When You Should (and Shouldn’t) Worry About Declining Revenue in a Dental Practice
When evaluating a dental practice to buy, one of the first things you’ll review is the financial history, specifically the profit and loss statements from the previous 3–4 years. Many buyers are quick to assume that declining revenue is a red flag, but that’s not always the case. In fact, a practice with decreasing revenue could present a fantastic opportunity—if you know what to look for.
Understanding the Story Behind the Numbers
At first glance, declining revenue may seem like a deal-breaker. After all, who wants to take over a failing business? However, the key is to dig deeper and understand why the revenue is declining. Is it due to a shrinking patient base, or is it because the current dentist is slowing down as they approach retirement?
For example, I recently visited a practice with a client where the dentist was only performing panoramic X-rays. He didn’t even have equipment to take periapicals (PAs) or bitewings. This means a lot of potential treatment was missed, but the patient base was still strong, as many of them were regularly scheduled for hygiene. In this case, the decline in revenue was due to the dentist’s lack of thorough care, not a lack of patients.
On the other hand, I’ve seen practices with increasing revenue that are actually quite risky. I recently evaluated a practice where the revenue had doubled over the past three years. However, the growth was entirely driven by the doctor’s production, and there was no hygienist on staff. If the current dentist left, the practice’s revenue would plummet because it was solely reliant on that one individual’s output.
Spotting Opportunities in Declining Practices
A declining practice isn’t always a bad thing. Sometimes, it can be a hidden gem waiting for the right person to unlock its potential. Here are some signs that a practice with declining revenue could be worth pursuing:
The Patient Base Is Still Strong: If the hygiene schedule is booked, but the dentist’s production is slowing down, that could be a sign that the practice just needs a new, motivated owner to turn things around.
Outdated Technology or Services: If the practice is lacking basic modern equipment, like in the case of the panoramic X-rays, upgrading technology and expanding services could immediately improve production and patient outcomes.
Good Staff and Systems in Place: A practice with a dedicated team and solid operational systems is much easier to revive. If the staff has been with the practice for a long time, you can step in and focus on growing production without the need for major restructuring.
When Growth Can Be Risky
Not all practices with increasing revenue are a sure bet. If the growth is entirely dependent on the current dentist, that can be a major red flag. For example, if a practice’s revenue has doubled over the last few years, but it’s because the doctor is working overtime and performing all the production themselves, the practice’s success hinges entirely on their availability and energy level. Once they leave, the revenue could drop dramatically.
Instead, look for sustainable growth that’s built on a mix of doctor and hygiene production. A healthy balance between the two ensures that the practice can continue to thrive even if the owner steps back a little.
What to Look For in Financials
When reviewing a practice’s financials, consider these factors:
Patient Retention: Is the hygiene schedule still busy? If so, it indicates that patients are staying with the practice, and the issue might be the doctor’s production rather than patient loss.
Doctor vs. Hygiene Production: Check how much revenue is generated by the dentist compared to the hygienist. If it’s heavily skewed towards the doctor’s production, be cautious, as it might indicate over-dependence on one individual.
Expenses and Profitability: Review the practice’s expenses and net income. Even if revenue is declining, a lean and profitable practice with manageable overhead might be easier to grow than one with high expenses and low margins.
Turning a Declining Practice Around
If you decide to purchase a practice with declining revenue, here are some strategies to turn it around:
Upgrade Technology: Introduce modern diagnostic tools and treatments to improve patient care and increase production.
Expand Services: If the previous owner wasn’t offering higher-value services like cosmetic dentistry or implants, you can step in and fill that gap.
Reinvigorate the Team: A fresh, motivated owner can breathe new life into the staff, increasing morale and performance.
Final Thoughts
Declining revenue isn’t always a red flag. Sometimes, it’s a sign that a practice needs new leadership to unlock its full potential. As long as you can identify the cause of the decline and have a plan to address it, a practice with declining revenue could turn into a profitable and rewarding investment.
If you’re in the process of buying a dental practice and need help evaluating it, I offer consulting services to guide you through the decision-making process. Visit my website for more information, or leave a comment below if you have any questions!
