If you're an entrepreneurial dentist or other healthcare provider, one journey to success is the de novo method, or “starting anew.” Our guide here includes all the planning, strategy, and metrics that are involved with this business growth technique. Here at Polaris, we love the de novo growth model - there’s lots of value in this method, especially once you nail down the key understandings to making it a success.
This is an exciting time in the dentistry field. Around 80% to 90% of the industry is growing through acquisition. However, for all those starting from scratch, or looking to grow anew, the de novo model can be highly beneficial.
The Reality of Acquisitions
Most entrepreneurs want to grow their group through acquisition because there are a lot of upsides to buying an already-established business - it has existing patients, revenue, staff, potentially less downside risk, and some level of profitability beyond debt…hopefully. Many like to think of acquisition as a ‘foolproof’ option.
However, one big hurdle presented by acquiring a business (that many owners may not realize until they run into it) is the integration aspect. Employees typically don't react well to a new owner. There are a lot of moving parts that are associated with acquisitions - you have to manage change, egos, resistance and culture clashes between the two entities. Resistance to change will start to erode the value of the business fairly quickly. So, although acquiring seems like the easier route, it’s not always all it’s cracked up to be.
Starting with a Clean Slate
That’s why the de novo model can be so attractive to new (and existing) practice owners - none of the above issues is a factor when you’re building a practice from the ground up. Your culture is your culture. And your systems are your systems. There’s no “change management” necessary.
In terms of spending, the acquisition price to buy a practice is typically multiple-fold larger than a de novo business. With a de novo start, patient onboarding is your first hurdle, but when you solve that, you can outgrow the cost of a de novo at a much faster rate than with an acquisition. In fact, the de novo strategy can be a really healthy opportunity to grow your business, grow it quickly, and grow it profitably.
There are certainly challenges to a de novo start - like figuring out location, marketing, and generating your first bit of revenue. However, we’re going to take you through those obstacles so that, by the time you’ve finished reading this blog, you’ll have an action list for what to do, and what not to do.
Focusing on Fundamentals
First things first. Location, location, location! Site selection is really key. It might sound a bit strange, but a great tip is to think about choosing your location in the same way that a fast food restaurant does. These businesses (take McDonald’s as an example) are highly dependent upon site selection.
Site selection (beyond the obvious first metrics of traffic counts, ingress and egress, accessibility, and the traffic flow) for your de novo business depends on three main factors: demographics, psychographics, and evaluating the competition.
Let’s talk about demographics. What are the objective criteria of a local marketplace? As a dentist, your main clientele will likely consist of families. When scoping out a location, you’ll want to look at the percentage of the local population that's married, what the average age is along a distribution curve, and how many kids are in the area, in addition to average household income and average education level, just to start.
You’ll also want to measure the psychographics, or buyer behavior, of an area. Where do the locals spend their money? What's their motivation to spend money? How important do they hold healthcare? What're the best means to reach them from a marketing context? There are a lot of great questions you can start to ask about the local population in an area to get a gauge of how your dentistry business will fare. This also helps us understand who our potential patients are.
Finally, research your competition. Be on the lookout for how many other practices are around that potential site from a two, five, and ten-mile radius. What are their specialties? Are they lower-level practices, or are they larger DSOs? In other words, there may be competitors, but how formidable are they?
Constructing Consistency
Next on the action list: have “a box” defined. What I mean by that is to make sure your de novo model is based on a standardized system. Nail down your amount of square feet, the number of operatories, dual entry, cabinetry layout, and equipment set up to be the same at all locations. All of those standardized selections will not only make your practices feel cohesive, but when you look to expand to other locations, you can use the same contractor, architect, and equipment company on the next layout to budget more accurately. This “box” method also ensures employee retention, as your existing staff can be rotated into positions in that near-identical new location. For these reasons, a standardized ‘box’ is really important for scale and repeat successes.
Driving the Metrics of Success
Another absolute pillar of present and future success is understanding which metrics matter. Measuring too many can feel overwhelming, so we advise focusing on a few fundamental metrics to create success.
The first key metric is understanding your “net equity breakeven” number. If you’re going to borrow money to start your business, keeping track of this breakeven number will give your lender confidence in your ability to execute success so that you can continue to borrow funds. As a rule of thumb, net equity breakeven is about two times the initial investment.
Furthermore, a de novo strategy places a premium on your marketing execution - part of that is knowing how much money you need to spend in a marketing context to reach net equity breakeven.
So, what are my marketing metrics? First, you’ll want to measure the cost to acquire a new patient and new patient value (or ‘first-year patient value’). Between cost to acquire a patient and new patient value, you can more accurately forecast your marketing spend.
Working Example
Here’s an example to break it down for you: Let's say that the buildout and equipment cost is $300,000 for your first de novo location. That would mean that your net equity breakeven is around $600,000 in revenue. So, you’re going to need to generate $600,000 in revenue at the end of our first 12 months.
We’ll say our new patient value is $1000 - so, the average new patient is worth about $1000 in the first year in your practice. The revenue number we need to hit is $600,000. When you divide $600,000 by $1000 per new patient, you get 600 new patients. That's the number of new patients we need in the first year that the business is open.
Then, for marketing spend - if one patient is $200 and we need to generate 600 new patients, now we can calculate our total marketing spend at about $120,000, or $10,000 a month. So, when we understand what the budget is, then we can extrapolate the revenue number we need to hit by the end of the first year to keep our funding window open from our bank.
De novo is not so much of an intimidating process when you know what to solve for! De novo can be a really wonderful strategy for growth - one that isn’t nearly as daunting as it’s made out to be.
We at Polaris are very passionate about the de novo method. If you’re interested in more information or education into building your de novo practice, consider joining us for our master class: "De novo execution" on March 10th and 11th, right here in Charlotte.
To get on the list, or for any questions, comments, or guidance, send me an email at perrin@polarishealthcarepartners.com - we’d love to hear your thoughts!
This blog is just the beginning! If you’re hungry for more guidance, give our Group Practice Accelerator podcast a listen at your favorite podcast provider. Until next time!