How to Create Value Post Acquisition

Creating value post acquisition is no small feat. It's one thing to tee up and find acquisitions, but it's something totally different to make sure they're worth your while and, frankly, worth your risk. If your growth strategy is to acquire practices, then you can’t afford to simply maintain them – you have to unlock new value.

If you're going to grow through acquisition, it's not a matter of acquiring practices – it's a matter of integrating them successfully and making sure you get a return on investment. The process of growing an acquisition, or several, is not as daunting with the right guidance and information. That’s what we’re here for.

There are a few key components to a successful acquisition. I’ll share what we think are the three biggest drivers of value in a business. Beyond that, I’ll also dive into four ways to grow revenue and three ways to reduce expenses.

So, what are the three biggest drivers of value in a group practice?

If you ever intend to sell your practice, the three biggest drivers of value to an acquirer are: same-store sales, the utilization rate, and EBITDA margin as a percentage.

First, let’s talk about same-store sales. Same-store sales is a phrase that's used in financial analysis and business at an enterprise level (think Home Depot, McDonald’s, Marriott). For any business with multiple locations, same-store sales is a metric that measures the performance of one individual business unit over a prior period. This is very important if you are going to unlock more value, and more cash flow, out of that business, above and beyond the debt service to pay for it. Same-store sales is about the most objective, clearest barometer of your ability to operate and grow a business. In a group context, you should be growing each location at two times the industry average - 10% minimum on same-store sales.

Next, let’s talk about utilization rate. Utilization rate is a private equity metric. The target you're shooting for here is $125 to $175 per chair per hour. This is a measure of how efficiently you run the business and how you're able to generate revenue on a least-common-denominator approach. With utilization rate, it doesn't matter how many operatories you have in a practice anymore – it matters how efficiently they're used. Specifically, we’re measuring how many hours these chairs are full or not full; how many days of the week they're open and hours per day that they're used; and whether or not you’re gaining maximum utility out of that fixed-cost.

The final driver of value is your EBITDA margin. Ideally, you are growing your EBITDA margin, meaning the percentage, at a faster rate than the revenue generation of the business. If you can grow your bottom line faster than your top line, you have phenomenal upside potential in the business. This is a concept called “operating leverage.”

Now that we understand the three biggest drivers of value, let's talk about some ways to unlock all of that.

The four primary areas of focus for generating upside are insurance reimbursement rates, expansion of clinical services, expansion of days and hours, and marketing spend.

First off is the top line, and that typically means insurance reimbursement rates. Enterprise level DSOs are renowned for this. They get paid more for a crown than you and I get paid for a crown. Any incremental pickup in your revenue line usually requires very little cost input, so a significant amount of that revenue increase drops straight to the bottom line in terms of profit.

Beyond that, you’ll also want to focus on expansion of clinical services. Are you able to unlock greater value from a revenue generation standpoint because you can do expanded endodontic work? Think about clear aligner therapy, guided implant surgery, and even single visit restorations in CAD/CAM. The possibilities are endless, and these expanded services bring you more revenue and a wider range of returning patients.

Additionally, you’ll want to expand your days and hours. Much of the younger patient base makes buying decisions around healthcare services from a consumerism mindset. That means they’re looking to go to the dentist on extended days and hours. So, when you acquire a practice, are you able to recruit an associate to come in there and maybe reconfigure some of the way the patients are scheduled and the hours of operation?

Finally, maximize your marketing spend to generate new patients. The bigger the business gets, you may spend more on marketing. However, the percentage of spend will likely decrease. You can then allocate those costs across all of the practices – even if they're not all branded. Maximizing your marketing spend, understanding where your marketing dollars are going, and then being able to track the results of it are very important factors.

Now, let's move over to the expense side of the ledger, where it's all about cost reduction. This can come in a variety of forms across different areas of the business. The three main points I want you to focus on here are clinical and lab costs, professional services, and potential employee benefits and/or reduction of headcount through centralization.

First, clinical supplies and lab costs. It’s useful to look at those two as one in the same, even though they're completely separate, since both are a function of completing clinical work. Having preferential arrangements with your supplier or your distributor, and a limited set of labs that do high quality work, is of critical importance. You're typically better off choosing one supplier and working with them almost exclusively.

Next, professional services like accounting and legal, consulting, marketing, etc., are likely already in place upon acquisition. When you start to make changes to the incremental cost, there should be some savings on a per location basis and an overall reduction.

Employee benefits is another crucial aspect that’s going to affect your staff. Changing benefit and payroll should happen all but immediately. The idea here is that the more employees you get on health benefits, the less that will cost for you as an owner/operator.

Finally, we come to the toughest point in decision-making during an acquisition: reduction of employee headcount through centralized services. Although it’s not always pretty, if you can start to reduce the overall wages of the business, you can really unlock a lot of value. Keep in mind that this is a longer-term initiative - it's not something that you're going to realize on day one or it could send the wrong signal.

The main takeaway here is that you have to unlock value in a business after you acquire it. When you're going to acquire a business, you need to identify and quantify the areas of revenue generation and cost reduction, and be able to forecast that with some degree of certainty and confidence. If you're able to do that, and if you're able to realize those cost synergies and those revenue generation opportunities, you've got a business that is incredibly successful.