Dental Financing Insights

Building Your Platform

Building Your Platform

9/19/2018

Non-clinical support functions are the difference between individually-run, disparate dental offices, and having the necessary platform to grow and scale. The sophistication of the platform drives the speed at which DSOs and groups can grow.


Guest blog by Chris McClure of Aligned Dental Partners

 
When most dentists hear the phrase “building your platform,” they think of the physical plant of the office or perhaps the foundation of the building. In actuality, we refer to building the platform as the virtual infrastructure required to operate a dental support organization, serving as the backbone of any investment-grade DSO.
 
Your platform accounts for the key functional areas that support, drive and monitor most non-clinical functions of the business. Platform areas include: human resources, accounting, finance, legal, supply chain/vendor management, marketing, IT, revenue cycle management, call center, and other central support functions depending on the business model.
 

DSOs buyers or investors will want to see a full-scale central operating platform that allows the business to sustainably run without the day-to-day management of the owner.

 
Most entrepreneurial dentists building a group or DSO have a vision of someday monetizing their business for a greater value than their investment. In order to achieve a premium valuation, DSOs buyers or investors will want to see a full-scale central operating platform that allows the business to sustainably run without the day-to-day management of the owner. Without this platform, there is no DSO. Without a DSO structure, all that remains are fractured, individually-run and managed dental offices or a group of disparate practices. And ultimately, with no platform and infrastructure, there is no premium valuation.
 

Human Resources

Human resources is an often overlooked function as dental companies transform from a solo office or small group into a DSO. Human resource managers are an expensive investment for any growing company.
 
However, without a structured human resources department, the company cannot effectively manage employee relations, employee performance, recruitment and hiring, benefits administration, pay scale management, or maintain a consistent onboarding process. Compliance within these critical functions becomes more stringent as the practice continues to add employees, and upon reaching the threshold of 50, the game changes entirely when health insurance becomes a requirement.
 
Utilizing a PEO (professional employment organization) is a way to cost effectively build your HR platform before hiring a full time human resources department.
 

Accounting and Finance

When surveying entrepreneurial dentists who have successfully built and exited from groups and DSOs, the first and most critical hire they made was consistently an experienced CFO.
 

When surveying entrepreneurial dentists who have successfully built and exited from groups and DSOs, the first and most critical hire they made was consistently an experienced CFO.

 
The accounting and finance functions within the platform are key foundational areas in building infrastructure and having proper insight into company performance. Correctly illustrating company financials is critical to use with a bank or other capital sources in funding future growth.
 
Many new groups or emerging DSOs struggle to identify trends in expenses from income statements if they have not adopted one single chart of accounts to make month-to-month comparisons. It is important to fully understand both the balance sheet and income statement and professionally monitor both of these areas in order to monitor performance, identify growth and savings opportunities, and highlight company performance in the best light for current and future investors.
 

Legal

The legal structure of a dental company is technically what differentiates a group practice versus a DSO.
 
A group practice generally operates with a solo or multiple dentist owners of the PC or multiple PCs (depending on the state) and typically raises capital from bank debt or personal investment from the dentist owners.
 
The reasons for forming a true DSO structure typically revolve around the way the company wishes to either raise capital or share company profits. In order for either of the two former goals to be fulfilled by a non-dentist, a separate management company must exist to leave the clinical functions at the PC level and provide services to the practice(s) through management services agreements.
 
There are many skilled lawyers who operate solely in the DSO space and it will be necessary to consult with one or more prior to executing your vision for growth.
 

Supply Chain/Vendor Management

Supply chain/vendor management refers to the centralized purchasing segment of the dental company.
 
Monitoring expenses and purchasing are critical components to maintaining profitability and controlling costs for a group or DSO. The larger the company gets, the more buying power it holds to leverage best pricing with vendors.
 

Dental supplies and labs should account for no more than 9% of revenue

 
In a well-run DSO, dental supplies and labs combined should account for no more than 9% of revenue (depending on the amount of crown and bridge, orthodontics, implants, etc.)
 
DSOs and groups will work with their supply companies to develop a formulary which narrows down a list of items to order while seeking the best pricing. The Clinical Director will select a short list of the best laboratories that will provide competitive pricing and support for their lab work.
 
Of course, the procurement of goods and services for dental companies spans more than the just supplies and labs – these are typically the two largest buckets when looking at COGS. Less sophisticated groups have failed to capitalize on these economies of scale through leveraged purchasing and give up significant value when looking to monetize their business.
 

Marketing

Marketing and branding are two distinctly different yet highly correlated functions in dental groups. The age-old question of “to brand or not to brand?” is more relevant today than ever.
 
Both branded and unbranded models successfully exist today in some of the largest DSOs in the country. Groups need to understand the risks of branding their offices before they have a consistent product across all locations. If you were to walk into a McDonalds in Detroit, how would those fries taste compared to the ones you had in Atlanta? In an unbranded environment, there is no expectation of consistency – but in a branded environment, they must taste the same.
 
Regardless of which option you choose, marketing the office is required to generate new patient flow. To build your marketing platform, you will need centralized marketing support to manage your website, SEO, newsletter, social media, internal referral strategies, and major media campaigns. Centralized marketing will allow you to best understand your patient flow, the number of new patients your group requires, and how to measure the CCA (cost of customer acquisition) from each marketing strategy.
 

IT

The IT platform, consisting of software, hardware, support, and other technology is a critical function in sustaining day-to-day functionality within the practice.
 
It is commonly thought that all practices in a DSO or group must be on the same practice management software platform. In some cases, that makes sense to implement, if your model is to build de novo practices and there is no data migration or downtime required as you aggregate offices.
 
However, many groups and emerging DSOs today operate on disparate practice management software systems. There are dozens of software companies providing data aggregation and dashboard services that can provide centralized and consolidated practice data without going through a full software transition.
 
Work with a trusted IT company to perform an initial IT assessment to identify weaknesses or areas that need to be upgraded to prevent or limit potential downtime within the practice.
 

Revenue Cycle Management

As group practices mature and the aforementioned administrative services have been centralized, many emerging DSOs will begin to integrate revenue cycle management as a platform service.
 
Revenue cycle management encompasses all functions related to capturing, managing, and collecting patient revenue from the individual dental practices. This process typically begins by synchronizing the credentialing, fee schedule management, and insurance components.
 
This system can expand to payment posting, adjustments, and claim denial management. Of course, none of these functions can be properly supported without the right IT infrastructure to allow a centralized team to remotely access this information and manage the process while providing economies of scale to the labor force.
 

Call Centers

Call centers can be one of the toughest platform areas to effectively integrate and centralize for emerging DSOs.
 
Patients of dental offices become very attached to familiar faces in the office, and familiar voices on the phone. Dentistry is a very relationship-based business and with each layer that is stretched, the less attached the patient may feel.
 
Some benefits do exist with call centers, however, including fewer missed patient calls, shorter hold times, and longer answering hours than typical practice hours. However, once fully built and integrated, dental call centers are typically still a cost center for the management company and rarely show any immediate return on investment.
 
Immense IT hardware and software costs, staffing issues, and decentralization from patients have caused problems in many emerging DSOs. Conversely, private equity seems to love the concept of a centralized call center and will typically use this as add-back to value if it has not been successfully integrated into the platform.
 
 



Chris McClure is a co-founder of Aligned Dental Partners LLC and serves as Chief
Operating Officer. He brings more than a decade of experience supporting entrepreneurial dentists and healthcare organizations to achieve their goals.
 
Aligned Dental Partners specifically focuses on building and implementing the necessary platform for entrepreneurial dentists, groups, and emerging DSOs to enable premium valuations. Aligned Dental Partners’ leadership team has been supporting the business of dentistry for more than thirty years. Contact Aligned Dental Partners for a complimentary practice assessment to understand your growth potential, what it takes to build your platform, and how to successfully scale your dental business.

 


First American Dental Finance is pleased to bring you important industry information to support the health and success of your business. For more information or to inquire about being featured in this forum, please contact us at
 dental.financing@faef.com.

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