What is diversification?
If you’ve invested your money (or thought about it) then you’re probably familiar with the term “diversification.” It is a ubiquitous word in the financial investing space and anyone who’s read an investing for Dummies book can tell you: one of the cornerstones of a solid investment strategy is Diversification. The concept of diversification put simply is: invest your money in multiple places to reduce your risk.
What Diversification can do:
- Manage Risk
- Avoid costly mistakes by adopting a risk level you can live with
With a diversified financial portfolio you are not putting your money all in one place. The age-old idiom says it best: Don’t put all of your eggs in one basket.
How does diversification translate to dentistry?
If the dental practice you own (or plan to own) is your investment we recommend you apply the same rule of Diversification here. With a lot riding on this large investment (your life’s savings, your future retirement goals, your family’s livelihood) we’d bet that the possibility of this dental office performing poorly (due to risk factors inside or outside of your control) is not a risk level that you’re willing to live with. So invest smart! There are many ways to diversify your dental office ownership investment. The two most common ways to diversify:
- Diversify in Dental Practices
- Diversify in Dental Services
This post will dive into diversifying your investment in dental practices and will plan to touch on Dental Service Diversification in a later blog post.
Dental Practice Diversification
Owning a practice is the dream for many dentists. The freedoms of being your own boss are enticing and sound rewarding. Because the decision to own is so emotional the thoughtfulness and judgment applied to setting that investment up for success is sometimes clouded. Not to mention the number of factors involved in opening or purchasing a practice bound for success. From site selection and marketing to employee training there are so many variables that can influence a practice’s success.
Many dentist owners fail to realize that with the freedoms of 100% ownership and 100% rewards comes exposure to 100% of the risk. 100% of the ownership of their practice means an owner has 100% responsibility of the management of the practice. If you own 100% of one location, your eggs are all in one basket. In many cases doctors in this scenario would say: “You don’t own the practice — the practice owns you.”
What happens if factors outside of your control inhibit the practice’s success? Maybe extensive road construction begins out front. Maybe the anchor business (a grocery or department store) in your shopping center goes out of business. Maybe staff members act dishonestly. These are just a few examples of the risks all practices face. How do you handle this dip in practice revenue if this is your one and only practice? These risks are completely out of your control. It is a tough spot to find yourself in.
What if you owned a percentage in 3-5 locations (different markets/different patient demographics) and partnered with a support organization to assist you with running the business sides of the practice? Yes, you would be disappointed if one office fell on hard times; but you have 2-4 other offices to pick up the slack. For the same investment value (and rewards potential) you could achieve with one location on your own; you could have ownership of 3-5 locations with MB2 Dental Solutions and reduce your risk exposure. You have just diversified your investment.
With investments in 3-5 practices your investment has been diversified, limiting your risk exposure. By diversifying that investment you do not have the burden of 100% of financial risk and you do not have 100% of the responsibilities of the management.