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The Magic and Mayhem of Mergers by Dr. Andrew Sarpotdar

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Categories: Practice Transitions;
The Magic and Mayhem of Mergers 

Grow your orthodontic practice through smart, strategic acquisitions without casting a spell of burnout, brand damage or financial loss

by Dr. Andrew Sarpotdar

As the father of an almost-3-year-old, my after-hours mainly involve browsing a seemingly endless library of content on Disney+. During one of these cartoon binge sessions, we came across the beloved classic, The Sorcerer’s Apprentice. Many of you know the story: A naive protege (Mickey Mouse) is left to his chores while his powerful master takes his leave. Lo and behold, the apprentice quickly discovers his master’s hat, the source of his magical powers, has been left behind! Not fully realizing the danger this presents, the inexperienced Mickey uses the hat to amplify his efforts, only to become overwhelmed by unruly broomsticks flooding the entire castle with their endless pails of water.

Order is quickly re-established with the sorcerer’s return, but a powerful lesson is delivered nonetheless: Ambition is a wonderful thing, but only if balanced with understanding and direction. In today’s environment, the consolidation of orthodontic practices is a common yet precarious maneuver to navigate.

When done correctly, it can provide beautiful benefits, such as economies of scale, data centralization and negotiating power. However, the downside is that it can result in burnout, brand degradation and even loss of investment. In this article, I will provide my recommendations on how (and why) to approach such ventures based on my own experience and interactions with experts in the field.


The magic of scale: Perks of strategic consolidation
Consolidation offers considerable advantages to those who can navigate its intricacies. The most apparent advantage is negotiating power through economies of scale—the larger the purchasing power, the better the deal. Supplies are one example, but widespread marketing influence can also be shared among multiple practices that could never afford the same reach individually. For a practice owner who has maxed out the growth potential of their current office, a satellite office or acquisition of charts can provide an opportunity for instant growth. Growth of this nature may provide an opportunity to hire an associate, giving the practice owner breathing room to focus on the business of orthodontics or to take more time off. Acquisitions can also be a defensive move. For example, when a local competitor announces plans to retire, one could acquire their practice to prevent a new competitor from gaining a foothold in the market. One can also proactively expand into a region where they already draw some patients, but which is far enough away that a nearby competitor could more easily capture that market if they don’t. With the recent rise of non-specialist orthodontic practices and the buyer’s remorse that some generalists face, one may even gain a referral source by purchasing the orthodontic charts of an overwhelmed dentist. One of the most significant advantages to being an orthodontist is the vast scalability of our mental efforts. While this often means we can reach our financial goals on two or three patient days per week, our hourly employees usually prefer a full-time work schedule. Adding a second location, especially if it allows us to hire an associate, can provide a way to hire and retain more committed employees, assuming they are willing to travel.


Flood warnings: The hidden risks of expansion
All investments carry risks and red flags, and practice acquisition is no exception. My practice broker, Rich Andrus, has seen it all in his 15 years with Menlo Dental Transitions and has negotiated on behalf of my wife and me for both our startup practices and two of our chart acquisitions.

First and foremost, Rich recommends you consider your goals. What value does growth bring to your life? Practice owners who currently meet their financial obligations with little to no stress often find that the financial rewards of a second location are overshadowed by a loss of discretionary time and a compromised work-life balance. Does a larger number in your bank account get you closer to your life goals and values, or is it the end in and of itself? If growth is indeed warranted, one must consider timing. Are you truly tapped out on growth in your current practice? In almost every scenario, it is better to grow an existing asset than to acquire a new one. Scaling up brings all sorts of headaches.

Most importantly, consider how effectively cases are currently managed. Many practice owners face the unfortunate reality of inheriting many patients who are well beyond their target debond date, with many no longer actively paying for treatment. Conducting a thorough chart audit can help greatly in avoiding this dilemma.

Additionally, as my wife and I have learned, adding a second location doesn’t scale marketing capacity as much as we had hoped. While a digital presence and brand recognition can certainly benefit, much of our marketing is conducted at the local level through community and school events. Grassroots marketing barely scales at all, with only a slight advantage from larger “swag” purchases and perhaps the ability to hire a full-time marketing coordinator.

Your brand may not connect with a second community if it is too closely linked to your original location. Management also becomes more complex and strained with additional locations, requiring the hiring of more specialized staff or handling a larger workload yourself. There is also a clear increase in occupancy costs, including rent and maintenance for a second location.

Finally, the potential for a culture clash between acquired patients and acquired employees can hinder synergy and, in some cases, could damage one or both of the brands involved in the merger. For all these reasons, expansion through satellite acquisition should generally be considered a last resort for growing the initial location.

Many of these disadvantages can be avoided by merging charts from a local practice, which can usually be a safe choice, as long as the location being shut down is within a few miles of your current practice. Occupancy costs often remain unchanged, and there are typically no additional marketing or management issues. However, there are specific considerations related to chart acquisition that should be noted. If the previous location is closed, there’s a risk that an opportunistic competitor may fill the gap. Startup costs are higher than ever, and a fully developed infrastructure might attract many aspiring startup practices. Patient expectations could also be impacted if they are asked to travel a significant distance, especially if location was a key reason for choosing to start treatment there.


Building your spell book: How to prepare for acquisition
When you decide that expanding through acquisition is the right move for your business, it’s crucial to prepare properly. First, let’s discuss financing. There was a time when capital was inexpensive, and the dentistry business was almost risk-free. However, lending conditions have become stricter. Today, any lending institution will review your “debt-to-gross-income ratio” when assessing your creditworthiness. Typically, this means your annual gross income should be at least 1.2 times your yearly debt payments. Because of this, your first location must be financially healthy before you even consider an acquisition.

Next, consider brand compatibility. One of the biggest pitfalls is acquiring a practice with a different culture or value proposition than your current location. Are the local demographics and consumer spending patterns similar? Does the current provider offer esoteric treatment plans you are unfamiliar with, or do they heavily brand their practice around the doctor’s personality? A good strategy during any acquisition is to maintain the current systems and branding for at least six months. However, this can be challenging if the doctor prefers an immediate exit or if the systems and culture are too incongruous with yours.

Also consider logistics such as software conversion, especially regarding chart notes and billing. This is often one of the most challenging parts of a merger, so be sure to contact both software companies in advance to develop a plan and learn about any associated fees.

Plan to notify patients well ahead of the upcoming transition and ensure it goes smoothly. Shadowing the current provider with a group of patients for a cycle or two can be a great way to build trust through an endorsement from a provider they already rely on. If patients are expected to move to a new location, this is especially important so they can be informed and scheduled at the new site in person. As a bonus, consider negotiating for the existing provider to work out of the new location for an extra cycle or two.

One must also consider the post-sale plans of the selling doctor. If the selling doctor plans to continue working, ensure you have a strong restrictive covenant in place. A minimum radius of five miles is recommended for three years, but some banks may require at least 10 miles. The radius of exclusivity mainly depends on population density. An alternative way to assess this is by drive time, with a 15–20 minute drive being the minimum, and a 25–30 minute drive considered reasonable. Taking these steps early can ensure a smooth transition and help preserve the value of your purchase when acquiring a new practice, which we will discuss next.


Valuation, not voodoo: Understanding what a practice is worth
These days, “EBITDA” has practically become a household word. Representing earnings before interest, taxes, depreciation and amortization, it is the most widely used benchmark to evaluate larger practices and is favored by private equity. Since it is not commonly used in doctor-to-doctor sales, we will focus on the more traditional valuation of three years’ trailing collections.

Traditionally, one would purchase a practice for approximately 60–80% of the average collections over a trailing three-year period, although this percentage could be higher or lower depending on several factors. A growing practice in a highly desirable area, for example, will command a premium upwards of 100% of trailing collections in some cases. In contrast, a shrinking practice in an undesirable community could be acquired for less than the cost of replacement (i.e., the cost of building a comparable practice from scratch).

Additional factors influencing value include overhead (<60% is considered desirable while >70% will be penalized), goodwill and insurance contracts (heavy Medicaid- or HMO-based practices are typically worth less). Factors such as equipment, accounts receivable and the experience of office staff are undoubtedly important but tend to contribute less to the sale price of a practice.

If your strategy includes consolidating an acquired practice’s patient base into your existing physical location, you may consider a chart purchase, which will value the sale considerably lower than an outright purchase. Chart acquisitions often occur when the selling doctor needs a quick exit or isn’t motivated to prepare their practice for a traditional sale. The acquiring doctor will typically pay anywhere from nothing to 50% of accounts receivable for such a transaction (another reason why chart acquisition can be favorable to a second location).


Casting the right spell: Why now might be the perfect time
As we have seen, growth through acquisition can provide significant benefits to an owner-doctor looking to expand, provided they are well-prepared and clear about their trajectory. Over the past couple of decades, private equity has recognized these benefits and capitalized on them through its consolidation of the dental and orthodontic markets. Private equity-backed acquisitions reached a peak in the years immediately following the COVID-19 pandemic but have slowed their rate of growth significantly because of higher capital costs and underperformance in some markets.

As of this article, dental consolidation remains at ~35% while orthodontic consolidation is estimated between 18–22%. At its peak, the eye-watering multiples being offered to owner-doctors drove up prices on the most desirable practices to the point that private buyers were mostly priced out. With things cooling off, I believe there’s a unique window for doctor-owners to expand their footprint thoughtfully—if they approach it with clarity, intention and the right strategy. Like Mickey Mouse, it’s tempting to grab the hat and go, but the real magic belongs to those with the vision to see the opportunity and the courage to seize it.
Author Bio
Dr. Andrew Sarpotdar Dr. Andrew Sarpotdar is a board-certified orthodontist in private practice with his wife, Dr. Jenny Sun, in the greater Phoenix area. He attended dental school at UCLA and later earned his master’s degree in orthodontics from Columbia University in 2013. Sarpotdar is a co-founder of the Orthodontic Pearls Facebook group, along with its corresponding annual meeting, the Mother of Pearls Conference, and is a strong advocate for collegiality and shared learning within the profession.
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