No Images? Click here 3 July 2019 Dental Corporatisation is FailingIs the Dental Profession Fractured? Consider:
Green Shoots and Dental Gemstones On the positive side we see many examples of practices which are run profitably by experienced ethical dentists who have confidence in their abilities including many who prefer to sell to an employed dentist that they have mentored rather than take a higher price from a dental corporate, but be tied to an earn out contract and be pressured by the corporate bosses to change the way the practices operate. The Strategic Failure of ADA Inc Back in 2005 ADA Inc, the dental profession federal body, then led by President Dr Bill O’Reilly and CEO Robert-Boyd Boland lobbied the Federal Government for additional dental schools and increased dental immigration. However, it became evident over time that they got their numbers badly wrong. While an Adelaide based researcher published figures of apparent shortages there were question marks about methodology. No comprehensive study was done on the extent of spare capacity in dental practices. Various studies amounted to desktop perusals of numbers and OECD comparisons. Apart from being notoriously unreliable across a broad spectrum of economies and industries, OECD statistics don’t take a good account of factors such as the spread and timing of fluoridisation of water supplies or cultural differences. Desktop studies give insufficient knowledge of existing dental capacity. Various studies were still claiming that Australia had a shortage of dentists long after country vacancies had dried up and dental oversupply was evident in capital cities. Bureaucrats tend to accept the study that gives them the answer that they want. It was evident at a point in the past that Commonwealth Department of Health bureaucrats wanted to be able to persuade Government to set up a dental version of Medicare, probably because overseeing it would have produced a number of high ranking positions for bureaucrats. The consequences of government being persuaded that there was a shortage of dentists was an explosion in dental numbers brought about by eased immigration rules and an increase in the number of dental schools and sizes of dental classes, hygienists and dental therapists. Synstrat Accounting is Australia’s most experienced dental and veterinary practice valuer. Speak to Graham Middleton or David Collins. Dental Graduations This year the various Australian Dental Schools are expected to graduate 668 final year dental students and a further 250 dental therapists and hygienists. 1,400 to 1,500 examinees are expected to attempt the Australian Dental Council examinations with a likely pass rate of 12 to 15 per cent. This does not include dentists whose overseas qualifications are recognized in Australia. 7 Years v. 5 Years! Three Australian Dental Schools, Melbourne, Sydney and Perth have seven year courses to qualify as a dentist. The remainder are five years. There is scant evidence to indicate that the seven year graduates are better dentists than the five year graduates but if full fee paying they would have much bigger HEC’s debts and enter the dental workforce two years later. In combination having a significantly bigger HEC’s debt and two years less of earnings represents a huge additional financial burden! Well informed dental opinions is that the difference in time is not worth the cost. Failure of Dental Practice Start Ups The failures are likely to be far more prevalent than most observers believe. Practice shut downs disappear quietly. Success has many parents, whereas failure is an orphan. Hoardings appear in shopping malls disguising the fact that behind them was previously a business but is now an empty space. Some of those empty spaces were dentists. And numerous dental practices have started quietly in a suburban shopping strip then quietly disappeared when they didn’t have the patients required to make them viable. The reality is that existing practices which provided a good dental environment for their patients and treated them well hung onto their patients because the overwhelming tendency is to go back to the dentist that last treated you. Most long standing dentists now believe that there has been a drop of professional standards in the profession. Of the four newer dental schools on the Gold Coast, Bendigo, Orange/Wagga Wagga and Cairns, at least one of them has had serious staffing difficulties leading to significant questions as to the standard of training. Corporate Failure The performance of corporatised dental and veterinary clients is demonstrating widespread failure. Synstrat has, since its inception, advised large numbers of veterinary practice owners and large numbers of dental practice owners including dental specialist practice owners. Prior to Synstrat’s formation in 1994 I personally had been advising vets, dentists and medical specialists since 1987. Currently we note the following:-
The accounting consolidations of some years ago, Stockford Accounting Limited, Harts Australasia Limited and Knights Insolvency Limited, all ended in liquidation. We are reminded of the dismal performance of some medical groups including Orthopaedic Group Limited which never actually got to its IPO having fallen apart once it became evident that orthopaedic surgeons had completely turned off the group and there was no prospect of more surgeons joining it. Are You Getting Good Accounting and Financial Advice? Ask how Synstrat Group can improve your accounting and financial advice. Has your accountant or financial advisor explained to you how successful dentists can grow their wealth by concentrating on proven non-controversial means. To follow up speak to Jenny O’Brien 03 9843 7777 for an appointment with Graham Middleton or other Synstrat staff. Charges will apply after an initial 30 minute discussion. Abano – Maven New Zealand Company, Abano, which purchased Dental Partners Limited and rebranded its practices in Australia as Maven, announced that it was ceasing purchase of practices in Australia due to lack of satisfactory financial outcomes. In early April, Abano share price had fallen from $5.75 New Zealand to $3.86, both well below its high of $10.20 in December 2007. Abano referred to challenging conditions in Australia. Abano’s critics in New Zealand had stated that Abano – Maven should stop buying practices altogether as its strategy of building scale by acquisition had been “value destructive for shareholders”. Pearl Healthcare Limited Pearl Healthcare Limited which purchased a portfolio of dental laboratories had an IPO subscription price of 25 cents but finished day one on the stock market at 18 cents per share, the highest price it ever reached. From there it slid inexorably toward eventual liquidation. Courageous Decision Making Sir Humphrey Appleby, in the British series “Yes Minister” used to refer to politically unwise decisions proposed by his Minister James Hacker as being “courageous”. This meant that such decisions were likely to lead to an electoral loss. The collapse in the share price of Smiles Inclusive Limited from $1 at IPO last year to 13 cents recently represents investors’ belief that the company has no future. Recent press speculation that a merger might occur with National Dental Care struck us as being courageous thinking. The Blinding Obvious The pathway to getting dental, veterinary or other professionals practices rolled up into a corporate, having a successful IPO and listing on the stock market, is now extremely difficult. Acquisition of a group of professional practices on the assumption that they can be sold onto a bigger buyer at an enhanced price earning multiple is running into severe hurdles. The greater fool theory behind this strategy is running into stock market reality. This is a miniature version of the pre October 1987 stock market collapse period when Australia’s so called entrepreneurs such as Alan Bond, Christopher Skase, John Elliott, John Spalvins, Abe Goldberg, Lawrie Connell, Larry Adler, Robert Holmes a Court and others bought and sold assets financed by heavy borrowings in a rising market paying premium prices on the assumption that they could on sell the assets at a greater profit. The October 1987 stock market collapse caused the buyers to vanish and the banks refused to continue lending money for such dubious purchases. A number of the entrepreneurs became bankrupt, fled into exile, went to jail or suffered heart attacks. The one clear winner was the late Kerry Packer who accepted a huge offer for his television network from the late Alan Bond confident that he would be able to buy it back in several years for about one-third of what he had received and achieved exactly that. Dentists who are interested should get hold of a book by Trevor Sykes called “The Bold Riders” which gives a riveting description of the downfall of the principal entrepreneurs of the 1980’s with a lot of financial detail. If you think you are paying too much for Life Insurance including Income Protection, etc. Cameron Darnley is a Synstrat Partner who can assist. His contact number is 03 9843 7777. Much the same is happening with the corporate consolidation of dental practices in 2019 and although the values are far less than the billions frittered away by the 1980’s entrepreneurs, the results are in danger of turning out to be quite similar. We can be certain that dentists who invested in Smiles Inclusive Limited’s IPO, or even worse took consideration for their practice in share script, would now agree. Those miniature entrepreneurs who have gathered together groups of practices in the hope that they can sell them on into a bigger corporate at a higher price need to reassess their strategies, particularly as dental registrations are running at twice the rate of population growth. Corporate dentistry may be a pathway toward failure. Wild horses could not pull me towards investing in an IPO of a dental or veterinary corporate at this point. What Happens after a Practice Enters Corporate Ownership Situations vary but a former owner of a practice describes what has happened to his practice under corporate ownership as being akin to a dairy farmer watching his favourite cow being turned into Oxo cubes! Some Corporate Practices are Leaderless! The impact of dental corporatisation has been to accelerate the retirement of many experienced dentists with many corporatised practices being operated by dentists of far less experience and skill. If you would like a copy of Synstrat’s publications 50 Rules for success as a dentist and Buying and Selling General & Specialist Dental Practices contact mary@synstrat.com.au indicating mailing address details. You will also be placed on Synstrat’s dental newsletter email list, if not already there. Naturally, we will delete the name of any dentist who does not wish to be on that list. Questions Investors Should Ask When Dental Corporates Conduct Initial Public Offerings Question 1 – are the figures from the investigating accountant shown in the offer document realistic? Question 2 – in the case of corporates which have owned practices for several years while they are getting together a sufficient portfolio to take to market the question is how many of their former owners employed in them as lead dentists remain in those practices? Question 3 – what is the average length of the remaining contracts of former practice owners from the date of the IPO? If it is apparent that few of the former owners are still active or it is apparent that most former owners contractual terms of employment are nearing their terminal date investors should give dental corporate IPO’s as wide a berth as possible as very soon many of the practices will be supervised by inexperienced dentists. Synstrat’s observation of the figures in the offer document from Smiles Inclusive Limited IPO were as follows:-
A practice which has performed admirably providing high quality dentistry including wisdom tooth extractions, implant placements, elegant crown and bridge work, enduring cosmetic makeovers (the Hollywood look) and has profited as a result will lose a lot of its income when a longstanding talented leading dentist departs and a much less able dentist takes their place who is unable to produce much more than routine drill and fill dentistry with a fraction of the former fees. The investing public and the stock brokers who recommend investments in a dental IPO are blissfully unaware of the changes occurring within the practices. To innocent investors dental practices seem to be all alike because most investors have only ever been treated by one or two dentists. The truth is that the skill set knowledge and fee generation ability of dentists varies hugely. Synstrat Dental Stories is a 335 page book which is a must read for dentists. It details a series of good and bad practice experiences but names and some details have been changed to preserve identities. It contains valuable insights for practice owners and intending buyers as to what works best and what doesn’t. 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 mary@synstrat.com.au and a copy will be sent to you. Donations can be made by mail to: Delany Foundation, PO Box 429, CASULA MALL NSW 2170 Or via direct debt to the Delany Foundation Ancillary Trust, BSB 062 784 CBA Account Number 4050 5402. Should you have any difficulties, contact Matthew Mahoney on 0419 202 787 or 02 9600 8184. Warning Most vendor dentists who sell to corporates are embarking on a way out of practice towards retirement and their former practices will be quite different within the near future. The Americans have an expression that nobody checks the oil level in a rental car. Employed dentists don’t have a wider concern about practice operations outside of their operatory. The Profit is in the Principals Surgery A Practice Principal owns a practice and premises with three chairs. The principal is the most talented and operates easily the most profitable surgery. He has three other dentists spread across the other two surgeries. He approaches Synstrat to discuss the option of extending the premises, putting in an extra surgery and fitting it out. The overall cost may be about $500,000. Our approach is to assess the income coming out of each of the existing surgeries operated by assistant dentists. It becomes immediately obvious that a couple of the dentists in the practice working four clinical days and three clinical days each are slow, happily spread out work and spend a fair amount of time chatting to chairside assistants. The reality is that if their work was booked properly they would be doing two and a half days and two days each, and there would immediately be two and a half spare days in the practice. Proper analysis indicates that the marginal profit on each of them is very low. The solution is to block up the dentists bookings and free up chair time for a faster assistant dentist. Capital expenditure is not required. We are sure that somewhere there will be an exception to every rule but overwhelmingly over many years the most profitable practices owned by a single dental principal are one chair, two chair or three chair practices. Rarely does profitability extend to a fourth chair because invariably some of the principal’s time is wasted fixing other dentists problems, or even worse still, an extra layer of staffing is required in the form of a practice manager. The sad truth is that most practice managers are profit absorbers rather than profit generators. However, we are not referring to efficient receptionists who have a courtesy title of practice manager. Best Wishes to all Dentists, Graham Middleton Disclaimer: The information contained herein is of a general nature and no specific action should be taken without individual advice. Speak with Synstrat staff as appropriate. Prepared by Synstrat Management Pty Ltd for clients of the Synstrat Group. Synstrat Management Pty Ltd is the holder of Australian Financial Services Licence No. 227169. ABN 57 006 295 325 The Synstrat Group provides Accounting, Financial Services, Business Advice, and Financial Advice. Prepared by Synstrat Management Pty Ltd for clients of Synstrat Group. Synstrat Management Pty Ltd P. 03 9843 7777 ABN 57 006 295 325 If you are not the intended recipient of this communication please delete and destroy all copies of this message and telephone Synstrat on +61 3 9843 7777 immediately. If you are the intended recipient of this communication you should not copy, disclose or distribute this communication without the authority of Synstrat. Any views expressed in this communication are those of the individual sender, except wh ere the sender specifically states them to be the views of Synstrat. If you do not wish to receive this email in future, please reply to the sender requesting termination of service. |