Dental Practice Acquisitions: A KPI Guide for DSOs

DSO Practice Acquisition Checklist

At the end of the day, executives want their DSOs to grow, and to grow profitably. The process of acquiring a dental practice is a significant endeavor for an organization, necessitating a comprehensive assessment of the prospect practice's financial and operational health, as well as its fit to the organization. 

The largest and most senior DSOs will only look at the top 10%–15% of US dental practices, and will conduct a comprehensive due diligence process. This should include a combination of financial analysis, operational assessment, market research, and qualitative evaluation to make an informed decision. The specific KPIs and qualitative metrics considered may vary based on the DSO's objectives, acquisition strategy, and industry dynamics, but as a general rule only the best of the best are on their radar.

So how do you know if a practice is the best of the best?

While it’s entirely possible to write books on the subject, we’ve set out to present a comprehensive checklist of KPIs that are crucial for facilitating informed decision-making on practice acquisitions. While this list is certainly not exhaustive, it’s a good starting point for assessing a good match for your organization.

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FINANCIAL EFFICIENCY & PERFORMANCE METRICS

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Revenue and Profitability | From a top-down approach, when considering a practice acquisition, it is essential to evaluate the annual revenue, net income, and EBITDA. These establishing financial metrics provide insights into the practice's revenue generation and profitability.

Patient Metrics | Understanding the active patient count, new patient acquisition rate, and patient retention rate is vital for assessing the practice's patient base and growth potential. These metrics shed light on patient attraction, conversion, and loyalty.

Overhead Percentage | Analyzing a practice’s overhead percentage allows decision-makers to gauge the practice's cost management efficiency. This metric compares total practice expenses to revenue and highlights areas for potential optimization.

Collections Ratio | A key sign of any healthy practice. The collections ratio reveals the practice's ability to collect billed charges successfully. It reflects the effectiveness of the revenue collection efforts/processes, and indicates the priorities of a practice owner. You can learn more about collections ratio benchmarks in our white paper here.

Accounts Receivable | Similarly, it’s best to evaluate the practice's A/R engagement process. Look at the average collection period, outstanding accounts receivable, and the efficiency of the revenue cycle management to determine potential areas for improvement.

Insurance Participation | Review the insurance contracts and participation agreements of the dental practice. Assess the percentage of patients covered by participating insurance plans to understand the potential for stable revenue streams and the impact on reimbursement rates.

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PRODUCTION AND TREATMENT FACTORS

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Production per Provider | Evaluating the average production or revenue generated by each dental provider in the practice provides insights into individual provider productivity and revenue contribution. Knowing your best (and worst) providers can be an essential element in making a decision on acquiring a practice.

Treatment Mix | To identify growth opportunities and optimize revenue generation strategies, observing the distribution of different types of treatments performed by the practice (the treatment mix) is a useful practice.  Evaluate the revenue contribution from different treatment categories to determine if the practice aligns with the DSO's strategic focus and service offerings.

‍Case Acceptance Rate | Assessing the case acceptance rate, which measures the percentage of treatment plans accepted by patients, allows DSO decision-makers to gauge the practice's effectiveness in treatment presentation and patient education.

Technology and Infrastructure | Gauge the robustness of practice's technology infrastructure, including dental software, electronic health records (EHR), and digital imaging capabilities. Consider the level of integration, scalability, and potential for optimizing operational efficiency through technology enhancements. 

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OPERATIONAL METRICS

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Staffing and Team Efficiency | Evaluating staffing levels, turnover rates, productivity, and performance of non-provider staff within the practice helps identify areas for improvement in operational efficiency and resource utilization. Consider the level of qualifications and experience of the most tenured staff.  Understanding the productivity of the office or practice manager is key to these insights.

Appointment Utilization Rate | Analyzing the appointment utilization rate provides insights into the efficiency of scheduling and resource allocation, maximizing productivity and patient access.

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REPUTATION & PATIENT SATISFACTION
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Online Reviews and Ratings | More of a qualitative measurement, assessing the practice's online reputation through platforms like Google, Yelp, or Healthgrades offers valuable insights into patient satisfaction and public perception.

Patient Satisfaction Surveys | In the same vein as reviews, gathering feedback through patient satisfaction surveys enables decision-makers to make a high-resolution  assessment of the quality of care, customer service, and overall patient experience within the practice.

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MARKET & REGULATOR FACTORS

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Geographic Location | Analyzing the practice's location in terms of population demographics, competition, and market demand helps evaluate its growth potential and market positioning. DSOs commonly search for high-quality general family practices that are mainstays in their communities. These are often in suburban areas with a stable or growing population and a broad base of insured and cash-paying potential patients

Market Share | Understanding the practice's market share within its geographic area provides insights into its competitive position and potential for expansion.

Regulatory Compliance | Ensuring the practice complies with relevant healthcare regulations, such as HIPAA, OSHA, and state-specific requirements, is essential to mitigate compliance risks associated with the acquisition.

‍Practice Culture and Fit | Assessing the practice's culture, values, and patient care philosophy is crucial to determine its compatibility with the DSO's mission, vision, and operational structure.

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The bottom line

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The successful acquisition of a dental practice hinges on a comprehensive evaluation of its financial performance, operational efficiency, patient satisfaction, and cultural fit.

By utilizing a KPI wishlist, DSO decision-makers can make informed decisions and identify practices that align with their growth strategies. Such well-informed practice acquisitions can lead to enhanced revenue, increased market share, and strengthened organizational capabilities. 

And to maximize growth potential, decision-makers should contextualize candidate practices within their existing DSO network. Assess synergies, economies of scale, and the ability to leverage resources, marketing, and operational support to drive sustainable growth.

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For groups and DSOs looking at dental practices to acquire, a few benchmarks to consider include:

• An annual production revenue of $1 million+
• A modern facility with 5+ chairs
• Central location in an area within 60 miles of a major population center
• Easily accessible and/or high visibility location
• Owner/doctor commitment to 2+ years after the sale

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