De Novo Growth Strategy for DSOs
What Is De Novo Strategy for DSOs?
De novo, latin for ‘from the beginning,’ indicates a DSO that is built from the ground up. De novo growth strategy for DSOs through a brand new location can help attain a lower cost of acquisition, stretch capital, and allow installation of your own technology and culture.
Dental service organizations, or DSOs, are growing competitively in the current market. Prices are up and offices are looking for higher multiples than ever before. Your options are to acquire an existing practice, or start with a clean slate (de novo). De novo growth requires less of an upfront investment than purchasing existing cash flow. It doesn’t require taking on as much debt and gives flexibility to invest in infrastructure. In today’s DSO world, you need a support system that will sustain long-term operations. Choosing how to deploy capital is critical to your strategy.
How to Utilize De Novo Growth to Maximize Your DSO Strategy
1. Know your model.
When choosing the de novo path, it is crucial for you to understand your business model. You need to know who your patient is and identify populations in your footprint that offer the greatest probability of success. Key factors of your population include age bands, financial bands, members of households, and access to care options. Consider launching a target market analysis to hone in on your ideal pool of customers. You can also pull the information from your practice management software (PMS), run a patient census through office questionnaires, or hire experts in the field.
Once you become comfortable with what your typical patient looks like, take that information to local demographers or experts in the data field. They will help you target broad territories or get as granular as specific corners of towns and cities. You can also observe who other retailers (your competitors) are targeting and how. Consider how Burger King often opens across the street from McDonald’s. Competitor DSO or complementary companies host a wealth of information on your target audience–see if you can learn from them!
2. Choose the right location.
Once you know your business model and target audience, you must find a location that fits your footprint. Know the size requirements and work with a broker that has experience with strategy for DSOs. Can you cut the floor for plumbing? Is the space ADA accessible? What other electrical and industry-specific questions can you identify to save time as you search?
You can also target a demographic area based on audience location, foot traffic, parking, and competition. Decide if you prefer a retail location or standalone suite. Calculate the costs and weigh the benefits of your different options.
3. Know the terms of your lease.
Once you decide on a DSO location, make sure you understand all aspects of the lease. Important commercial lease statutes to keep in mind are rent structure, short-term versus long-term lease terms and expenses, transfer structure, personal exposure, holdover rent, and a nondisturbance agreement.
You should also offer an LOI that favors your de novo growth strategy. Build in your preferred tenant improvements (TI), rent abatement, covered utilities, and other friendly terms like designated parking, signage locations on buildings, or street pylons. Prioritize your needs and negotiate the ones that you are willing to bend on.
Landlords should be conscious of the long-term nature of DSO usage, particularly in the current market. If you are considering an eventual portfolio sale, an acquirer will want the remaining number years left on the lease to be significant. A 10-year lease with two five-year options is a good strategy and one that landlords should be amenable to.
4. Understand EBITDA.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) gauges your operating performance and is a key phase of the roadmap strategy for DSOs. EBITDA calculations are used by most financial institutions and buyers to understand an organization’s true performance by providing a baseline to measure value. When developing your de novo strategy, you must understand EBITDA to strategize growth–for both the same store and a new store.
Consider the one million dollars you plan to invest. You can build out a practice for $350 million in construction, $200 million in equipment, $50,000 on launch marketing, and still $400,000 to hit the ground running. That same one million dollars will buy much less in the M&A market! This exercise will show you that with less capital, you can choose to grow faster, invest in infrastructure to support your multilocation DSO, and grow EBITDA for higher multiples in the future with a de novo strategy for DSOs.
Are you considering launching either an acquisition or de novo strategy for your DSO? Learn more about our services and how we can help!