We expect dental practices that bill above 1 million to produce significant business profitability. We generally anticipate this to be around 20% of turnover. However, recently we’re analysing more and more of these practices that are far off this target with some even making a loss. Profitability typically rises with billings. There are exceptions such as when going from 2 to 3 chairs as the staffing ratios become less efficient. Nonetheless, the profit figure as a whole should increase with billings. It is important to note business profitability does not include the owner’s earnings through their own clinical work; it is the profit left after paying all expenses, associates, principal dentist/s etc.
The 3 main examples we’ll discuss for this article is a practice we analysed in Sydney billing 1.4 million and making an 80K loss, a practice in Melbourne billing 2 million but making a 50K business loss as well as a group of practices in Sydney billing 6 million but only making a profit of 10K.
In all 3 examples above the owner did a considerable amount of the billings in the practice. The owners own clinical earnings disguised the lack of business profit being produced. That is, they were still drawing out money and didn’t notice (or care) that the business was effectively making a loss. However, when it came time to sell the practice this lack of profit severly impacted the saleability and expected price. It is important that prospective buyers can recognise when the vendor is not taking a market wage and add this back as an expense.
In the Sydney example auxiliary staff (DAs/Receptionists) were being paid much higher than expected industry norms and significantly greater than the award. Further, the practice was also overstaffed with inefficient/lazy rostering. Auxiliary staffing costs should be between 19-24% of turnover. Further, the Sydney practice was spending 170K! per year on advertising. Marketing costs vary with the stage that the practice is in. Newer practices generally need to market more than established practices. As a guide the industry benchmark for advertising is 3-6% of turnover. However, this was an established practice that had been operating for 23 years.
In the Melbourne example, the practice had a Hygienist and OHT who were being significantly overpaid for what they were billing. The Hygienist was being paid an effective commission of 63% with the OHT being paid an effective commission of 56%. We do acknowledge that having a Hygienist and OHT allowed the owner to increase their own billings. However, this weighed heavily on business profitability and also the saleability of the practice.
The group practices in Sydney had their auxiliary wages 15% above the industry benchmark. They had a layer of management as well as excess staff which was draining profitability. Further, their collective rents were much higher than the industry benchmark of 5-10% of turnover. Exorbitant rent can lower the profitability and ongoing viability of practices (please also see our previous posts on leasing costs). The owner may have signed up for a certain rental rate many years ago but through annual increases or market reviews the rent may have jumped drastically (this is especially apparent in Sydney).
These examples are becoming more common as costs rise in our industry. Wages, consumables and rents are all putting pressure on the bottom line. We’ll likely see more examples of this going forward. Nonetheless, it is critical for owners to regularly assess the financials of their practice and measure them against industry benchmarks. We typically do this every 6months for our practices. Further, any prospective purchaser of these practices needs to understand why profitability is lacking and if there is scope to increase profitability.
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We’re holding our 3rd Dental Practice Owners Conference (DPOC2023) in October this year. This is the premier event for practice owners and not to be missed. We have an amazing line up of speakers including Bhupesh from BDO who will be discussing dental industry benchmarks in the post covid world. There will also be other spectacular events and a trade show with exhibitors from the major dental companies present providing conference only specials. The learning and networking opportunities will be immense. Please see the link below for more information.
Also, our next practice ownership seminar is coming up in Brisbane on the 18th and 19th August 2023. This seminar has sold out in previous years – please register ASAP to avoid missing out.
We also offer expert guidance in various areas of practice ownership. Please see the below link for more information.