Open a New Dental Practice or Increase Profitability of Current Ones? 5 Mental Models for Deciding

By July 3, 2019Strategy

It’s a question that can keep you up at night.

We imagine it’s a question you think about often:

“What’s next? Squeeze the juice out of my current locations —  or acquire new ones?”

It’s a timeless problem, and a difficult decision. We understand the challenges you face as a dentist-entrepreneur.

At The DEO, we’ve got a bird’s-eye view of what’s happening in the dental space right now — and what’s coming up in the future.

    • We exist to help you achieve your mission and vision.
    • We are a peer-to-peer learning organization, committed to connecting dental group executives to the people and resources they need to grow.
    • We believe in coming together as a community to share, connect, and tackle tough challenges together.

It’s a conundrum that never fully goes away. You find yourself thinking about it with every LOI you send or new location you consider.

The solution? You’ve got to gain clarity! But how do you determine your next move?

Before we answer that, here are a few ways that DON’T work:

Mulling over spreadsheets.

  • No single metric or spreadsheet can give you the insight you need to determine the profitability of an acquisition.
  • Everyone looks at different metrics and has different opinions on what data points  are important for their company.
  • You can have a great spreadsheet that shows excellent projections, but those plans gets trashed when they hit the real world. Employees aren’t excited about the path, the team isn’t ready, your personal life gets in the way, etc. Spreadsheets don’t account for the personal, emotional part of growth.

Listening to gurus.

  • Having someone tell you what to do can work temporarily, but if you don’t learn how to navigate problems based on your own courage and critical thinking, it takes longer to achieve your goals.

Divine talent.

  • No one is born with inherent entrepreneurial talent that give them god-like abilities to understand how to make the right moves and right decisions.

What DOES work time and time again?

Trial and error.

Experience over time.

The shared wisdom of others.

So when you’re looking for clarity, you’ll find no better tools than mental models!

When things are confusing and there are a lot of variables (metrics, people, emotions, etc.) you need to simplify the decision-making process.

Mental models are one of the best ways to do that.

A spreadsheet is not a mental model. That’s why the best investors and private-equity folks don’t only work with spreadsheets, but mental models as well.

What’s a mental model?

Wikipedia says: “A mental model is an explanation of someone’s thought process about how something works in the real world. It is a representation of the surrounding world, the relationships between its various parts and a person’s intuitive perception about his or her own acts and their consequences.”

It’s a filter to run decisions and problems through so that you might make better decisions, and solve problems easier or faster.

One common example of a mental model?

The 80/20 rule: 80% of effects come from 20% of causes.

Squeeze the Juice, or Get a New Location: 5 Mental Models for Deciding

Mental Model #1: Where Is My Next Easiest Dollar?

Look for the path of least resistance in growing your group.

Rather than get overly complicated and risk “analysis paralysis” for weeks — or even months —  think to yourself, “Where is my next easiest dollar?”

There are 2 sides to this.

1. Logical side: looking at the structure of your business and determining where the easy revenue is.

  • Adding more hours of operation?
  • Adding production?
  • Adding services and procedures?
  • Adding marketing?
  • Training associates?
  • Expanding your facility or adding more operatories?
  • Adding specialties?

Tip 1: There is usually great opportunity in optimizing your new-patient flow at each step in that path.

Tip 2: If you have a strong KPI dashboard and benchmarks in place, you can take a look at your operational efficiencies to see where you have opportunities for growth.

2. Emotional side: Where do you sense the easy revenue gain is? What’s your intuition telling you? Where do you see the opportunity? A lot of times analysis won’t tell you this part.

  • Where do I feel the opportunity is?
  • Where does my team feels the opportunity is?
  • How strong do I believe in my vision?

Mental Model #2: Beware of “Optimizing the Margins”

Sometimes when we talk to dentists, we find they have fallen into the trap of continually optimizing the low-hanging fruit.

Zoom out, and you might find that it often takes the same effort to go from 1% to 98% as it does to move from 98% to 99%. In fact, oftentimes your easiest dollar is a “BIG MOVE.”

Here are 2 examples.

Example 1:

  • Go from $3M to $4M; might take 2 years;  have to upgrade staff, train docs. Or, buy 1 location and get to $4M in 6-10 months.

Example 2:

  • Currently at $3M in revenue; want to take supply cost from 6% to 4% = $80,000 savings to your bottom line. Or, add a location making $1M in revenue at 20% net margin = $200,000 added to your bottom line.

Mental Model #3: Benchmarking

This is something you’re going to want to get really good at. We’ll give some example numbers, but as far as where you should and shouldn’t be, that varies. The best thing to do is to talk to like-minded peers in your situation, experts, and mentors who have been there to get your personal/professional benchmarks.

You want to “normalize” your benchmarks —  to control for all the different variables. This is usually done through ratios.

Example 1: Production Benchmark

  • Production per operatory
  • Production per doctor
  • Production per patient
  • Production per square foot

These metrics give you clarity by showing you what levers you can pull to move your business,  and how much you can actually squeeze out of your practice.

Example 2: Profitability Benchmark

Let’s say you have $3M in revenue (or $6M or $10M) and you’re at 15% margin. Maybe you’ve talked to a few other DSOs / group practices under $10M, and you know they’re operating at 18-20% net profit because you’ve benchmarked against them.

GP 15% net profit on $3M = $450,000

GP 25% net profit on $3M = $750,000

Total profit = $300,000 difference if you can increase from 15% to 25%

We used this example because  one of our DEO Members did this recently.

How’d they do it?

They spent the past year focusing on profitability, implementing business systems, implementing formularies, and getting their costs under control.

But say you were already at 25%. Then you might be optimizing at the margins, so beware.

Mental Model #4: Do You Have a Repeatable Platform?

With this mental model, you’re taking a look at your team, your systems, etc., and whether you get the sense that you can add locations without harming your current practice(s).

Are your systems and processes repeatable?

Having systems and practices in place will ensure you start on the 40-yard line and not the 0-yard line. It’s a question of purchasing locations that are ALREADY doing fairly well so that you don’t have to resurrect them from the dead.

If you don’t have duplicatable processes in place, when you acquire another location you’re going to be running around putting out fires rather than focusing your time and attention on the business.

Mental Model #5: Go For It

Even just considering the four mental models above, there’s a lot to think about. Just do it. Just go for it.

In the technology space, a form of this is called blitzscaling: a sudden, all-out effort that improves your ability to handle growth. It’s not just all-out growth, though.

“It’s about prioritizing speed over efficiency in the face of uncertainty” says the inventor of the term, Reid Hoffman, co-founder of LinkedIn.

There are a group of people in the world who like that challenge.

To shift gears a bit, the secret of most bigger DSOs who have been in your place will tell you to focus on increasing profitability before acquiring another location.

Why?

Because they blitzscaled when they were smaller, and it was probably so hard that they will give you the opposite advice.

It all depends on your risk tolerance. When investors look at the dental space, they love it because it’s a fairly safe business — the risk of anything catastrophic happening is low.

And most dental practices are viable and can return the investment. Things can be bumpy, but bumpy doesn’t mean bad.

Conclusion

Whether you decide to squeeze more juice out of your current location(s) or add more practices to your group, one thing is certain. You’re on a journey to finding more clarity regarding that timeless problem.

But instead of struggling on your own and worrying if that next hire or strategic move is going to work out, or doubting whether you can build a group…

Join a community of like-minded dental entrepreneurs who’ve already hiked the uphill battle you’ve started, and can help you avoid pitfalls and setbacks on your way to the top.

Or join to bond with fellow go-getters and climbers who are still figuring out the same problems, like:

  • As the new practice owner, how do I reduce turnover?
  • How do I maintain production when I’m not in the chair?
  • How do I hire, compensate, and retain great associates?
  • How do I create better systems so I can stop putting out fires nearly every day?

You’re always one decision (or one connection) away from a totally different life. We’re happy to be that connection. Schedule your free Growth Accelerator” call today.

 

Resources on Mental Models

Books

The Great Mental Models: General Thinking Concepts by Shane Parrish

Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger

Smarter Faster Better by Charles Duhigg

ReModel by Joshua Spodek

Online Articles

Mental Models: The Best Way to Make Intelligent Decisions (109 Models Explained)

Frameworks by STRATEGY UMWELT

Mental Models: How to Train Your Brain to Think in New Ways

Mental Models: Learn How to Think Better and Gain a Mental Edge