There comes a time for most successful practice owners when they get to a level of comfort with their first practice, and start to contemplate starting or buying a second practice.
The obvious main motivator in choosing to own a second (or third) practice will always lie in the possibility of increased wealth creation. However, anyone thinking that the way to assess this crossroads in your career is as simple as “if I own double the practices I will double my income”, is in for a rude awakening. Purchasing a second practice will increase the scale, scope and complexity of any owner’s operation, and with this it will no doubt:
- Come with a second set of overheads and a second set of staff issues and other things that can go wrong.
- Mean that the owner needs to learn how to balance their focus, attention and time appropriately between their two practices.
- Increase stress and compromise their personal time (at least in the short term), while they adjust to the new moving parts in their practices.
- Increase the risk of capital loss and quantum of capital at risk.
- Increase the chance of failure of both practices, if they don’t have the skills necessary to leverage themselves and manage them both. There is a saying that illustrates this point well: “If you throw a juggler one more ball than they are capable of juggling, they will usually drop all the balls, not just the extra one”.
And yet, even with all of these arguments against owning a second practice, many of the most successful dental practice owners will make the decision to do so. Why is this?
Bottlenecks and diminishing returns
Sometimes, a practice owner’s ambition outstrips what they feel is easily achievable in their current practice.
There are intrinsic limitations in all practices that will only allow them to grow so far. These limitations may have something to do with:
- The physical capacity of the premises
- The zoning of the premises or trading hours of the businesses surrounding the premises
- Recruitment difficulties in the area
- The demographics of the patient base in their area
- The competition for their services in the area.
- Their own personal clinical and business capabilities
These limitations will mean that, despite their practice having all the ingredients that helped them grow to be a successful practice, at some point, if their practice keeps growing, they will start to butt their head against the ceiling of what is possible at their current facility. Any effort and time from this point forward will have diminishing returns in terms of growth and, despite their best efforts over time, the production and profit of their practice will start to slow.
Faced with the bottlenecks and diminishing returns of their current operation, a practice owner may conclude that it will be far more rewarding for them to spend their time and effort growing a second practice.
Ideally, you could buy another practice whenever you reach a level of comfort and success such that your practice’s fortunes are continually growing and never plateau.
Increase Market Penetration
No practice can be all things to all people. Even if your practice offers a superior service for a better price, there will be some people within the catchment area who will not come to your practice, simply because it is inconvenient for them to do so. The practice isn’t near their work, or home, or kids’ school, and there is another practice that is. Opening a second branch in another part of town allows you to capture these patients and increase your total market penetration in your town or suburb.
Speed of growth
If you focus on one practice, you may well be able to double your turnover or profit, but not nearly as quickly as if you grew through acquisition. Growth through acquisition is almost always the fastest possible way to grow.
Economies of scale
Even though a second practice brings with it a second set of overheads, there are frequently financial and operational efficiencies that can be realised by owning or combining two or more facilities.
By consolidating functions like accounting, purchasing, payroll, marketing efforts, etc., significant savings can be achieved, along with a favourable impact on bottom line profits. There are economies of scale discounts that suppliers will give you for buying in bulk.
Replication of efficiency
If you are already the owner of a successful practice, you probably have a good idea of how to run an efficient ship of your size. You know what works in terms of marketing, cost control, etc.
Armed with this knowledge, you may be able to identify a similar sized practice for sale that isn’t run efficiently. You may be able to identify a practice that could be turned around, or drastically improved, by applying the lessons learned in your first practice.
Managing turnaround like this can be far easier in terms of time and effort, and far more successful, than finding new avenues to grow your existing practice.
Asset diversification/risk mitigation
Owning one practice in one area means that your fortunes are inextricably linked with that of the area. Your successful practice can tank if there is a slump in the local economy (e.g., if your local economy is dependent upon the mining industry and it evaporates), or if there is a redevelopment project in your area that disrupts your practice’s exposure and access (e.g., if the Gold Coast or Sydney light rail tears up the street in front of your door for a year).
It is for this reason that most financial planners will tell you that it is better to have a diversified portfolio of assets, rather than to have all your capital tied up in one investment. If you are able to leverage yourself successfully, owning more than one practice in more than one area reduces your risk of failure enormously.
Conclusion
Buying a second practice isn’t a decision to be made lightly. Everyone has limits for what they can handle in terms of their abilities and time. Exceeding these limits by diluting your attention with too many moving parts can be a disaster.
However, if you are a practice owner who does have the capacity (in time and ability) to buy a second practice, it can be an excellent wealth creation strategy that also diversifies your asset portfolio, and mitigates your exposure to the risks inherent in any local economy.
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