The 4 P’s of Your Dental Practice: Performance, Productivity, Profitability, and Patients
All dentists want a practice with high performance, productivity, and profitability. These three P’s represent the standard by which successful dental practices are measured. There is, however, another “P” that many dentists forget, which is arguably the most important – Patients.
Happy patients lead to positive outcomes and accelerate the other Ps. Enhancing customer service and public relations are vital to running a thriving dental practice. To accomplish this requires dentists to devote more time to patients and provide them with what they need to complete their treatment recommendations. By incorporating current, proven, safe, and secure technology into the dental practice, staff can focus more on patient care.
Performance indicators The recall program is the performance enhancement engine of most dental practices. When patients commit to and show up for regular recall appointments, dentists can diagnose potential issues early. These appointments allow time for patients to express their concerns and discuss what needs to be addressed with their teeth. In order to have an effective recall program, the practice needs a good hygiene program to encourage patients to return at six-month intervals. This means the practice has enough staff to see both recall patients and those coming in for more time-consuming dental treatment.
If the one-on-one time with the staff decreases, performance may suffer, and patients may become uneasy about accepting the recommended treatment that was not effectively explained to them. Enhancing patient communication internally and externally during this pandemic time will help to ease patient fears and build trust with being treated at the practice.
Productivity indicators A full patient schedule, along with healthy collections, is indicative of high productivity. In fact, according to the ADA’s Practical Guide to Expert Business Strategies, “Controlling the schedule requires constant vigilance, commitment, and training. It is the foundation for the success of the entire practice. (Ref 1) It takes valuable staff time to maintain this schedule and work with patients and insurance companies to collect payment. When staff is concentrating on reminding patients about appointments, preparing monthly invoices, and communicating with insurance companies, they are not focused on patient treatment and business-building tasks.
Here are several signs that the practice is busy, but not productive:
- The main objective is to keep the schedule full rather than focused on patient care.
- Both the hygiene and dentist schedules are booked for weeks or even months, forcing patients to wait long periods of time for even routine procedures.
- There is no consistency in the procedure schedule—patients are booked for 30, 60, or even 90 minutes.
- Staff skips lunch breaks to catch up.
- There is low patient retention.
- Revenues are flat. (Ref 1)
Using or adding technology can help staff maintain a full patient schedule through automated email, text, mail, and phone call reminders to help patients with their appointments. These software programs also provide practices with essential statistics, such as appointed and completed versus missed appointments, to increase productivity.
Another productivity indicator is the number of patient referrals. Satisfied patients refer others to the practice. Happy patients believe the staff truly cares about their dental care and goes the extra mile explaining treatment options. Happy patients = more referrals! (Ref 1)
Poor performing dental practices experience a myriad of problems. For instance, there may be staff issues that lead to high turnover. High turnover results in reduced efficiencies within the practice since dentists spend more time training new employees and less time with their patients. Patients notice the constant staff changes and increased waiting time.
To have a high performing, productive, and profitable dental practice, focus on the fourth “P”—patients. The solution is having your staff focus on practice building work and less time on busywork that can be automated.
Omni Practice Group has been helping dentists for over 15 years to maximize the value of the practice and provide smooth transitions for dentists as they retire.
References 1. American Dental Association (ADA). The ADA Practical Guide to Expert Business Strategies: Advice from Top Dental Consultants. 2014.
Read MoreBiggest Decisions Dentists Will Have to Make
As a dentist, you worked hard to build a successful dental practice. This has often meant putting in long hours, dealing with staff turnover, insurance hassles, ongoing CE requirements, and economic issues. Everything about the practice has been on your shoulders, along with having a good life balance outside the practice. Then comes that day when you want to transition the practice and retire.
Transitioning the practice is probably one of the biggest decisions a dentist will make in their career. Deciding on whether to transition the practice to a partner, associate, a new dentist, or corporate dentistry, you will need expert help to make the right decision.
Developing a plan
Having a plan that is 6-8 years out from transitioning the practice will allow you to maximize the fruits of your labor. Most dentists should consult experienced and reputable practice transition advisors who specialize in dental practice transactions. Having the practice transition consultant explain the practice valuation process can show you your practice’s true worth. This will allow you to develop a plan that meets with your goals of when you want to transition the practice and what you want the practice to be worth. This will allow the practice transition consultant to advise you on possible strategies to maintain or increase the value of the practice, ensuring that your practice is ready to transition when you are. Many dentists wait “too long” to develop a plan and make decisions to slow down as they get closer to a retirement date or they may add new overhead or make other business decisions that could have a huge negative impact on the value of the practice.
Consider all possible options
Developing a plan early will allow you to compare different possible options to transition the practice. Explore all the different options with your practice transition advisor and pick the one that is right for you and your professional reputation and legacy.
Finding the right buyer
Finding the right buyer that is financially qualified to buy the practice is the most important process of the transition process. Working with your practice transition advisor and their banking partners will allow you to identify the most qualified candidates to negotiate a final deal. Using an expert practice transition advisor will help to maximize the value of your practice and make for a smooth transition.
Finalizing the deal
Once you have a qualified buyer and an offer for the practice, the offer must be reviewed with your attorney and accountant before you accept to make sure that you are protected and know the tax implication of the sale. This will provide you with expert guidance that all your personal financial affairs are in order and you are sufficiently funded for your retirement.
Transitioning of the practice
Developing a transition plan with your transition practice advisor and the new buyer is critical for a smooth transition. A plan must be in place to ensure patients and staff retention. Most dental practice transitions require a transition time commitment from the seller. Make sure you work with your transition practice advisor to identify a time commitment that fits with your exit time frames. This transition time frame is an essential process in providing the buyer with a comprehensive understanding of the day to day operations of your practice.
Practice Transitions Buying or Selling a practice
If you are thinking about transitioning your practice now or within 8 years, you should seek professional help. Selling or buying a practice can have complex processes and numerous legal, financial, and tax implications.
OMNI Practice Group is one of the experts in the industry helping dentists for over 15 years, with developing plans for adding associates, developing transition plans, and selling or buying a dental practice and real estate.
Omni provides:
- Practice Appraisals
- Web Practice Listing Services
- Marketing and Listing services
- Practice Real Estate and Lease services
- Banking Referral Options
Patients seek out their dentist professionals for help when they need it, dentists should also seek out the use of experts in assisting them with all their transitioning needs.
Contact us today for a no-obligation consultation with one of our expert Practice Transition Advisors.
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Read MoreAre Solo Practice Owners Going the Way of the Golden Toad?
When I talk about corporate practices, I’m primarily speaking of the non-dentist owned corporate practice. There are dentist owned practices where a licensed dentist owns 3, 5 or more practices. He or she has full and legal ownership of their practices. I call these small group practices. Corporate practices tip-toe down the legal sidelines of practice ownership by having a dentist own the clinical aspect of the practice, called Dental Services Organization (DSO) and the non-licensed dentist corporation owns the non-dental management aspects, called a Management Services Organization (MSO). Note that this structure can also occur in small groups, but in the small group, a licensed dentist owns both the MSO and DSO. The large corporates include Aspen, Gentle Dental, Pacific Dental Services and others. Both solo practices and corporate practices have their pros and cons from both a patient perspective and from a dentist perspective.
As a patient, I prefer to know who my dentist is going to be when I go into the office. I want to build a relationship with him or her and want my dentist to know the history of my dental care — and a little bit about me as well. In a corporation, you might get the same dentist the next time you go in, but there’s a good chance it will be a different dentist. Small groups lean more towards a solo practice and you will have a reasonably good chance to get the same dentist in the well run small groups.
From a dentist perspective, most dentists do not want to be told what treatment to focus on, what supplies to use, etc., The majority of dentists surveyed by the ADA still have a dream of owning their own practice, being their own boss, making their own decisions.
Recent court decisions in New Jersey, Allstate vs. Northfield, sided on the side of dentists. It may begin to set the tone to start scaring away the non-dentist corporate owners. Washington State has been trying to pass a bill to allow non-dentist owners and so far has been successful. If you’d like to read an article on the New Jersey case, you can read it here.
So, if you have been holding off on not buying a practice because corporates are going to drive solo practices away, think again. There will always be a need and demand for a solo practice. Court cases like Allstate vs. Northfield will help ensure non-dentist owned practices stay away. Join the practice ownership club today!
Dental Practice Transitions and Taxes
Taxes are a fact of life, and an extremely important consideration when considering a dental practice transition or sale. Let’s explore some potential tax mitigation strategies to consider.
Stock Sale. If you are incorporated, sale of the stock in your corporation to the dental practice buyer can potentially yield you the greatest tax savings, because the sale of stock is almost exclusively taxed at the lower fixed capital gains rate as compared to the higher, tiered ordinary income rates. However, and this is a BIG however, stock is a non-depreciable asset to the buyer. As such, the dental practice buyer is not able to write off the sales price and essentially ends up buying your practice with after-tax dollars. Consequently, a buyer is likely only to agree to buy your stock if you are willing to reduce your purchase price by 30 percent or more. For this reason (and many associated legal and liability complications), almost all dental practices are sold as “asset sales.” In other words, the seller retains his/her corporation and all of its stock and instead sells all of the tangible and intangible assets of the corporation (i.e., the dental practice). The buyer is then able to depreciate and amortize (write off) the entire purchase price.
Price Allocation. The IRS requires the total price of a dental practice for sale to be allocated to the various types of assets being sold and that the allocation be made according to the fair market value of the assets. As a general rule, the tangible assets are taxed as ordinary income above basis, and the intangible assets are taxed as capital gains. (Above basis means the difference between what you are selling the tangible assets for and your book value or depreciated value.) Any consideration for a covenant not to compete will also be taxed as ordinary income. Since fair market value is somewhat subjective, there is some room for negotiating the overall allocation of the purchase price. As a dental practice seller, you will save taxes if you can negotiate with a buyer for a lower allocation to tangible assets (equipment, furniture, fixtures, supplies, etc.) and a higher allocation to intangible assets (goodwill and patient records). (Unfortunately, it will benefit the dental practice buyer to have just the opposite allocation, so consideration must be given to making the allocation fair to both parties.)
Carry back a note. Sellers frequently ask us, “Won’t I save on taxes if I self-finance part or all of the sales price (i.e., carry back a promissory note from the buyer)?” The answer is, “No, but maybe . . .” As mentioned above, the portion of the price in an asset sale that will be taxed as ordinary income will be due in the year of the sale. That recapture will be taxed regardless of the receipt of any actual cash at closing, which means you owe the ordinary income tax associated with the recapture even if you do not receive a cent at closing. Consequently, if you do not want to have to pay to sell your practice, it would be prudent to ask for enough of a cash down payment to cover the tax liability you will incur from the recapture. Since most of the remainder of the sales price will be taxed as capital gains and since the capital gain tax rate is a fixed rate, the same tax will be applied and the same tax amount owed whether you receive that portion of the price now or paid to you over time; unless . . . there is a change in the capital gains tax rate before the note you are carrying is paid off. If the rates go up, you would be taxed at that higher rate on that income as it comes in. Otherwise, self-financing a portion of the price serves only to defer capital gains tax, but it will not lower the total tax. (Also note that the interest portion of any promissory note payments will be taxed as ordinary income to the holder, while the principal portion subject to capital gains will be taxed at the capital gains rate.)
Sale Timing. As discussed above, the tax associated with recapture over basis on the sale of tangible assets will be determined by your ordinary income tax bracket in the year of the sale. If you are planning to retire after the sale of your practice and, consequently, will have a drop in your ordinary income level, it may behoove you to strategically time the sale of your practice until after the start of the next tax year. Also, if you have owned your dental practice for less than one year, you should, if possible, wait at least one full year before selling it since the sale of goodwill within a year of ownership will result in the higher short-term capital gains rate being applied instead of the long-term capital gains rate.
“C” Corporation Consideration. If you are currently incorporated and being taxed as a regular “C” Corporation, the sale of goodwill by your corporation will likely be subject to double taxation, once as capital gains inside your corporation and then again as ordinary income when paid as a distribution to the shareholder(s). There is some case precedence that allows for the shareholder(s) of “C” Corporations in closely held and professional businesses to sell goodwill individually, outside of the corporation, thus avoiding that double taxation. If this applies to you, consult with your CPA and/or tax attorney regarding the details of such a tax strategy and its application to your particular situation.
1031 Exchanges. If you are selling a dental practice now and are planning to buy another practice within six months, a 1031 or “Like Kind” Exchange may be a tax deferral strategy to consider. It allows you to defer the taxes associated with recapture over basis you would otherwise incur with the sale of your tangible assets. A 1031 Exchange has very specific and rigid requirements. Consult with your CPA and/or tax attorney regarding the details of such a tax strategy.
Charitable Remainder Trusts. Charitable Remainder Trusts are not subject to capital gains tax. As such, a seller may potentially eliminate capital gains tax on the sale of his goodwill by donating it to a qualified charity. The downside, obviously, is that the seller must donate the goodwill proceeds to that charity. This is another strategy where you would want to receive guidance from your CPA and/or tax attorney.
ARE YOU 5 TO 7 YEARS AWAY FROM SELLING YOUR DENTAL PRACTICE?
You have had a great career and now you are thinking about selling and transitioning out of your dental practice. You would like to get the best value for your practice. Do you just walk away? Being prepared can not only help you get the best price, it will help ensure a smooth transition.
Here are a few things you can do to help prepare for your dental practice transition:
1. Know your financial situation – Meet with your financial advisor, CPA, or whoever gives you financial advice to get a good picture of where you are with your savings and investments.
2. Get a practice valuation – A practice valuation will help you see how much equity you have in your practice. Additionally, a CPA can help you figure out what the taxes and net proceeds from your sale will be.
3. Update Technology – Buyer’s like to see new technology in a practice.
4. Cosmetic updates – Have you updated the interior with paint and carpet in the last 20 years? If not, it’s time. Buyers like a practice with a fresh feel to it. A 1970’s feel was good in the 1970’s.
5. Review Accounts Receivable Aging – Collect any past due accounts, send to collections or write them off. Also, review credits to either pay back to the patient or send unclaimed property to the State.
6. Review Staffing – Are you over or understaffed? Adjust accordingly.
7. Clean up your financial statements – Make sure the expenses you’re running through your dental practice financial are related to your practice, or at least identifiable as an adjustment.
8. Consider ramping up production – If you are not sure how, then hire a dental consultant. Ramping up your practice when you’re 3 or more years out will pay dividends on the sales price.
9. Review your fees – Do you have the lowest fees in the area? Consider a fee increase to catch up.
10. Harvest your Equity – Maybe you are a few years away from retirement, but tired of being an owner. You should consider selling now, take the equity out of your dental practice and work back as a dental associate.