Assess key performance indicators
Use key performance indicators (KPIs) to evaluate your existing practice to assess your practice’s growth, profitability, and overall stability in the context of building a profitable second location.
1. Practice production
Production is one of the most fundamental KPIs to consider when evaluating the overall financial health of a practice. Without production, there can be no revenue. Consider factors like production per patient and case acceptance.
2. Active patient count
Active patients are those who have been seen in a practice within a defined set amount of time, (typically the past 12 to 18 months). While total patient records may be very high, a practice is only producing revenue on patients who actually come into a practice for treatment. Hence, the active patient base is responsible for the ongoing cash flow to a practice.
3. New patients and patient attrition
Your dental practice’s patient base likely decreases each year, due to patients relocating, dying, patient changes in insurance coverage, or numerous other reasons. To continue to grow, practices need to replace patients. If a practice isn’t replacing patients and growing, it’s probably not a prudent business decision to open a second location.
4. Practice collections
Production is very important, but it only really matters if a practice is actually collecting on said production. Collections percentages can be calculated by dividing a practice's total collection by the total adjusted (net) production. If collection percentages are not to the level where they should be, you should evaluate specific business processes to see where improvements can be made.
5. Overhead
Overhead can be a killer for a business in any industry, and it’s no different for dentistry. Any excess money spent on overhead is money that isn’t going towards a practice’s profits or ultimately into your pocket as the owner.
The saying goes, “you must spend money to make money,” and that rings true with expanding a dental practice. If you decide to add a second location, you are also adding more overhead, including paying more staff (one of the biggest portions of practice overhead), buying more supplies, and paying utilities at a second location.
6. Practice profit
Profit is a clear frontrunner when it comes to KPIs, as it combines the success of both collections and production, as well as overhead. Use Seller’s Discretionary Earnings to understand the profitability and overall health of your practice.
Seller’s Discretionary Earnings = EBITDA + add-backs + doctor’s compensation
7. Cost of expansion
If collection rates are high, profits are strong, and your current practice is thriving, you should still consider how much of that profit is to be invested into a new practice location rather than into your pocket. Can the current practice support the costs of starting a new practice, and still generate an acceptable level of profit for you and for the bank looking to finance the second location?
It can cost up to $600,000 on average to start a new practice location from scratch. Purchasing an existing practice will cost even more, including funds needed for renovations, upgrades, and technology updates.
