Huge Challenge Facing New Smiles Inclusive CEO
The recent troubles of Smiles Inclusive Limited highlights the significant risks of dentists who enter into co-ownership contracts with dental corporates where the corporate owns a controlling share of a practice and the vendor dentist a minority stake. There is also a risk where a dentist takes shares in a new start up in lieu of cash payment. In our view these arrangements have significant risk and can disadvantage vendor dentists. Minority owners are captive of the corporate and the sale of their remaining equity positions may pose serious problems as the corporate effectively controls the sale price and can choose to buy or not buy or make it difficult to sell to another dentist, if indeed other dentists would be interested in buying in. The collapse of Smiles Inclusive Limited share price contrasts
with the much better managed 1300 Smiles Limited which has been far more careful in its acquisition of practices.
Where a corporate breaches its banking covenants the situation becomes quite serious as the bank may:-
- Force a change in management as banks generally won’t deal with a CEO who they see as having been closely involved in the circumstances leading to the breach of covenants, i.e. the banks’ lending contract which specifies the ongoing conditions that the borrower must meet; and
- Impose a punitive increase in interest rate charged on its financial facilities. It is not known whether Smiles
Inclusive Limited has had a significant increase in interest rate charged by the NAB but if it has it should inform the ASX as to what conditions have been imposed. It is a public listed company and shareholders have a right to know.
In the case of Smiles Inclusive’s founding CEO Mike Timoney, he has stepped down and been replaced by a new CEO acceptable to National Australia Bank and probably sourced by the bank.
While individual practices in the Smiles Inclusive group may be well run, they are likely to be placed under stress by the wider performance failure of the group, and hence, the flow on impact. Each individual practice is in danger of being adversely affected by the decisions of the new CEO who will be under pressure to satisfy the bank which has loaned money
and put bank shareholders capital at risk.
In the case of Smiles Inclusive the decision to buy a mobile dental van business which had been fined by the New South Wales health authorities for taking x-rays of children’s mouths without holding a radiation license was itself unusual. While the vendors of that business may have covered up their breach of the law the fact was that Smiles Inclusive was buying into a quite different business:-
- One which did not fit naturally into a structure of conventional dental practices. When a business changes its course, in this case soon after IPO, it usually rings warning bells.
- At the stage when he began negotiating to buy this business Smiles Inclusive CEO would still have been in the early stages of identifying and dealing with the strengths and weaknesses of the 52 practices that it had purchased. Running off to become involved in a very different business model did not make sense and it is apparent the purchase was done in haste with too little due diligence.
Where all this leaves the individual practice vendors who invested a chunk of their sale proceeds back into practice profit share proceeds arrangements is unclear!
New CEO Tony McCormack has little choice but to do the banks bidding. According to the Australian Financial Review – “costs will come out and plans to turn around some of the
under-performing practices will be implemented quickly”.
Again, according the article “experienced management and operational improvements were needed rather than specific knowledge of dentistry. Dental experience is on hand” Mr McCormack said.
Mr McCormack is reportedly working closely with a group from main bank lender, NAB and an “independent review” has been initiated to ensure that Smiles Inclusive complies with its banking covenants. “Independent review” is usually code for some very expensive accountants from the top end of town who will do a report on the business but who will charge it a high price for so doing.
We predict that:-
- Mr McCormack’s task of cutting costs and making operational improvements will be far more difficult to achieve than adding up the profit and loss from cattle sales (he had previously had a stint as Chief Financial Officer of Australian Agricultural Company).
- The original 52 practices purchased were said to have 61 totally vacant dental chairs which indicated that many of the practices, probably most, were in a rundown condition with patient numbers less than in their prime years of operation. Turning them into vibrant expanding practices is no easy task.
- Cutting costs other than at head office will face
challenges. Where exactly does he start in dental practices? Cutting dentists contracts and percentages of income isn’t going to be accepted lightly and risks losing the better performers. Cutting nurses and reception wages quickly runs into significant problems. There may not be much saving in dental materials and rents will be contracted to landlords.
Turning around under-performing practices sounds nice in theory but faces huge difficulty in practice. Probably some of the practices in the group should not have been bought. Turning those around likely requires substantial investment in them and will be a very slow process. At a time when there is a huge nationwide surplus of dentists, and most practices face stiff competition in a profession which is patient relationship driven, quick
turnarounds are most unlikely particularly if bank restrictions on expenditure impede necessary investment such as re-equipping badly run down practices or doing significant renovations to lift appearances.
It may be that new CEO’s best outcomes will be to quickly sell off the worst practices, if indeed contractual conditions in existing arrangements between Smiles Inclusive and the practice vendors permit this to happen.
However, assuming that the worst practices could be separated then disposed of and the practices which have the basic wherewithal to succeed, albeit with a long slow gradual improvement process are retained, this may create a circumstance where the residue of the business can be turned into a profitable enterprise. They could then be sold off as a package and
bank debt paid out. In these circumstances existing shareholders will be lucky if they can recover much of their original investment from the situation. Based on Smiles Inclusive recent share price of around 16 cents the stock market is doubtful about its future.
Obviously the mobile school vans business, legal problems permitting, should be separated out and sold.
It’s unlikely that Mr McCormack can cut the contracts of dentists, nor the wages of DA’s and receptionist staff, nor save much in the way of laboratory fees or dental consumables. His best long term option may be to be to cut out the worst practices, work hard at getting the rest on a sustainable curve and then sell off that part of the business, and wind up the company after having paid back the banks
as secured creditors.
Warren Buffett’s observation that:-
“if a new manager is put in charge of a poor business it is usually the business which emerges with its reputation intact”, is likely to prove itself once more.
Lessons for Dentists
- Some dentists have learned the hard way that selling to corporates and working for them as lead dentists is often far from the smooth outcome that they had hoped for.
- Ex practice owners often do not enjoy working for a new boss; particularly if the new boss is not a dentist and does not understand that dentistry is a profession, the success of which, is conditional on the relationship between dentists and patients.
- Non-dentist CEO’s easily misunderstand the critical drivers in a corporatised dental company business.
- There are a long list of corporate failures of professional practices spread across a spectrum of accounting, medical, orthopaedic surgical specialists, ophthalmic specialists, dental laboratories, veterinary franchising and stillborn dental start-ups. While some are successful to a degree, the rapid failure of some and other mediocre outcomes indicate that doing a
roll up of a group of practices and expecting easy financial reward is a high risk undertaking.
- The corporatisation of dental practices in Australia has fallen well short of what was predicted by the promoters of dental corporatisation schemes some years ago. While it is variously estimated that corporate ownership of dental practices may rest somewhere in the 8 to 10% of all practices, the reality is that over the time that the first corporates have been in the market (1300 Smiles Limited) it seems that far more dental practices have been started than have been purchased by the corporates.
Graham Middleton
Independent Dental Network (IDN) – Keeping Control of
your Practice
IDN provides dentists who wish to retain their freedom from the encroachment of large health funds the tools to market their practice and offer patients an ethical and more beneficial choice of dental insurance, including an ability to switch to a mutual fund which doesn’t interfere with patient choice of dentists by discriminatory rebate setting, and which offers patients superior value for their insurance dollar. Alternatively, patients can opt out of extras insurance and contribute to a savings plan (with accounts run in a major bank) to pay for planned dental treatment.
The health insurance industry heavily advertises extras (ancillary) cover because that’s where it makes the big profit. Overall the industry only pays out 78 cents per
dollar of extras premium, which in turn covers only 52% of treatment costs. Dentists are aware, that’s a rip-off. Every member practice retains its own identity while belonging to IDN, which gives it the marketing tools to promote itself under its own name.
Merv Saultry – Contact merv@independentdentist.com.au
Disclosure – Neither Synstrat Group nor Synstrat’s directors have any financial interest in Independent Dental Network other than the interests of our dental clients.
Selling Practices –
Working for New Owners
The relationships in practices can change. A new owner may employ the old owner but replace long term DA’s with inexperienced casuals and suddenly the dentistry becomes frustrating for the old owner.
Conversely, we see some excellent role reversals where the vendor works on harmoniously, gradually reducing their pinnacle time over several years and fading out gracefully.
The Federal Election – Dentistry
The coming elections sees dentistry again being added to political policies. The Labor Party is promising to throw some money at a dental scheme. Hopefully no universal dental
scheme will emerge, albeit that there are healthcare bureaucrats who would like to create another administrative empire for themselves. Rather a bit more money for emergency dental treatment for those at the bottom of the social welfare pile might be forthcoming. The real issue then becomes one of how the bureaucrats manage it so that the expenditure goes to the deserving rather than those who are smart enough to manipulate the system as has been the case with previous schemes.
Synstrat Dental Stories
Did you know that “Doc” Holliday who stood alongside Wyatt Earp and his brothers at the battle of the OK Corral, was a dentist. Or that another dentist commanded the eighth Australian Lighthorse Regiment which took
surrender of 12,000 Turkish soldiers in Damascus in World War 1; or the famous Indi racing car driver Jack Miller was a dentist, as was Zane Grey a famous American author, and World War 1 and World War 2 hero Bernard “Tiny” Freyberg trained as a dentist. Read about them in Synstrat Dental Stories which is a 335 book which is a must read for dentists. To obtain a copy of this publication, make a tax deductible donation of at least $30 to the Delany Foundation, a charity which brings hope and opportunity into the lives of young people deprived of education in Australia, Papua New Guinea, Kenya and Ghana.
Once you have made your donation, please email confirmation of your donation along with your postal address to dental@synstrat.com.au and a copy will be sent to you. Donations can be made by mail to:
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