Are you going to own more than one location? Have you already made that decision? What happens if you're super successful with one? Do you see yourself as an entrepreneur where not only are you caring for patients, caring for employees and making money with your two hands, but now you are going to build net worth with these assets we call dental practices. Do you want multiple locations? If so, there's something we need to understand. How should we do it? Should they be startups? Should they be acquisitions? Does it matter? Does it change our funding? Does it change our management? Does it change our speed? We need to understand the right strategy to roll out multiple locations when it comes to managing the money, managing the risk, and understanding how we're going to get funded. Are these going to be startups? Are these going to be acquisitions?

What the heck are we going to do to make this more profitable, faster, more simple? I'm going to answer that question in great detail today on the Dental CEO Podcast.

The Problem with Single-Strategy Approaches

I don't know why we've been acting this way in dentistry, but when you look at a lot of groups that have been formed, it's like the owner had success with their first practice and they just tried to do the same thing over and over and over and over again, which seems logical. I bought a practice, it worked out, so I want to have multiple locations, so let me go buy another one and try to make that one work, and then let me go buy another one, try to make that one work. Or the opposite. I started a practice 10 years ago, and I've finally been successful at having it grow and be large. I've got a couple associates, and now I think I want to do five more startups. And so let me find the locations and let me start planning this out and let me do more startups.

A lot of us are just doing all of the same, the one thing we started with. But what if the guy that bought a practice for his first practice would be better off if he started the next practice or the opposite? What if the guy that started a practice would be better off buying the next practice? I want to walk you through how this works and why you should actually take a blended approach. Well, I'm assuming most of us should. Not everyone, but most of us should take a blended approach in multiple locations where we start some and we buy some and we need to do it the right way and we need to understand why we're doing it that way. So let's dive in. The first big issue with owning multiple locations is that you can't get funding to do the next location. So on the bank side, the underwriting, acquisitions are easier to underwrite and fund than a startup.

Funding Challenges for Multiple Locations

When we do an acquisition, the bank will look at the value of what you're buying and give you money toward it, kind of like a house. If you're buying a house, the bank looks, okay, what's the value of the house? Let's get an appraisal. All right, it's worth a million dollars. Okay. So we will approve you for whatever it is, 90% of the value of that house for a loan. I'm going to fund you based on the value of what you're buying. It's a very important concept. That's what happens for the most part when you buy a practice. However, when you start a practice, the first startup, the bank will give you money because it's you. They're going to fund you because you're you. What I mean by that is, are you a dentist? Have you been out a couple years? What's your debt level?

How much money have you made? Can you produce enough or not? All right. Based on you, based on who you are and what you do, based on you, we're going to give you money. Go do your startup. Not based on the value of your startup. No, it's based on you. That's the first startup. But after the first startup, oh, it's different. The second startup loan is not based on you. It's not based on the value of what you're building. The second startup loan is based on the value of what you already have. In other words, your first practice needs to be big enough that it can not only support the debt it still has, but now the new debt you want. The home office has to be big enough that the bank says the home office is worth both debts combined. That's significantly different than buying a practice.

When we buy a practice, the bank wants to know how much is the practice worth that we're buying, and I'm going to give you a loan on that. And if you buy second practice, I'm not only going to look at your home office, I'm going to look at the second practice you're buying and how much is that one worth. And the combination of the two locations is going to determine how much loan money I'll give you. If the first practice is worth a million and has 500 grand debt, I've got 500 equity. If you go buy the second practice for a million, now you've got 1.5 million equity. How much money will I give you for that? A lot. You've got a ton of equity. I hope you followed me just there. I'll do the same thing now for a startup. You built a startup 10 years ago.

It's grown. It's worth a million dollars now and you got 500 grand of debt. Okay. So that's 500 grand of equity in your home office. Now you want to do a second startup. You need 800 grand for the second startup. How much is your second startup worth to the bank? Nothing. Nothing. So how much equity do you have? Nothing plus the 500,000 for your home office. You have 500,000 equity. You want 800 grand for the bank, not approved. You don't have enough equity to afford the $800,000 loan. Do you see the problem? This is a big problem. So in order to do another startup, your existing practice organization needs to have enough equity to fund that startup. So when we now kind of step back and look at this, it's actually pretty common that your existing organization does have enough equity. You've been successful. It's not that hard for most successful practices or practice owners to fund the second startup.

The problem happens at the third startup because the second one is worth negative or nothing. They can't get a loan for the third, especially if they're wanting to build startups quickly. If you build it slowly, that second startup eventually grows enough and now it's worth something. But if you want to build things quickly, it's not giving the second startup enough time to grow up and be worth something. And so you're having a hard time getting funding for that third practice location. This is why the blend is so effective, the blend of starting and buying. If I do a startup, I can't get funding for the next startup after it. But if I do a startup, I could probably get funding for an acquisition after it because that acquisition is worth something. It's easier to get acquisitions funded. So I might do a startup, then buy a practice, then buy another practice, then do a startup, then buy a practice and buy another, then do a startup and so forth.

If I can't get funding for the next startup, I could get funding for the next acquisition and therefore I'm going to do one after the other. I'm going to mix it up, blend it together. How should we actually blend it together? Here's what I would do. If you're ready to add the next location, I would search for the practices that are for sale.

Choosing between Startup, Healthy Acquisition, or Fixer-Upper

And if there's nothing, I would start a practice. However, let's say I search for the practices that are for sale and there's really nothing good and I want to go start a practice and the bank says, no. Nope, we're not going to fund you. Then I'll go back to the shitty practices that are for sale and I'll go buy a fixer upper and fix it up. So I guess let me back up a bit further and say, when you buy a practice, you can buy healthy practices or you can buy fixer uppers. So I'm going to restate my strategy in a different way. If I want to have another location, I am going to look for healthy acquisitions, and if nothing's available, I'm going to attempt to get startup funding. And if I can't get startup funding, I'm now going to buy a fixer upper.

And that's the process. If healthy is available, I buy it. If it's not, I do a startup. Or if heaven forbid I can't get a loan for a startup, then I buy a fixer upper. And when you use that strategy, it'll be the easiest to fund. You'll always be able to open another location or add another location, and you'll get some startups in because you will be big enough to get the startup loan. So again, I'm going to say it one more time just to make sure I'm clear. Every time I want to add a location, I will. I'm not going to just be paralyzed and do nothing. I will add another location, but the way I'm going to do it is I'm going to first look for a healthy practice to buy because that's easy to fund. It's immediate. If there's nothing healthy to buy, I'm going to do a startup, and that's a great long-term investment.

Timing Considerations for Expansion

Ideal practice. However, if the bank won't approve me for the startup, then I'm going to buy a fixer upper practice. It's cheap, it's easy to get funding, but I'm going to have to fix it up. And that's what I do every time I want to open the next location. Okay? Well, what about the timing of this? The startup practice will take 18 months usually from the day I run the demographic report until the day it's open to see a patient. So because I know a startup practice can potentially set me back 18 months, I'm probably going to be a little pushy. I'm going to be aggressive about being ready to open the next practice. In other words, I'm not going to wait until my current practices are absolutely perfect before I feel comfortable starting the process of adding another location because that can take 18 months.

So when is the right time to add another location? I would say the most important thing is that your existing organization is predictable financially. It's stable financially. It may be chaos. There may be all kinds of things wrong with it. You may be dealing with a staffing shortage and you lost an associate and all kinds of drama, but financially, like clockwork, it makes money. And if that's the case, you are ready to start working on the next location. You see, you kind of have two faces when you own lots of locations. One face is the financial face that says, "Are we ready to expand?" And the other face is the operations face. The operations face tells everyone, "We need to attempt to be perfect. We need to have high quality patient care. We need to have high quality clean operations. We need to be high quality.

We need to be an A+." The operations face preaches the message, we need to be an A+. But the financial face says, "Dude, as long as we're a B+ operationally and we're stable financially, let's go add another location." You see, we're not going to wait until we're an A+ to add another location because most of our equity gain is when we've risen to a B+. It can take so much money, so much time, so much focus to get to an A+ that we would've made a lot more money had we taken that time and focus and added another location. So we're going to preach we need to attempt to be an A+, but financially speaking, when we're stable and add a B+, we're starting to look for the next location opportunity. Now, I mentioned equity gains.

Equity Gains from Multiple Locations

Every time we add a location, we are going to gain equity in two ways. We're going to gain equity by the financial growth of that second location, and we're going to gain equity because the larger we become as a whole, the more each individual piece is worth. You see, when you only have one practice, you might be worth five times your EBITDA or your, let's just call it profitability. So if you've got 200 grand profit or EBITDA, then you're worth a million dollars because you're worth a five times, a five multiple, five times your EBITDA with one location. But when you have 10 locations, you might be worth an eight times. I'm just coming up with a number, but you might be worth it eight times. In other words, that first location that has 200 grand profit that was worth five times by itself is now worth eight times, eight times 200 grand.

That's 1.6 million. If it's all by itself sold off as an individual practice, it's only worth a million, but if it's sold as part of a larger organization, it's worth 1.6 million. That's an equity gain. That's called EBITDA or multiple arbitrage. It's worth more because it's part of something bigger. So our strategy in growing lots of locations is obviously to build net worth and we can build net worth with multiple arbitrage and of course we could build net worth by perfecting the earnings of that practice we bought or we started. Same store sales growth. It is worth more because it is generating more profit. Those are the ways we gain equity. So we want to keep adding locations when it's appropriate so that we can have these two opportunities, the multiple arbitrage and of course the same store sales growth or the earnings growth. Now, how do we get earnings growth?

Strategies for Increasing Practice Profitability

In a simple way of looking at it, how do you get more profit from a single practice? You can grow it, right? Grow the collections. That's what most dentists just focus on. They get obsessed with it actually. They hyper focus. And another way you can grow the profit is by spending less. And hopefully as you grow, you can keep expenses down and that creates a lot more profit. So one thing we're going to do is have a big focus on spending less. We need to buy a practice and immediately cut costs, get it on an appropriate supply budget, an appropriate lab budget with new fees. We need to maybe even transition the staffing model. Maybe we're going to not rehire everyone, but we are going to have instead virtual assistance at a much lower cost doing great work for the practice. Maybe we're going to, instead of hiring more hygienists, we're going to go to an assisted hygiene model.

Those are the types of things that we need to think about to immediately generate more profit and therefore immediately generate more equity. And therefore, we are approved to finance more practices in the future. If I can buy a practice or start a practice and generate profit more quickly, I can get approved for the next location more quickly. So cutting costs has to be part of our strategy. Now, in blending these practices, there's another component to this besides getting funding that is incredibly important.

Cash Flow Risk Management

We want to avoid a situation where we stack up multiple locations that are all losing money. I remember back early in my career where I built seven startups at once. Every Monday, we opened a new startup and there were some advantages to that, but a massive disadvantage was I was in startup mode losing money as expected, but times seven. And I underestimated how much money they would lose in the beginning and how long it would take to get out of startup mode.

And that is very dangerous. That's risky. That can reduce our cashflow as an organization to negative cash flow, which can suck away our working capital. It will stall completely opening any new locations. We'll be frozen in time until we fix this issue. And it might cause us to lose locations, I mean, lose everything potentially, right? So we want to avoid that as much as we can, and that is why a blended approach is also advantageous. For everyone startup that might lose money, we're going to have two or three existing or acquired practices that are stable or making money. And while an acquisition practice isn't necessarily going to make a ton of money for us long term like a startup could, in the short term, we can pretty quickly cut some cost and do some things on marketing, do some things on phones, do some things on case acceptance to kind of give it a steroid shot of growth and immediate profit.

Corporate Infrastructure Benefits

So buying a practice is like a jolt of profit to the entire organization that can offset these kind of temporary losses we would have in a startup. So this blend is important for our cashflow. Let's not stack up cashflow negative startups at the same time if we can avoid it. Also, something to think about is as we add locations, we are going to have a centralized level of infrastructure, meaning we're going to have maybe an offsite revenue cycle management team or people managing the claims and the patient collections. We're going to have a way to answer phones that is offsite, get offsite help on the phones. We're going to have a way of managing expenses. We're going to have kind of a centralized person or team and they know, here's how we order supplies, here's how we run the P&Ls and analyze our decisions. We are going to build a corporate layer that is going to bring value to all the locations. That corporate layer is very effective in getting an acquisition practice and elevate it quickly, elevating it quickly. That corporate layer also enables us to open a startup practice with a lot of things figured out and a lot of things done well.

When we do a blended expansion strategy of startups and acquisitions, the corporate layer is going to bring us quick success with the acquisitions and long-term growth and like this kind of organized way with the startups. So this blended approach, again, if we do acquisitions, we get another boost to profit short-term while we have this long-term ideal setup for startup. If we're only doing startups, we're not going to have the short-term boost or if we're only doing acquisitions, we'll still gain the long-term benefit of this, but the acquisition itself is in the wrong location, has the wrong software, has the wrong team, has old equipment. We don't get an idealized equity gain and growth from our central infrastructure if the practice has some compromises and is stunted. So the blend of the two kind of balances out the big opportunities, the short-term growth and the long-term profit.

Technology and Service Stack Considerations

What is going to run our group? What's going to be our tech stack and our service stack? You probably have never heard those terms before. I made them up. So it's part of my language, but tech stack means what's our products management software? How are we getting metrics? What's our accounting? What is our imaging software? What about our phone software? What are we doing on the marketing side software-wise? What's the IT setup? All that technology, let's stack that up, put it in a basket and say, okay, what does that look like? That's our tech stack. Service stack is what people set up is going to manage our claims or our collection calls or our phones or our supply and equipment service. So all the kind of service from people we need from the outside, what does that stack up to look like? It's important to work this out as we buy practices and start practices so that they all become common and we get the common benefits of doing things right.

We also get the benefits that we can manage them more easily. If they're all in the same software, we can pull the numbers the same and they're all getting the same service. So maybe this is really kind of unrelated to the main topic of this podcast, but as a side note, as we build multiple locations, we want to make sure that we are finalizing the ideal tech stack and the ideal service stack. And that means if we buy a practice, it's not going to be on those things. We're going to have to go through a chaotic transition period to put that acquired practice onto this stack. That can be painful. It can cost turnover with the staff, turnover with a dentist. It can cost some costs that maybe were unexpected. A startup doesn't have those problems. A startup gets to start on the stacks properly in a clean way.

So keep that in mind. All right, so let's kind of sum up now what I'm really trying to say. The main things that are going to impact how fast we can open locations and what kind of locations we're going to open, the main things are the ability to get funding, the ability to avoid negative cash flow, and the ability to have stable, predictable management and profit, those three things. So can we get funding? Can we avoid negative cashflow and can we have stability? And the best balance of all of that is likely going to be startups and acquisitions, one startup for every acquisition or one startup for every two acquisitions. And the thinking, the strategy behind what to do next is this. Am I stable currently with my organization with B+ operations? If so, I'm ready to add a location. What do I add? Let me first try to buy a healthy practice.

If there's nothing readily available, let's not waste our time. Let's do a startup. Oh shoot, the bank won't fund me on this startup. Okay, let's not waste time. Let's go buy a fixer upper. And now we're going to do one of those three things. We're going to put them on our tech stack, we're going to put them on our service stack, they're going to get our corporate infrastructure, we're going to cut costs, and we're going to bring that next location to our stability and our B+, and now let's add the next. That's the strategy. I hope that was helpful for you. Follow that and you are going to avoid a lot of challenges that other people have had. Follow that. You're probably going to have the most money, the least amount of stress you can have playing this game, and obviously you get an equity gain in the same store sales growth or the profitability of the location and in that arbitrage of the EBITDA multiple that you at some point get to sell for.

That's how you play the game. That's how you're going to play a monopoly with these assets we call dental practices. That's how I would do it and how I would coach you if you were my client. Best of luck. And that was the podcast here, this episode on the Dental CEO Podcast. I'll see you next time.