We assess many practices every year from all around the country, whether it be associates looking to buy in to the place they work to people purchasing a second practice. Even in divorce cases where spouses are looking at appraisals for the purposes of asset splitting.
Something we are seeing more and more, which I think is worth discussing is examples of medium sized dental practices having a lack of business profitability.
We define a medium sized dental practice as one billing above 700K but under 2 Million. Typically, smaller sized dental practices or those billing under 700K will have a business profitability of roughly 10% on turnover and larger practices or those billing over 2 Million will have a business profitability of >25% on turnover. Medium sized practices should have a business profitability of at least 20% on turnover. It is important to note business profitability does not include the vendor’s earnings through their own billings; it is the profit left after paying all expenses, associates, principal dentist/s etc.
However, we’re seeing many of these medium sized practices having a business profitability closer to 10% and some even under 10%! There are several main reasons for this that we’ll discuss in this two part series.
Perhaps the most common reason is auxiliary staff (DAs/Receptionists) are paid much higher than expected industry norms and significantly greater than the award. Further, we’re finding that some of these practices are significantly overstaffed and have inefficient/lazy rostering. Auxiliary staffing costs should be between 19-22% of turnover but in some circumstances, we are seeing great than 30%! This is something that’s common with older dentists approaching retirement who have had staff members for the last 20 years. They are on very high wages and the dentist doesn’t have a care in the world. The staff are usually friends and the arrangements are comfortable for all concerned. Often the staff are not as highly skilled but have great rapport with patients.
If you are purchasing a practice with high staffing costs, this is something that can be both an opportunity as well as a liability depending on your ability to identify the high costs and your plan to manage them.
Secondly, we’re finding Hygienists or OHTs are significantly overpaid for what they’re billing in some practices. Or put another way their effective commissions are much greater than 40%. This is, at times, difficult to determine and may not be overtly apparent. Typically, Hygienists/OHTs are paid on an hourly rate and there is a trend towards having a DA rostered with them as well. However, we do also acknowledge that having Hygienists/OHTs in a practice may allow the principal dentist or associates to increase their own billings.
If your hygienists or OHT are paid a high effective commission (use their total hourly wages to determine this effective commission) then they need to be helping convert high end treatments in the dentist’s books. If their presence is not significantly impacting conversions, then they can be a massive drain on profitability.
What other things lead to low profitability in your experience? Look out for part two where I will discuss other factors that impact profitability.
We cover this and much more in detail at our practice ownership seminars. Our next seminar is coming up in Sydney on the 28th and 29th of March 2020. There are still a few places remaining so please register ASAP.
We also offer expert guidance in various areas of practice ownership and will do this analysis for any potential purchaser of these medium sized practices through our practice purchase assessment. Please see the below link for more information.