In 2002, Billy Beane, the general manager of the Oakland A’s baseball team, was faced with the departure of star players and a limited budget to replace them. He realised that if he was going to look for players using the same metrics as all the other teams, he was going to find the same players as every other team, and be outbid every time. His solution was to find and use new metrics (Sabermetrics), in order to find underappreciated and affordable players and create a winning team from them.
Using these new metrics, the Oakland A’s were able to recruit a team that brought them to the playoffs in 2002 and 2003, with a third of the budget of their competitors. If the story of how Billy Beane revolutionised how baseball players were valued seems familiar, it’s because it was made into a book and a movie (starring Brad Pitt in 2011), called “Moneyball”.
A nice story…. A good movie… But what does all this have to do with buying dental practices?
The central premise of Moneyball is that the metrics of baseball, used by insiders to rate players, missed some fundamental value that allowed great players to slip through the cracks and go unnoticed by recruiters.
In my experience, many dental practice buyers are making a similar mistake with how they are assessing practices. Most dental practice buyers are using the same metrics as other buyers to judge quality practices. These metrics take far too narrow a view of the available data and have blind spots and biases that let quality dental practices slip right past them.
Buyer Blind spots
In order to assess the future financial prospects of a practice, most buyers will focus primarily on its historical performance. While this is extremely important…it is only important in so far as it informs future profit and revenue.
If I launched the following two practices for sale at the same time:
| Practice A | Practice B |
| $800,000 gross |
| $100,000 profit |
| Older tired equipment facility |
| No website or advertising, poor signage |
| Reasonable rent |
| High consumables spend as a % of revenue |
| Clinical range includes: few crowns, no ortho or implants |
| Practice open 4 days per week |
| Principal working 4 days per week, 9am - 530pm, 46 weeks per year |
| Low fee levels when benchmarked against other practices in the area |
‘Practice A’ would get more enquiries and higher bids from buyers every time, as most buyers’ analysis will focus purely on historical trading and only use the first three rows of the table as inputs. I believe this buyer preference and method of assessment highlights some rather large blind spots in dental buyers’ views of practices:
1. Dentist buyers tend to ignore or undervalue opportunity
If, as a buyer, you look at Practices A and B with a view to trying to assess future income and profit, I think there is a very high probability that practice B has a brighter future for several reasons:
- Practice A already has a wide clinical range, is open 5.5 days a week, has high fee levels, a good website and is spending significant money on advertising. Its revenue doesn’t have many obvious avenues of opportunity to explore.
- On the other hand, if practice B is able to produce $800k revenue and $100k profit without a website or advertising, with poor clinical range and poor patient availability, and with far lower fees than other practices in the area … imagine what would be possible if someone bought this practice who was able to change these things. There is huge opportunity in what the practice isn’t doing!
- Not all expenses should be assessed equally. For example, most general dental practice consumable spend can be benchmarked as between 5 and 7% (dental consumable spend as a % of revenue). If a practice is spending considerably more than this, it can usually be fixed post purchase by shopping around. Rent as an expense is usually locked in via a lease at the current rate with mandated annual increases and is not usually negotiable at all.
2. Dentist buyers tend to ignore or undervalue the opportunity cost of time and effort
In the example I gave above, the owner of Practice A is achieving its results working 1 more day per week and 2 more weeks per year than Practice B. If you add this up, the owner of Practice A is working 56 more days per year. Surely this needs to be considered and factored into the desirability of Practice B?
Buyer’s inherent Biases
3. Dental practice buyers in general have a bias towards high socio-economic areas.
If we have two identical practices for sale, one in a higher socio-economic area and one in a lower socio-economic area, the one in the higher socio-economic area would get twice the interest from buyers. There are many often ill-founded reasons for this that you can read about here:
4. Dentists have a suburban bias (as opposed to rural and CBD)
There are many advantages of rural and CBD practices that are overlooked by buyers. You can read about them here:
Conclusion
Many buyers will express frustration at the amount of competition that exists for quality practices. If buyers can slightly adjust their views to incorporate some new metrics, they would be able to recognise value that is invisible when using their current assessment of practices. They would be able to find quality practices that are overlooked or under appreciated by the market. and be able to buy them at a reasonable price.
For more articles about buying a dental practice, click here:
- 5 reasons why smart business owners sell successful businesses
- As a practice buyer, would you rather be right or rich?
- The unappreciated virtues of a CBD practice
- The unappreciated virtues of a blue collar practice
- A buyer's guide to practice site inspections