyone is telling you that you should do it. And they're right. All right. Those are the four reasons to buy a second dental practice. And I know what you're thinking. Wait, Wes, I got the impression at the start of your podcast that it is not a good idea to open a second location. And yet you just gave me four compelling reasons to open up a second location. One, twice the practice, twice the profits. Two, you can have associates do all the work. Three. Three, great dentists are great business managers. And four, everyone is telling you that you should do it. And they're right. Well, there are also four myths to buying a second practice. And guess what? Myth number one, twice the practice, twice the profits. Myth number two, you can have associates do all the hard work. Number three, great dentists are great business managers. And number four, everyone is telling you you should do it. And they're right. These. These are the four myths of buying a second dental practice. And they are very pervasive myths. They are perpetuated by a lot of people who want you to spend money. Suppliers want you to spend money. Lenders want you to take on more debt. If you go up and down your P and L, a lot of people are going to get paid twice because you made that decision and you're making them happy. Let's go through the economics of this to understand why this is so challenging. Let me run through two scenarios. In scenario one, I'm going to take a nice, even $1 million practice. Very simple math to start with. And let's look at the overhead of your practice. There are two main types of overhead. There are your variable costs, and there are your fixed costs. I don't mean to sound like your economics teacher back as a freshman in college, but this is true. There are variable costs and there are fixed costs. The true variable costs of your dental practice are your labs and your supplies because they go up and down directly with your collections. Your other costs are fixed. Your labor cost is. Are you looking to buy or sell a dental practice. If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales. In such a fragmented market, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com practice orbit is modernizing how dental practices are bought and sold. It's a platform technology. Y' all know them Zillow, Airbnb, Uber, and OpenTable, just to name a few. These technologies do two things. First, they help match buyers and sellers by centralizing the marketplace. Second. Second, once the match between buyer and seller is made, these technologies help them navigate the sale to a successful close. Here are a few of the features inside a Practice Orbit users can determine.

A reasonable sale price for practice in just minutes.

All they need is the most recent business tax return. Practice owners can use the directory to find important service providers like practice brokers, attorneys, accountants and bankers. Practice owners and their brokers can can invite those service providers into the platform.

So all parties are coordinating the sale together.

Practice owners will have a beautiful digital listing of their practice like a home on Redfin. And importantly, the listing will be anonymous and personal information like your address, name and pictures are only released after an NDA is signed and approved by you or your broker. Practice buyers can create saved searches to be auto notified when new listings come on the platform that fit their desired specialty and location. And hey, dental practice brokers, you can list all your practices on the site for free. By doing so, you'll get access to Practice Orbit's large pool of buyers, all of whom have created profiles and saved searches to be auto notified when new listings come for sale. You can use the platform to introduce your listings to a targeted set of buyers. Additionally and optionally, you can use the platform tools such as a built in NDA, a customizable loi, and a workflow tool to navigate the sale from LOI to closing. In fact, you can manage all your listings on the system from listing the practice to NDA to LOI and finally to closing the deal. Create your free account today at www.practiceorbit.com.

Pretty much the same month to month for the most part. Your rent is the same every month or you're building mortgage every month. Very much a fixed cost. Your marketing is generally fixed. You're paying some monthly amount to do mailers or to do SEO or online marketing or social media marketing. Or maybe you have an ad agency or a marketing consultant helping you out. Generally there's a fixed amount of that, with some maybe variable costs associated with pay per click or whatnot. But for the most part, your advertising expenses and marketing expenses are roughly the same each month. Your administrative costs, like your accounting costs, your phone bill, those are pretty much the same from month to month, and those typically make up 85%. Now, you may be thinking, well, that's not entirely true, because if I end up only collecting $500,000 a year instead of a million, I'm probably not going to need all of my staff members and I'd have to let somebody go and maybe I would downsize into a smaller space. Well, all that's true. And at the, at the end of the day, every single cost in your P and L is variable because if you go from 1 million to 5 million, trust me, you're going to need a bigger space. So your rent goes up, you're going to need more labor, so that's going to go up. You're probably going to be marketing more to fill the chairs. Everything goes up at that point. But those are sort of stepped cost, not necessarily variable costs. Step costs go up with each sort of new phase of growth. But assuming that you're in this, this phase of around $1 million, maybe it goes down to 900, maybe goes up to 1.1. But you're in this sort of phase now, that's at a million. But you may be in a $2 million practice, you may be in a $3 million practice, and you're in that stage. And that stage generally doesn't change dramatically from year to year, which means pretty much 80 to 85% of your cost structure, for the most part is fixed. So in this example, I'm going to say 15% of your collections go to pay your variable costs, labs and supplies. And if you're doing a million dollars a year, that's $150,000 or 15%. Now, your 15 fixed costs are in this example, if you add up all of your fixed costs, which are your labor, your facility, your marketing, your admin cost, they're coming out to 500,000 in this example. So your total overhead is 650,000 or 65%, and therefore your operating income. This is before paying you before paying your debt. If you listen to my podcast, you know, this is the punchline of the P and L. If you're a client of practice cfo, it's a big orange highlighted row on your P and L that we give you every month. This is the most important number because it pays for you. Today, you in the future through savings. It pays your debt, it pays your taxes, and it pays your personal perks that you run through the business. That is your operating income. If I were going to buy your practice, that's the number that I really care about, because I'm going to use that number to pay an associate, and the rest is my return on investment. So operating income here is 35%, 65% overhead, 35% profit, $350,000 profit on a million dollars of collection. All right, now, let's say if you had two scenarios to raise your operating income from 350,000 to 450,000. All right, so we want to get an extra $100,000 in your bottom line. That's fantastic. You can pay down your debt faster, you can save more money for your future, you can maybe spend a little bit more personally. All these great things that you can do with that extra a hundred thousand, and you're gonna have to pay a little bit more in taxes on that. But overall, you're gonna keep the majority of that, and that's gonna go toward many wonderful things you can do with it. So your goal is to get an additional a hundred thousand in your bottom line. So option one is you do that in your existing practice, you're not going to start a second practice or to buy a second practice. Option number two is you do go to a second practice, and let's say you start up that practice in order to net you the same 450,000, which is that extra 100,000 we want. Let's compare option one and two. That's the analysis here. Going back to option one, here's what you have to do, because most of your costs are fixed at 500,000. And the only thing that's going to go up with collections for the most part. You might have some labor bonuses to your team and some other basic stuff, but for the most part, it's your labs and supplies that are going to go up. So in option one, you don't open a second office. You simply get more production out of your current resources. And let's say you raise it to 1.117 million. So 1,117,000, to be specific. $647. $1,117,647. If you do that, your. Your variable costs go up. They go up by about 17 to $18,000, which is just 15% of that extra 117,647 over the million. And so not a big difference. Your variable cost went from 150,000 to 167,647. So not a big difference. Your fixed costs didn't change. They went from 500,000 to 500,000. Because your rent didn't change. Most of your labor costs stayed the same. You just had them working more effectively. You're still paying your accountant the same. You're still paying your, you're still paying your.

Your legal costs, your phone bill. All of that is staying the same. And so your total overhead now went from $650,000 to $667,000. And yet, so that overhead went up by 17,000, but your collections went up by 117,000. 6, 47. So that extra differential flows right down to the bottom line. And your operating income is $450,000, which is 1,117,647. Less your overhead, the 667, 647 equals 450,000. So if you're not seeing my screen, you're not watching this on YouTube. Bottom line is, if I round here to make this really easy, your collections went up by about 100,000. Your variable cost went up by about, about 15,000. So your collections went up by 115,000, to be specific, 115,000. Your variable costs went up by 15,000. So that extra hundred thousand right to your bottom line, you went from 350,000 operating income to 450,000 operating income. Now, this is a really important part of the economic structure of a dental practice that whatever change you have in the top line, meaning your collections from year to year because most of your cost is fixed, it creates this amplified effect to your bottom line. As an example, if your collections go up by 10%, your profit may go up by 25 to 30%. If your collections drop by 10%, your profit may drop by 25 or 30%. There's this accentuation on the change at the top line with the change in the bottom line. And again, that's because most of your cost structure is fixed. That's why once you sort of pierce that fixed cost amount during the month, let's say it's somewhere around the 20th of the month that you have collected enough in revenue in collections to cover all of your fixed costs. Every dollar above that, about 80 to 85%, is what's finally going down to your bottom line. So in a month where your fixed costs are 50,000, if you collect 50,000, your bottom line is zero. If you collect 80,000, your bottom line is 5, $30,000. This is a really Important concept. All right, now let's go look at option two. What do you need to collect total between the two offices in order to net the $450,000 operating income? Well, because your fixed costs are essentially doubled now it's not.

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Can be exactly that way. You may open up a second office that has a less lower fixed cost than the first office or more fixed cost than the first office, depending on the size of it. And sometimes you may have some staff travel back and forth between the two offices. I get that. But as a, as a concept, this still stands if we keep it nice and clean. To compare option one and option two. Option two has fixed costs that are twice as much as option one, because now you have a second location. And so your fixed costs go from $500,000 a year to a million dollars a year. Now, your variable costs, remember those are 15%, and those go up proportionate with the increase in your collections. So what do you have to collect in order such that after your variable costs and the million dollars of fixed cost across the two offices, you net the 450,000. The amount is 1.7 million. So $1,705,882 to be exact. I'm going to round it here at 1.7 million. So in option one, you had to increase your collections by approximately 10%, 11%, you had to increase them by about $100,000. In option two, you had to increase the total collections between the two offices from 1 million up to 1.7 million. Now, there's only one of you. So in order to do this, you've got to get your. You've got to get your associate in either the first office or when you start up the second office, you have to have an associate there doing the production. Now, I can tell you usually what we all underestimate, and I underestimated this as well when I brought on another financial advisor in the early days and helped had had some of my client relationships transitioned on over to them. Even though they were highly capable people and they did a great job at advising, I think our clients, they didn't necessarily have their heart and soul invested in the business itself. And so where I think about it on weekends, I think about it, I get home at night and I work on things. Oftentimes it's a part of my soul. It's a part of who I am. I love it so much. It's really hard to get somebody else to replicate that level of commitment and devotion to the profitability and the success of the dental office. And so oftentimes we just assume that others will love it as much as you do, but in reality they don't, primarily because they don't have equity. And even sometimes you can grant equity and they still don't love and care for it like you did. That's why so often what happens is.

When we leave and we go to.

The second location, we start building that location up. The first location can get neglected. I've seen this happen many, many times. And then what happens is the docker starts having to juggle these two offices in order to stay afloat. And oftentimes what happens is the first office sees some reduction in collections and therefore a reduction in profit. And then some of that profit sometimes has to go to fill the negative cash flow in the second location as it's really trying to get established. And so the amount of work and headache and stress and stretching and business management and savvy need needed to open up successfully and run a second location is really high. Now, that said, I said this in the beginning and I'll say it again, that doesn't mean you can't do it. It doesn't mean you can't have 10 offices. I'm just saying the probabilities of success are get lower and lower with the first few offices. If you are ultimately really successful with three offices or four, Ben, you're probably, you've got a pattern figured out. You've got a business operation and a business platform that's working really well. You probably are a great leader. You probably have a really good management team with your office managers. You probably got some solid marketing going on, really good processes throughout the business. You probably have front office staff members who are answering the phone really well. Your case acceptance is really well. A great financial coordinator. You sort of got all that stuff, those modules in place for the business to run really smoothly, which means the more that you can pull yourself out of the indispensable role in a business and you become less indispensable, meaning that you become more dispensable. That's a good thing because that means that the cash flow and the operations of the business doesn't rely entirely on you. It starts to rely on a process and a culture and a team and a camaraderie and a leadership and the management. That starts. That's what's making the money. Now. A lot of dentists really want to bridge this gap from being a clinician to being a great business operator. Not easy, not easy. It just doesn't come natural for most people. Just like throwing a football 80 yards doesn't come natural for most people. And yet it's a, it's a talent or skill set that has to be learned if you want to bridge that chasm between being a great clinician on teeth and being a great clinician on business. And so it takes dedication. It takes learning, it takes study, it takes trial and error. It takes a risk tolerance. If you don't have risk tolerance, you're never going to make that, make that jump. A lot of dentists have an incredible amount of risk tolerance. They make the jump without necessarily getting properly trained and ready in order to do that. So bottom line here is you can do it. I'm your biggest cheerleader, I'm your biggest fan. And if you're with practice CFO and you have two offices, we are going to go to the ends of the world to try to make you successful. We're going to create P&Ls by office. You may have them set up in two separate tax IDs. A lot of attorneys like to do it that way. You may have it all under one tax id, but either way, you need to separate out the P and L expenses and the balance sheet and the cash flow so you can evaluate the practices independently. That's actually very Critical, which means you've got to set up the accounting very specifically in order for you to monitor the financial health of your practice. You can do it just not easy. And for those of you who have done it successfully, and you can look back and say, I'm glad I did. I'm making more money and life is better with two practices than one. I'm going to put you squarely in the minority of business owners that I know, and congrats to you who have been done that. Some of you are really trying to go even bigger and the sky's the limit and you're trying to create essentially a DSO structure with many offices that is even a whole nother level overrunning, say two or three practices. A whole nother level, which is for a podcast on another day Practice CFO works with the private practice owners out there. So this is our specialty, is the one location, two location, maybe three location. And as I said before, if there's multiple owners, two owners, three owners, etc. Then it makes more sense to be able to run multiple locations because it's not just one of you with only two hands and two eyes, two legs, trying to be in two places at once, that's very difficult to do. All right, everybody, any other thought on the subject of opening multiple locations? I sure do hope I'm not discouraging anybody from going after their dreams. My job, as I say with so many of these podcasts, my job is simply education. I love to educate. And if you're educated on the concept, on the process and can therefore forecast out better the outcomes and what you need to do to make those outcomes successful, then I did my job. I did my job as an educator. It is therefore stated for the record that if you go to open up a second office and you're a client of practice cfo and it's really difficult, stressful, eats into your personal life, your personal time, you feel like you're making less money, just know I stated it for the record. That said, we are here to support you regardless of the decision that you make. We want you to be successful going after your dreams as you do so in a very informed manner. Thanks everybody for joining another episode of the Dental Boardroom podcast.