Incremental Revenue – A Series – Part 3 – New Patients
At this point, we will have elaborated on the value of incremental revenue and the essential components of incremental revenue. For the next eight or nine installments, I will expound on different ways to add incremental revenue to your practice. The topic for today is the effect of new patients.
One of the main components of the incremental revenue function is new patients. We have already established that patients are a dental practice’s raw material, so the more incremental new patients you can add, the more raw material you have and the more services you can provide. The value of a block of new incremental patients ranges between $4,000 to $4,500 per patient. The current market value of a chart is less than $1,000; therefore, purchasing blocks of patient charts is a highly profitable acquisition and one that you should seek.
Let’s start by making a few assumptions and observations. It is reasonably safe to assume that, on average, a new patient will generate $1,000 during their first year in the practice. Suppose we also assume that your practice will annually generate an average of $500 per patient with an annual 5% inflation factor, which would include both additional services and fee guide increases. We can now calculate the expected incremental revenue that each new patient will contribute to the practice over ten years with that information. The total incremental revenue will be just over $6,500, and the net present value of the incremental revenue will be just over $5,000. We already know that $0.66 of every incremental revenue dollar goes directly to profit. This means that 1,000 incremental new patients will produce about $4.2M of total incremental profit with a net present value of $3.3M. If we assume the incremental net profit is spread out evenly over the ten years, $420,000 per year, that equals an increase in practice value of over $2M. The point being, if you want to increase the value of your practice, find a block of new patients.
For the most part, a dental practice will gain new patients in one of two ways. Normal new patient growth is referred to as organic growth; it offsets normal attrition and will allow the practice to grow slowly. As current patient needs are treated, new patients with pre-existing treatment requirements are needed to maintain practice revenue flow. This is not incremental new patient growth. Incremental new patient growth is the injection of patients into the practice in excess of normal organic growth.
The very best way to inject large numbers of incremental new patients into a practice is to buy them. As it turns out, this is not a bad time to be purchasing patient charts. Two things have made this strategy a little easier. The first is COVID and the second is landlords.
The COVID pandemic has shortened the retirement timeline for a good number of dentists. Between continuing shutdowns, stay-at-home orders, virus proofing requirements, and increased PPE costs, many dentists approaching retirement have decided to accelerate that process. Many of these practices are physically small or have relatively small patient bases and are not appealing as stand-alone facilities.
A dental practice with less than 500 patients will not appeal to many buyers; however, 500 patients added to your current patient base could increase your cash flow significantly. The only downside to older practices is older patients. Patients who are 70+ may not be ideal from a longevity point of view; however, patients between 55 and 70 typically have lots of money and require lots of dental treatment.
Currently, one of the biggest practice sale impediments is a toxic lease. Toxic leases are leases that have demolition or other clauses which are unacceptable to the banks. Practices with toxic leases are virtually impossible to finance. As such, they must be moved to another location or sold and merged into another dentist’s location. This second option is the one that should appeal to anyone looking for incremental patients. These buying opportunities have the advantage of including a more evenly aged patient base. Selling and merging is usually a more attractive option than moving the practice to a new location.
A third option that is harder to execute effectively is implementing a phenomenal marketing strategy that will bring in hoards of new patients. Hard to do or hard to find someone that can do it for you.
Regardless of whether you are purchasing shares or assets, it is likely that any normal appraisal will be misleading. Appraisers typically prepare appraisals assuming that someone will buy the practice and operate it as a stand-alone practice.
In this case, the practice will include all of the revenue and all of the expenses of the acquired practice. If the purchaser is going to incorporate the purchased practice into an existing facility, then all of the revenue is purchased but only part of the expenses. If this is the case, then the actual value of the practice will be greater than if the practice was bought or appraised as a stand-alone whole.
If you intend to add the acquired patients to your existing office incrementally, buying such a practice at the usually appraised value will likely be a bargain. To determine the actual value of such a practice, you need to prepare an incremental appraisal of the practice. In a multi-offer situation, it would be very much to your advantage to know the true value of a practice you intend to merge into your current practice. You can safely offer more for a practice that has incremental implications for you. This is something we would be happy to help you with.
The takeaway here is obvious. When you think about incremental revenue, you need to be thinking about securing more patients. A patient that you may only need to pay $500 or $600 for, if used incrementally will result in many times that value for you. Regardless of what stage your practice is at you should always be on the active lookout for practices that can be merged into your existing facility.
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