Magnifying glass: dental practice valuation

Should You Buy a Dental Practice Near Other Dentists?

Learn about the pros and cons of buying a dental practice near other dentists.

Location, location, location. Yes, it’s important. I’ve talked around this a bit already, but let’s tackle a common, and specific, question: What if the practice I’m looking at is geographically close to 3 other dental practices? Or 5 other practices? Or…if you’re in Draper, Utah like me … 22 other practices in a two-mile radius?? .

Your practice location plays a major role in its value. But this comes with a major misconception. Some dentists think they should only buy a practice if it’s physically distant from other dental practices. They think, “If I’m too close to other practices, I’ll lose customers to my nearby competitors.”

This is perfectly reasonable! It’s also usually wrong.

Common sense has led us astray here. Let’s dig into why.

Dentists (and grocers, and car salesmen, and so on) don’t cluster together because they like each other, or to twirl their mustaches and collude more easily. It’s for a simple reason, that, once understood, should make the prospect of having neighboring practices much easier to bear, and perhaps even desirable.

Yes, you probably WANT to be close to at least a few other dental practices. Why? The answer lies with something called the “nash equilibrium.”

Instead of dental practices, let’s use selling ice cream on a beach as a way to illustrate the concept and keep this easy. If you have a one-mile stretch of beach and want to sell ice cream there, it makes perfect sense to set up shop right in the middle, to make it as easy as possible for as many people as possible to get to your ice cream.

Let’s say you’re raking in the sweet ice cream cash and some other retired dentist wants to get in on the ice cream game as well, and they set up their own ice cream stand on the same beach. Ideally, you would both set up your ice cream stands an equal distance from each other, so you could both reach the maximum number of potential customers.

But ideal is almost never a synonym for reality. In reality, one of the ice cream salesmen would eventually get the bright idea to move their cart closer to the center, pulling away some of the other cart’s customers and gobbling up more market share.

The other ice cream cart owner is no dummy, so he moves his cart closer to the middle as well, trying to even the playing field. After some frustrating back and forth, both vendors end up side by side, right in the middle of the beach, which is now the Ice Cream Zone, where everyone knows to go to get their sweet treats.

The ice cream vendors have reached a simplified version of what’s called a Nash Equilibrium. If you’d like to see a 4-minute video that explains this even better, check this out.

Now, it’s true that a dental practice isn’t an ice cream cart and isn’t on wheels, so the situation from our example wouldn’t play out over days or weeks. But over the course of years and decades, the same phenomenon has played out in any number of industries, including dentistry.

In fact, far from being a sign of future difficulties, a cluster of dental practices, is probably a sign that a lot of hard work — finding a client base and optimizing geographically — has already been done by others before you. Zoning laws, which you may run into in your search, are often just a formalized acknowledgement of this phenomenon.

That doesn’t mean there aren’t things you can and should do to differentiate yourself from the competition! Being in the same location doesn’t mean you have to act the same as the other practices around you. This could be as obvious as having a different specialty — a pediatric dentist isn’t going to compete much with an endodontics specialist.

But it could be even simpler than that. Even if you’re a general practice next to another general practice, if you do the small things well, you can easily elevate your practice compared the others around you. Does your office pick up the phone every time patients call? Do you keep appointment start times within seven minutes of when they’re scheduled? Are you able to explain the why and how of procedures to patients in plain English? If you can get even these basics down, you’ll be ahead of most of your competition right away. Add some awesome staff, a nice-looking interior, and modern equipment, and your proximity to competition will matter less and less.

In your search for the perfect dental practice, location is key. But don’t get too hung up on how many other practices are in close proximity to one you’re thinking of buying. Instead, pay more attention to other important factors, like existing client base, overhead percentage, and so on. Ultimately, as with any location situation, matching a practice with strong past performance with your own solid business practices will be the best predictor for success.

Oh…and make sure at some point today you slip into a conversation, “So today I was learning a little bit about the Nash Equilibrium with regards to my practice location…” Guaranteed to be just as impressive as selling ice cream on the beach.