Dental Practice Acquisitions with George Hariri

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George Hariri

George Hariri is a fourth-year dental student at Midwestern University in Glendale, Arizona. He co-hosts the Shared Practices podcast with Dr. Richard Low, runs a course called The Ownership Accelerator, and just published a new e-book. George is happily married to a fellow fourth-year student at Midwestern University and together they have a 10-month-old son. I sat down with him recently to discuss dental practice acquisitions. 

I’ll admit, I was skeptical when I first saw George speak at our local ASDA district conference. How could a dental student possibly get up on stage and lecture other dental students about practice acquisitions? How can a dental student know enough to lecture on a topic that often confounds veteran dentists? As it turns out, he knows a lot. 

Book Learning

George is exceptionally driven and razor sharp. Speak to him for just a few minutes and you will feel smarter by osmosis. This is a guy who downloaded the course syllabi from the Wharton School of Business and purchased old editions of the texts and case studies they use. Did I mention that he read them all during his first year of dental school? 

The genesis of George’s journey to business enlightenment really begins with Howard Farran, the founder of Dental Town. Dr. Farran gave a speech at Midwestern University where George was a first-year student. During his speech, Farran asked the audience a question, “what do you call a dentist who does one or two things right? A millionaire.

Dr. Farran’s business philosophy changed the way George thought about dentistry. He also credits the book Rich Dad Poor Dad by Robert Kiyosaki and Sharon Lechter, a book which advocates building financial literacy and increasing your financial IQ.

George would go on to spend his first two years of dental school soaking up as much as he could about business, finance, and entrepreneurship. But that alone isn’t enough to make him an expert on practice acquisitions. For that he needed real world experience.

Finding a Mentor

I asked George how he learned the ropes and managed to involve himself in more than 200 dental practice acquisitions as a dental student. He credits Dr. Hunter Smith, the owner of Southern Dental Group in Tennessee and Arkansas, for giving him an early start. George first met Dr. Smith through a group he runs with Dr. Derek Williams on Dental Town called Ambitious Dental Students.

When he and George first collaborated, Dr. Smith owned two dental practices. George was just a curious second year dental student hoping to learn about the business side of dentistry. Dr. Smith served as a mentor for George who openly shared his knowledge and experience about buying and running a successful dental practice. 

Real World Experience 

But working with a couple of dental practices is still not enough to make George an expert at dental practice acquisitions. To really know the ins and outs of buying a dental practice, he would need a lot more exposure. 

This is where Dental Town enters back into the picture. Earlier I mentioned that George was influenced by Dr. Howard Farran. It is hard to overstate just how important Dr. Farran’s contribution to modern dentistry is. His website, Dental Town, has provided an educational outlet to tens of thousands of dentists globally and likely increased the standard of dental care around the world.

The huge user base of dentists on Dental Town, many of whom are looking to buy and sell practices, was the perfect environment for George to experience the volume of dental practice acquisitions he would need. 

George cooked up the clever idea to offer his help to users on Dental Town for free. He had spent the last two years devouring business literature and absorbing as much as he could about Dr. Smith’s dental practices. Why not use his knowledge to help other young dentists make their first dental practice acquisitions? In the process, he too would learn more about them and this would make his first purchase easier. 

His idea was wildly successful. The weekend I interviewed George, he had already looked over three separate practices for buyers. To date he has assisted with more than 200 dental practice acquisitions. 

The Science of Dental Practice Acquisitions

I asked George what he looks for when he evaluates practices for buyers. He is critical of schools that teach dental students to valuate practices by pricing them according to their gross collections. In fact, he told me that he doesn’t even really consider the collections when he first looks at a practice.

There are more than a dozen key metrics that matter he says, a few of which are: income after debt service, net income, fixed expenses, hygiene as a percentage of revenue, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). 

Fixed expenses are costs that you can’t change. Utility costs, lease, property taxes, insurance, employee salaries, these are all expenses that are relatively static over the short-term. It’s important to know if the practice you are looking to purchase is spending way too much on its staff or if property taxes are really high in that area. 

Hygiene is a good indicator of the health of a practice. If your hygiene is below 20%, then that may mean that the practice is relying on income from other procedures. This is an indication that there aren’t enough patients and the practice is trying to make up the shortfall by extracting more money from each patient.

Ideally, your hygiene production should be 30% or more of your total practice revenue. This allows you a cushion and some room for future growth.  

Buying a Job vs Buying a Business

George points out that any buyer should look at an opportunity as “buying a job versus buying a business“. If you are looking to purchase one practice and then operate only that business your entire career, then your net income matters most because that is the salary you collect before taxes and debt service.

However, if you are looking at purchasing a practice and being an absentee owner, then EBITDA is more important as that is the amount of money being produced for you as an investor in that business. Your EBITDA should be more than it costs you to run the business and service your loans.

Bucking the Status Quo

There is a general rule of thumb in dentistry that says a practice should cost about 60-80% of its collections depending on equipment. George thinks this is a poor assessment of how valuable a practice really is.

He points out that only in dentistry are businesses valuated as a percentage of revenue. Businesses in all other industries are valued as a multiple of cash flow (EBITDA). 

Why are dental practices valued in what George considers a flawed metric? Because it’s tradition apparently. Dentists before us were taught to expect a selling price of 60-80% collections, and this same thinking applies to both buyers and sellers. Because everyone believes the same thing, everyone in the market has the same expectations. 

George points out that the consequence of this valuation system is that some dentists will overpay for practices. Dentists who do their due diligence will be able to find a great deal on other practices.

For example, a buyer might pay 60% of collections for a practice that should only be worth 40%, but the buyer and the seller both learned in dental school to expect it to cost 60% or more. Conversely a buyer may find a practice that should be valued at 100% of its collections, but the seller only expects between 60-80%, creating a terrific opportunity for the buyer. 

Making an Approach

I asked George about approaching potential sellers off-market. Specifically, I wondered what the best approach would be for an interested buyer to go about meeting a seller without going through a broker. He insists that buyers should spend the time building a relationship with a potential seller.

The process is a bit like a courtship ritual. The buyer doesn’t make their intentions known until an adequate level of trust has been achieved between both parties. Once the buyer and seller are on the same page, that’s when the buyer should bring up their interest in buying practices in the area and allow the conversation to turn naturally if the seller is actually looking to sell. If the seller isn’t interested in selling their practice, they won’t bring it up. 

Going Off-Market

Why might a freshly minted DDS or DMD go off-market to purchase a practice? Because brokers aren’t usually interested in recent graduates, especially not those with mountains of student loan debt. George says that Dr. Williams was working with brokers initially and they wouldn’t show him anything that was collecting more than $500 to $600k. Since George was in the market for practices grossing in the $1 to $1.5 million range, he decided to look off-market. 

George’s approach to finding great opportunities consists of the following three steps: 

  1. Assume every practice in the area with a dentist 55+ is available.
  2. Plan to employ the current seller after the sale.
  3. Convince current owners that you might be the right buyer.

Using the Right Tools

George used some clever methods to scope out potential buying opportunities. For help locating dental practices, George offers an Advanced Demographics Guide on his website Shared Practices which you can access by clicking here.

One tool he uses is called Google My Maps and is offered free from Google. For basic information like the age of a dentist, George performs a simple Google search and looks on each dentist’s website to see what year they graduated. Basic area demographics can easily be found on zipwho.com. For more advanced dental demographics, George recommends Dentagraphics

Knowing What to Look For

George makes it clear that along with location demographics, visibility is his top criteria. Most importantly, he wants passing cars and pedestrians to see the practice easily to ensure a healthy influx of new patients.

Generally, dental offices are in areas with a lot of commercial real estate and thus, a lot of competition. When evaluating an opportunity, buyers should be aware of how many dental practices are in the area and how much residential zoning is there to sustain them.

You can’t control where a practice is located. However, you can choose where you will buy your practice. The first thing you should look at when searching for good opportunities is local demographics. Next, you should look at the internal workings of the practice to ensure that it is a good financial opportunity. George created a handy financial spreadsheet which you can find here

Location, Location, Location

Nationally, there is roughly one dentist to 1,600 residents. Favorable demographics for a healthy practice are around 2,000 residents per dentist. According to George, areas with roughly 3,000 residents for every dentist are suitable places to start a de novo startup dental practice. There is enough growth opportunity to start a practice from scratch.

If you are wondering, the practice George is in the process of buying has a dentist to resident ratio of 3,400 to 1. He says that three dentists would have to move within two miles of his recently acquired practice to bring that number down to 3,000 to 1. Nine dentists would need to move in to drop it further to 2,000 to 1. You get the idea I’m sure. George is meticulous in his approach and quickly rattles these numbers off after punching a few keys into his computer. 

Clearly then, George has done his research, and he knows that there isn’t enough commercial real estate for new competitors to move in and hang their shingles. All the available real estate is taken and the dentists who are there have already signed lease agreements. He believes that the market in his locale will be quite stable for the foreseeable future. 

Doing the Leg Work

Using this methodical approach, George identified 11 practices that he was interested in buying. They had dentist to resident ratios numbering anywhere from 6,000 to 1 down to 2,700 to 1.

He scouted every location in person and created a formula to rank them objectively. His rankings were dependent on factors I touched on earlier such as street visibility, commercial to residential zoning, dentist to resident ratio, etc. After he concluded his analysis, George said that his top pick stood out far above the rest. 

It took five phone calls before George finally got a call back from the owner at his top choice. His persistence paid off. He is set to close on the practice this summer and will hopefully transition into ownership as soon as school ends.

He admits that calling potential sellers isn’t for everyone, nor is it right for every situation. Phone calls are great for smaller markets where you are targeting a limited number of practices, but they can often demand 45 minutes to an hour of your time. In larger areas, you may want to blanket local practices with postcards and wait for potential sellers to call you. 

The Path to Entrepreneurship?

Given George’s strong business acumen and his unique expertise in dental practice acquisitions, I was naturally inclined to ask him if he plans to own multiple practices. Surprisingly, George says that he currently plans to own just one. He leaves the possibility of owning multiple practices in the future open, but he insists that being an entrepreneur dentist is a mindset that requires careful and deliberate planning.

In his words, anyone looking to open more than one practice needs to be “extremely intentional” in their plan to grow their business. He also believes that you must grow quickly to make it worthwhile. You should also strive to own more than five practices. He feels that anything more than one and less than five probably isn’t worth it for reasons we didn’t have time to go into.

Transitioning Ownership

When buying a practice, the staff will naturally have to acquaint themselves to their new boss. I asked George for some insight on what could be a difficult transition period. He says that this is the one aspect of dental practice acquisitions that worries him most. He mentioned Good to Great, a book by Jim Collins that compares successful companies to less successful ones. In the book, employees at great companies are interviewed and consistently comment that they didn’t realize their company had gone from good to great while it was happening.

George says that his plan is to introduce minor changes over time. He doesn’t want to give his new employees the idea that they aren’t already doing an excellent job. He wouldn’t be buying the practice if it wasn’t a great opportunity. The staff is a big part of what makes it one. George hopes that his employees will feel that they remain great without noticing the slight changes that may be implemented over time.

Someone Gave You a Loan??

Since we are both students at an expensive private dental school, I asked George how he found a bank to loan him the money to purchase his dream practice without any experience. Note that George does not have any scholarships. Like most dental students, he is paying his tuition and living on student loans. In fact, he maxed out his student loans to provide the 6-9 months of liquidity banks would be looking for.

George identified three criteria that banks typically look at when extending a loan to a new grad: 

  1. High cash flow.
  2. A seller who is willing to stay.
  3. The seller is willing to carry part of the loan (25% typically).

Sometimes banks are willing to extend a loan to buyers even if the seller is unwilling to carry part of the loan. In such cases, the banks will usually offer less than favorable loan terms with higher interest. 

In George’s case however, the bank did not require the seller to carry part of the loan. He got favorable loan terms by satisfying just two of the three above criteria, your mileage may vary.

Different Strokes for Different Folks

We often hear from financial advisers that we should get a year or two under our belts as associates or in corporate dentistry. George obviously didn’t do things this way, but he says that it isn’t necessary if you do your research and plan diligently. Dozens of students will purchase practices this year straight out of school thanks in large part to the help they got from George. 

For students who don’t buy a practice immediately, George recommends REPAYE which I covered in a previous article. Many health professionals pay down their student loans as quickly as possible.

You won’t be able to secure a small business loan if you have no capital. George mentioned earlier that banks want to see 6-9 months of liquidity before they’ll offer you a loan for a dental practice. If you put all your money into repaying your loans, then you will have nothing to show the banks when you want to buy your first practice. 

If you are serious about paying down your student loans, then ownership is the way to go. You will make significantly more money as a practice owner than you can as an associate or an employee. A potential buyer’s main concern should be building enough capital to secure a small business loan. This means putting as little as possible toward your loan repayments. 

Focus on Things You Can Control

I asked George how he feels about the current climate surrounding dentistry. We hear complaints from dentists about dropping reimbursements, increased saturation and competition, rising tuition, fewer patients, etc. George was reluctant to weigh in, but he offered this gem, “maybe you worry about those things before you choose to be a dentist, but the second you commit to being a dentist, your focus should shift to things that you can control.”

He added that some of the things you can control include your ability to earn a high income, to pay down your debt, and to put yourself in a position to succeed. He says that helping people to put themselves in that position is why he does this. I think it’s worth mentioning that for all the dental practice acquisitions George has helped with, he does not charge anything for his time.

Why Dentistry?

I asked why George chose the field of dentistry. He told me that his mother is a dentist, and I mentioned before that his wife is a classmate at Midwestern. He said that he originally planned to be a physician, but he was concerned with the changes he saw in healthcare. George likes the freedom, flexibility, and the autonomy of dentistry.

He is from Tuscon, which is just two hours away from the Midwestern campus in Glendale, Arizona. But that is only part of the reason he chose to attend Midwestern University. George says he read a study about future demographic changes in general dentists versus specialists. He decided that technological advances and the changing landscape of dentistry favor the generalists. He believes that Midwestern has uniquely positioned itself as a school that trains well-rounded general dentists.

Peace of Mind

I can’t say what the future holds, but I agree with George that practice ownership is still the best way to be a dentist. It has its challenges, many of which we did not cover in this article. But dentistry offers us all a unique and fulfilling opportunity to control our own destiny. 

We can be our own bosses. And we can control the variables of our lives that matter most to us. The gift that George has given to so many of his fellow dental students is peace of mind. When they went out to buy their first practice, they knew what to expect. George had learned what works and what doesn’t so they didn’t have to. 

Although this is a lengthy article, there are many things I didn’t have time to cover. If you want to learn more about the topics I touched on in this article, I recommend that you subscribe to his podcast Shared Practices and learn as much as you can. 

 

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