Flying Solo

The concepts of utilizing an associate or partner for the purpose of identifying a purchaser for a practice, increasing the selling price of a practice or reducing practice overhead are fundamentally flawed. It is our company’s opinion that the solo practice is the superior dental delivery system when measured against the successful practice determinants. It is estimated that roughly 75 per cent of all Canadian dental practices are operated on a solo basis. The remainder features multiple dentists in owner-associate, partnership or cost-sharing (group) practice arrangements.

We recently performed a review of the largest database of dental practice appraisals in Canada, which includes over 2,500 cases. The results show that the highest percentage of cash flow earned (after true operating expenses are deducted) is realized by solo practitioners. In short, solo dentists keep more of their gross billings. We have identified two expenses to explain why this occurs.

Why solo practices are more profitable

First, multiple-dentist offices tend to either purchase too much equipment or rent excess space so they can work the same hours. After studying dozens of these offices, I found that the extra operatories (usually rooms four and five) were only being used for 10 to 15 hours per week. This represents a utilization rate of less than 50 per cent, creating a situation referred to as “over-capitalizing” a practice. In short, the costs outweigh the benefits.

Second, multiple-dentist offices tend to hire excess full-time personnel. Many of the owners I speak with openly admit they only need certain personnel for 15 to 20 hours a week, but don’t have the heart to cut their hours or let them go. What’s more, the search for a part-time staff member may not yield the best available person. In addition to that, costly office managers are usually hired to run multiple-dentist practices, yet a solo practice rarely utilizes one for basic paperwork issues. And finally, wages, as a percentage of gross, are lower in solo practice when compared to identical sized multiple-dentist offices.

Another reason to own a solo practice is that associates frequently leave under less-than favorable terms. We recently attempted to sell a practice to a young dentist who had worked full-time for the owner for two years. During negotiations, the associate more or less told me that he had over 1,000 patients “of his own,” and so did not need to pay the owner anywhere near the appraised goodwill value because they were now his patients. He also said some of the personnel were more loyal to him than the owner, insinuating that they were willing to quit the practice. These are very contentious and complex issues that have the potential to spark serious disputes.

Next, let’s consider the psychological aspects of this situation. To begin with, how do you think the owner felt when we told him the associate was offering significantly less than the fair market value. The owner felt betrayed. He told us he took the newly-graduated dentist under his wing and “taught him everything he knows” over the past two years. This may or may not be true, but the owner felt very strongly about his contribution to the learning curve of the associate, who was paid a fair percentage for the work he performed and was welcomed into the practice with open arms.

The owner claimed most of the patients seen by the associate had been with the practice for many years prior to him coming in. Can the associate claim he “owns” those patients after seeing them only three or four times? We will leave it to the lawyers to answer that question, but can you see the problem arising? We believe these two dentists are destined to split up and have their professional relationship deteriorate. We predict a very long and painful dispute over patients and staff. It will be costly and emotionally draining, and in the end it will be a lose-lose situation. The solo practitioner never has this problem.

Don’t count on a partner or associate to buy

Another reason to stay away from multiple-dentist offices is that one partner rarely wants to buy out the other. We have listed dozens of practices after the selling dentist had spent months or years waiting for the other to make an offer. They foolishly held onto the notion that their partner would purchase the practice, and made no attempt to investigate other options. The reality is that partners are probably busy enough and don’t need to pay fair market value for your patients or your equipment.

When trying to sell to an associate, the owner often discovers that the associate has secretly developed a plan to demand a sizable discount from the fair market value of the practice. Associates will attempt to negotiate a lower selling price on the premise that their years of service grant them a certain “entitlement.” We had one associate make an unbelievable claim that she was keeping the practice alive, single-handedly in her opinion, and that she should not have to pay for any goodwill whatsoever. When this was discovered, the owner promptly relieved the associate of her position. While some owners may allow a minor price reduction as a courtesy, there is neither a meaningful basis, nor any statistics supporting discounts when selling to an associate.

Legal wrangling

Many agreements we see include a first right of refusal clause that puts restrictions on the owner. They are required to first offer their practice to the associate or partner, who commonly has between 30 and 60 days to make a purchase decision. While this is honorable, it ironically works against the concept of fair market value because the practice cannot be put on the open market to obtain the highest and best sale price.

Furthermore, if the purchaser is allowed this exclusive term (which can delay the eventual sale for at least two months) and then decides not to buy it, suspicions will be raised in the open market. A new purchaser may become very skeptical about the practice when they find out it was not purchased by someone who knew it very well. The first questions the new purchaser will ask are “Why won’t the partner or associate buy it? Is there something I should know? Is there anything wrong with this practice? ” This is a classic example of how perception can become reality.

It is our experience that purchasers believe the remaining partner will lure patients away and the staff will be more loyal to the established dentist. And when an associate refuses to buy a practice and leaves, the perception is even more negative. Eventually, the purchase price is driven down because of the buyer’s perceptions. Our data indicates sale prices can drop as much as 10 to 15 per cent below that of an identical solo practice.

The other side

In fairness to those of you who are practicing in multiple-dentist offices, we are aware of the many benefits you enjoy, such as professional companionship, the ability to take longer holidays, someone to turn to when faced with tough clinical decisions and the sharing of practice management duties. Our challenge to you is to honestly consider the compromises that have been made over the years. How many have there been? Is it all worth it in the end when you consider the potential risks, disputes and other personality challenges you face every day when working with another dentist? If your answer is no, then get your practice appraised and study your options now. Don’t wait any longer.

Of course, we are not foolish enough to discount the concept of multiple dentist offices completely. There will always be people who are well suited to work together and we wish you success when practicing with your colleagues.

However, when asked by new graduates what practice modality they should follow, we tell them to go solo. Seventy five percent of you are already doing so for a reason. We think we know what is: peace of mind.

By Timothy A. Brown