Episode 122: Assembling a Group Practice - “De Novo” v. Acquisition
In the fourth episode of The Dental Amigos’ fifth season, “Assembling a Group Practice,” Rob and Paul discuss key differences between growing a DSO “de novo” (as a start-up) and by acquiring existing practices.
They dive into pros and cons of both strategies, such as how branding is often more consistent in a DSO that grows its practice “de novo” and how a DSO acquiring existing practices benefits from having an existing patient database. Then, the Amigos discuss external factors, like the economy and region, that may factor into a DSO’s decision as to whether to pursue a “de novo” or acquisition approach.
See the full transcription below:
Welcome to the dental amigos podcast with Dr. Paul Goodman and attorney Rob Montgomery, taking you behind the scenes of the dental business world. All the things you didn't learn in dental school, but wish you had. Rob is not a dentist and Paul is not a lawyer. But since Rob is a lawyer, we need to tell you that this podcast is for informational purposes only and shouldn't be considered legal advice. listening to this podcast does not and will not create an attorney client relationship. As is always the case, you should formally consult with legal counsel before proceeding with any legal matter. Learn more about the dental amigos at WWW dot the dental amigos.com. And now here are the dental amigos.
Rob Montgomery 0:39
Hello, everyone and welcome to another episode of the dental amigos Podcast. I'm Rob Montgomery. And I'm joined as always by the head Nacho himself, Dr. Paul Goodman, great to be talking to rob. It's good to see you, Paul. And here we are in season five talking about issues and things to think about when assembling a group dental practice. Today we're going to talk about the very popular topic that comes up in all sorts of dental entrepreneur discussions, de novo versus acquisition, right? So looking to grow the group, should I be doing startups in new locations, to novos or acquire practices, existing practices to grow that practice portfolio. And typically what we see in this world is, most people kind of have a model, and it's one or the other. Now, there are some folks that will do a few to novos and do some acquisitions and kind of mix it up. But that's not really like are these
Paul Goodman 1:37
football, every football coach is either an offensive defensive coach, and then you see them as their team, you know, as either focused, you know, Andy Reid on offense, or some of these other coaches like are used on defense, I think he's a good example. I'm someone who's only ever done acquisitions, I've done kind of technically four of them to some degree. And even though I love listening, and their sponsor my group and talk to Steven Trotter all the time, but ideal practices, if you said, Hey, Paul, you do you want to do another location startup or acquisition? I would say I'll stick with my acquisition world. I know that world, right. And then I also have a good friend in Florida who's kind of theirs too. And he's done de novo in his away his self away to a group because I don't think they look at acquisitions. And I think you're right, it kind of has you kind of a model that you stick to
Rob Montgomery 2:21
Yeah, yeah. And that's, you know, if that makes sense. So it's just like anything, you know, how you have your, your, your area of expertise and what you're comfortable at, and what you know, and what I'll share is bandwidth
Paul Goodman 2:33
value for the listeners in a kind of, you know, people in life like to think that their job is tougher than someone else's, right. It could be a husband and wife, it could be brothers who managed to do something different. It could be people who set up for parties, you kind of for some reason, think, you know, whatever you do is the tougher of the things and oh, look, they have it. Easy, easier over there. And I will say with the acquisitions for awareness, when you buy an existing team, that does come with a lot of emotional challenges. Whereas if you start up a practice, and you can interview everybody for it, that comes with challenges, but not hey, we used to do it this way, 10 years ago. So for someone who has acquired I mean, I have done this in a small way. And when you look at those faces after the dentist has left, and they're still there, and they used to do it 12 years ago, the different way, there's a lot of emotional energy surrounding that.
Rob Montgomery 3:23
Yeah, no doubt. I mean, that's, that's a challenge. And if you're talking about, again, this gets back to the, to the model, right? If if the model is to have a brand, that is with uniformity, and the appearance of the of the practice, and sort of the the the marketing collateral, and everything is made to look like it is one big group, you know, they're very similar. It's hard to, to change the practices that you're acquiring. A lot of a lot of folks though, we'd rather have the more under the radar thing where they don't even want the patients necessarily to know that the practice has been has been acquired by by your group stealth, the STEALTH Stealth, exactly. And, and there's plenty of them out there. But if you are looking to make it uniform, as you said, I think it's challenging because as you go into each of these acquisitions, the staff the appearance of the office, the way that things are done, or it takes time
Paul Goodman 4:29
to change, you know, it's trading out problems with people, right when you acquire a practice, patients aren't the problem, you have all patients, but then you have the people running their patients you have to deal with if you start up a practice. Now I know between deal practices or marketing sponsors, you can definitely get good marketing going for practice. And you don't have 3000 patients, right? So you can buy a practice with 3000 patients and an existing people team or you can you know, start up a practice with a few patients but build your own People team. And it's it's interesting. I also think Robin reknown, how you see this could use across the country. I think there's also geographic influence on this to, you know, the startup versus acquisition where there are opportunities for each can be drastically different depending on what region you're in, right?
Rob Montgomery 5:14
Look, if you're in a place that's completely underserved, or why would you pay for the goodwill of a practice? If you have the ability to just go in? And do a start up and capture the same number of patients perhaps without without paying for that? Yeah. And that's, that's a good point. I think, you know, and that also, depending on what market you're in, it is it is tricky, because in some places, it's very competitive to buy practices. As you know, we're still very much in the seller's market, I think. I mean, I would put your,
Paul Goodman 5:45
I think for for any practice that has solid profit and solid bones to it, it's super 100% in a seller's market it is because you just have to kind of look around, whether it's the social media world that I'm in, whether it's through the in person SeaWorld, there's more people looking to buy practices than sell them in areas like this, right? I'm doing a big event next week. And if I wanted to mess with the group, I wouldn't do this because I don't think this is particularly kind. What am I said, Hey, everybody, at the break, I just have a listing in Center City, Philadelphia, it's $1.2 million with five operatories, who's interested, Texas number, my phone would literally blow up. Yeah, right. I mean, it would, you know, you'd I wouldn't do that just to be deceitful. But if it was really fun to experiment, I'd say hi, just kidding. So I agree with you there.
Rob Montgomery 6:32
Yeah. But, but that's it, you know. So that's another thing is, you know, in an area where there's a lot of competition, and it's challenging enough to find a good practice. Now, if you're going to sort of make it even more challenging by limiting the pool by saying where you only want to find certain practices that were where the culture is a really good match for hours with a vision is very similar. You get to the point where you may not have that luxury 10 years ago, 15 years ago, totally different story. And now when when was very much of buyer's market. But that's changed. So now if you're looking at a wanting to assemble a group that, that has that uniform look and feel, it gets challenging, I think,
Paul Goodman 7:22
you know, for the name, you can actually I'd like to learn from you, you know, I know for starting up a dental practice or acquiring your first dental practice, banks are going to be incredibly favorable to either one, right? I mean, they're gonna
Rob Montgomery 7:32
get number one, I'm sure, yeah.
Paul Goodman 7:34
But with startups, I feel like you need access to a lot of capital. Because when you acquire, you know, when you acquire another practice, there's the cash flow of the practice. And often there's a dentist that comes with the practice for a period of time, right? If you're going to say, Hey, join me for this division of starting up the gwoc groups, good name for a group, and we're going to start up these practices
Rob Montgomery 7:53
with patients. Yeah, I think he would actually would need more avocado on just serve some walk on the side.
Paul Goodman 8:01
I thought I get guac here. Well, you do. It's like Chipotle of dentistry, but you need money to pay these associates to work full time before your full time patient point. And then also dentist, I mean, I'm going to tell you that you hang around with attorneys I hear with dentists don't actually hang around with more than attorneys in your dentists are not good at sitting around, even if you paid them. So what's interesting too, is like if you ask someone to join your de novo, and kind of help you build it, even if you say, hey, I'll pay you 200 grand no matter what, if the practice doesn't have a certain momentum to it, it's challenging that person, their skills could not erode. But I don't know if you kind of catch my drift here. It's like, Sure, the startup group practice has really got to I think has a challenge is built into what people have to be aware of, if they want to do something, I think need to like need a lot of money is one.
Rob Montgomery 8:49
Well, you need money. But you know, you need money for acquisitions, too. I mean, I think it's less of a money issue in some respects. And we'll talk about that in a moment. But you know, as your your point is well taken, you know, if you're looking at having to put dentists and staff in this new office that didn't, quote unquote, come with it, then that that can be a challenge. And in as we record this episode, in the spring of 2023, doesn't look like the job market job. You know, the supply pool of potential employees is all that spectacular, right? Difficult. So if you have trouble hiring people in one location, what makes you think that you're going to be able to do it easily at a second or a third?
Paul Goodman 9:42
We tend to focus on the negative or when things go wrong in general in our lives, and but not but when you acquire practice from an existing dentist. Most of the time they got there for a reason. And yes, they might have ways of doing things that you don't understand, but they're kind of like a grandfather. They run things before or they worked with a team, they can deal with upset patients. So when you acquire a 57 year old in your group, as we've done before, it definitely comes with challenges. But some of that you don't have to necessarily train them on kind of this is how to deal with a patient Is that really so when you're doing a de novo and you're maybe building a team from scratch, it can be very cool. And you can definitely kind of talk the same and walk the same. But the day to day challenges of working with a lot of people new to the fields can be difficult for some people growing something.
Rob Montgomery 10:29
Yeah, no, that's a good point. And that's important to think about and factor into things. Here's what I would say, though, with both of these, whichever way you go. And if you choose to do a mix, which is also possible, the biggest thing is that they need to be financially sound, right and doing a bad acquisition, or doing a start up in a location that's not getting off the ground. Neither of those things are good for the growth prospect. You know, when you're looking at lenders and investors, you don't want to have this bad deal, pulling everything else down. Because if people are looking, you know, again, lenders and investors are looking at the, the global portfolio practices is the overall organization, you know, they will look a little more granularly at the numbers for each of those locations. But the first look is the overall, right. And if you have a bad one that's bringing everything else down, that will inhibit your growth more than anything, and because it's going to inhibit your growth, because nobody's gonna want to give you more money to buy or start up another one, when you've got one that's floundering. And so it just really underscores the importance that if you're doing it to novo, that you do all the things jumped through all the hoops, right? You do it? Well, you know, the things that we talked about, as you said, with ideal practices, doing the right demographics, doing the right marketing, the right design, the right lease, all the things to help you really stack the deck so that you could thrive there. Or if you're buying a practice, same thing, you know, don't buy a practice, just for the sake of buying a practice, you buy a practice that has good revenue, but high, you know, out of control overhead out of control staff salary,
Paul Goodman 12:20
and also these, you know, some of the dentist here on this podcast who've done this before, these practices have themes to them. So being overly optimistic, saying, Hey, I'm gonna buy a $4,000 practice and triple the production. Those stories are few and far between afford $1,000 practices that way for a reason. Can you make it into a $600,000? Practice? Yes. But whether it's the operatories, whether it's the patient base, dentists sometimes are just way too optimistic about what they think they can do to their second third practice. Yeah. And you know, there's a McConaughey movie Failure to Launch. Back in the day, there's just many failures to launches with these things. Yeah. And then you have these practices attached. I got one of myself, right. I mean, it's it. You said to me, Hey, Paul, your second practice? How much money have you made running it for a decade? I don't know if we've made any I think we have right. And people think, Oh, are you foolish? You don't know your numbers? No, it's because you have this other business? Yes, it feeds the business, you know, it feeds some of the bigger business, but it's just, you have to really be ready for that type of life where you're thinking of more than one practice at a time. And you probably have seen, we've said this before the return policies, pretty bad, terrible, nice things. Yeah,
Rob Montgomery 13:25
bounce back. And the tricky thing with all this, too, you know, is kind of where you are in the continuum, you know, it's as as the organization gets bigger, and you're able to hire more people, to task them to just do acquisitions, or just to do the the design and the, the demographics and the planning for de novo, it gets easier. But if you're the dentist, you know, who's practicing dentistry, and you have to, you're going to three, four locations. It's not like you've got well, we've got our, you know, Chief Development Officer, I've got our chief executive officer and this is the person in charge of acquisitions like and also
Paul Goodman 14:05
was huge thing I was just had a meeting with this guy, he said a funny thing, because, you know, I don't know a lot of practices. And I was supposed to work three days a week, but then my associate left one. So now I'm back to five days a week, right? So also, just as we talked about previous episode, and you know, Dennis job connects to some I created to help with this in a meaningful way. Who are going to be the dentist, all these practices, right? We just talked about retaining them through equity, but how about just getting them to work with you for a year getting to work with you for two years, give them don't say, hey, guess what? My wife's moving across the country for a residency. Hey, guess what, we're going to start a family. I'm going to stop working. So there's just a lot of vulnerability to the dentist chefs because I've not seen a business. I know law has some of the Senate too. But you literally can't open it up unless the licensed dentist is there early.
Rob Montgomery 14:48
I mean, I had a conversation years ago with somebody who proposed that they were going to do a bunch of startups said sounds great. Who was a dentist? We don't know. We're just gonna get some desks. Any dentists Right, yeah, any dentists, you know, like you do realize that there are some dentists that can really produce a lot of revenue, and there's some that really can't, we'll get, we're gonna get the ones that produce a lot. That sounds great. How are you planning on getting those people to work? Because as people would like to own their practices, how many dentists out there, they produce $2 million a year dentistry. And they're like, you know, what? The associate chip is my, my, you know,
Paul Goodman 15:26
it's very good. I'm a sports fan, you're a sports fan. They pay people so much money to draft players in the NBA and NFL, and they get it wrong all the time. So you think just because you sit across from someone at a Starbucks, you're gonna be able to determine what type of dentist, they'll be in your organization, you're not going to know that till they're playing the game with you. Right? And you might find out the hard way that they're not that good at playing the game.
Rob Montgomery 15:48
Right? That's a great, great analogy. And I think the overall takeaway we're not, you know, we're like, you know, the Debbie Downer is here, but it just you whatever you're doing, whether it's expansion through de novo, or, or acquisition, you still have to be careful, you still have to do the same kind of planning, same kind of business planning, cashflow, projecting, and demographic demographics depending on which way you go. And it's important every time and you're adding or growing for the sake of adding or growing. From my perspective, my observation never works out, you know, and, and there's sort of this misconception, I think, in the, in this in this space, that? Well, as long as I just keep getting bigger, it's going to be more valuable. Not necessarily,
Paul Goodman 16:40
and I think, you know, I, you said something with rap a few minutes, but like, it's not a debit, I have an elevated thought on this. It's not a Debbie Downer, it's explaining the risks so that the people who want to do it are the right people. Right, right. Like if I explained the risks of being an entrepreneur, and I say, you got to do XYZ here, you eliminate the people don't want to do it, then the people say I can do that, right. I can get the associates, I can dedicate the time. So I think it's a it I understand what you're saying. We say sometimes it sounds like Debbie downer, but to me, it's more about truly explaining the risks. So the right people want to do it. And then the other people say thanks for telling me. I didn't want to spend my weekends trying to go to dental schools to meet associates. Thanks for telling me. I didn't want to miss my kids game, right? Because my associated practice number four couldn't come in. And then the other ones who want to do it, they love doing it.
Rob Montgomery 17:25
Right. Right. Well, I mean, the right people want to do it, but then also the people want to do it know the right way to do it. Right. Right. You know, and again, I can't say it enough that just growing for the sake of growing is not that's not the way this goes, you know, and you have to be tactical and strategic about how you do that. And it's part of what we talked about in earlier episode two, as you mentioned, you know, are we is the model to bring in people with equity interests in each of these locations? Yeah, because maybe that can help attract associate dentists, maybe that will help keep people maybe that'll help motivate, I
Paul Goodman 17:54
think it also you have to like to do it. I mean, if you've run a solo practice to 1.5 million and you make $600,000, then you got a group that does $4 million, but you only make 400, but you don't have to work as much. And you like working with a dentist. That's a cool life too. As long as you understand it. Sure. Yeah. As long as you're seeing what you're getting into,
Rob Montgomery 18:09
well, that's it and that's, that's we, I love to say you know, like and that's part of the sort of the overall the cash flow and the in the forecasting and the projections for what this looks like. And you need to know that going into it. And don't find out don't just pick what's behind door number three now, because you may be surprised pleasantly, but not usually, you know, usually it's it's, you know, the goat behind door number three, not the brand new car.
Paul Goodman 18:36
It's a decade of annoyance running a dental practice. You're not sure if you want it at all.
Rob Montgomery 18:40
Yeah. Awesome. Well, thanks, Paul for for the chat. As always as a pleasure. And folks, if you'd like today's episode, please go on your podcast platform there and give us lots of stars until the next time. Thanks, Rob.
Thanks for listening to another great podcast with the dental amigos. And don't forget to tune in next time to have the dental business demystified. If you're looking for more information about today's podcast, you can find it on the dental amigos.com If you're looking for Paul, you can find Paul at Dr. Paul goodman.com. And if you're looking for Rob You can find him at your dental lawyer.com This podcast has been sponsored by Orange Line Media Group. Helping dentists and other professionals create content people love find out how we can help you take your business to the next level at WWW dot Orange Line mg.com. Till next time