It’s the time of the year that many practices will be reflecting on the past financial year. Profit and loss statements will be produced and tax returns completed. For many practices it was perhaps the best financial year in their history. Owners will be considering expanding or developing their own premises. New South Wales or Victorian owners can probably ignore this article as the current lockdown is likely putting any expansion plans on hold. Although, both these states will likely experience a large uplift towards the end of the year as lockdown conditions are eased.
Nonetheless, this expansion decision needs to be done in a calculated and analytical way. Initially, cashflow projections and breakeven points are important to understand the feasibility of expansion. In order to calculate a cashflow breakeven point we need to obtain the clinics current profit margin. This can be obtained from your profit and loss statement and obtaining an accurate earnings before interest, tax, depreciation and amortization figure (EBITDA). We then look at the yearly loan repayments on the fit out and equipment and also additional rent repayments. We divide this by the profit figure to obtain the additional revenue needed to breakeven on the expansion. We’re assuming the money needed for the expansion will be financed.
For example, if our profit margin is 25% and additional loan repayments for the fit out and equipment 80K/year then we will need 320K in extra revenue to breakeven on the expansion from a cash flow perspective. This is purely from a cashflow perspective and does not consider tax benefits, depreciation benefits and any profit margin increase (the profit margin should increase as billings increase thus lowering this breakeven point). The tax and depreciation benefits will make this expansion more favourable. Obviously, as the repayments come off the cashflow will become much better and the breakeven point no longer a concern.
Although, extremely important to understand, there is more to the decision to expand then just a cashflow analysis. The current growth trajectory of the clinic needs to be analysed and if the clinic has capacity in the current premises. Each dental chair performing general procedures can bill roughly up to 750K. Further, the competition and population growth also need to be considered. Is it a competitive area? Is there projected population growth to fill the additional chairs?
Moreover, the clinics overall billings and profitability needs to be considered. Is the clinic running efficiently to justify expansion? Also, the current location may have some attribute making it undesirable (poor signage, poor parking etc) and/or the leasing rates may be exorbitant.
Finally, the proposed expansion or relocation tenancy needs to be examined. What kind of incentives are on offer? Are rental rates reasonable? and if going into a self owned premises – what investment returns can be expected on the commercial property?
The expansion decision is certainly multi-faceted and this analysis may come naturally to some owners. However, we have recently had an influx of clients interested in expanding and unsure how to proceed. We have therefore introduced a tailored report to do the analysis for our clients through a dental practice health check. Please see the below link for more information.
We also cover this and much more at our practice ownership seminars. Our next practice ownership seminar is coming up in Brisbane on the 9th and 10th of October 2021.