Wednesday, April 19, 2017
So you’re in the market looking to buy a dental practice, and you’ve seen information from brokers with summary practice information.
As you’re looking at the overhead information, you think that some of the OH stats look really low and that must be great, and some look really high, and that must be terrible, so you quickly disregard the high OH practices and move on. Well, I’m here to tell you that sometimes the opposite is true.
The ones that appear to have low overhead may not have low overhead at all, or there’s a not so good reason the overhead is low….that’s going to have to wait for another blog. This blog is about the practice with what appears to be high overhead, which you think is bad.
Like ANY practice purchase transaction, a buyer MUST do their due diligence, and I’m here to tell you that sometimes high overhead can be a good thing.
First, higher overhead while generally not a good thing will usually generate a lower asking price. Higher overhead means lower profits; lower profits usually mean lower values. So from a buyer’s perspective, a lower price can be a good thing in terms of price.
Second, once you dive into the overhead and find out WHY it’s so high, you might learn a little more about the practice and how the owner is actually running the practice. Maybe they’re being lazy and not shopping around for the lowest cost of supplies or worse; maybe they’re letting a staff member handle all the supply ordering without any controls. Maybe they’re using the most expensive labs out there. Maybe they’ve cut back to working three days a week which can make some of the fixed expenses seem high like rent, utilities, insurances, etc. and maybe they’re still paying staff for four days per week.
Third, maybe they’re a fairly aggressive taxpayer and like to try and deduct as much as they can thru the various expense categories. Sometimes this is the hardest area to verify and confirm, other times this can be detected and verified. This is when we get to advise the buyer that the overhead will be lower under their watch.
Fourth, one common aspect of high total overhead is high labor costs. As noted above, maybe it’s because the staff is getting paid for more hours than they’re working. That can be an easy fix, just add another day of production to match the hours they’re getting paid for…assuming the patients are there to allow this. Maybe the owner has been very generous and the staff is paid at the top of the market or even above the market for the area, or the owner is paying 100% of their health insurance premium and some pension contributions. This is a little more difficult to address and will usually require a buyer to “ease” into proper compensation and benefits. Sometimes it fixes itself when the employees leave, and the buyer can replace with market rate pay.
Lastly, and the main reason for this blog, is maybe it’s because the hygienist comp is running 15% of revenue when it usually runs around 8-10%. Unfortunately, some buyers and their advisors won’t even look this deep to know exactly where the issue is. This is one reason we want to see the W-2s for each year and break them down into their departments. Many times, if hygiene wages are high it usually means the practice is generating a lot of hygiene production and you’ll be able to see this when you breakdown the production by provider. You may see hygiene production at 40% of total production when it usually runs around 25%. When you see it at 40% or more, you’ll almost always see hygiene wages greater than 10%, and that drives up the overhead percentage. It also usually means many of the other categories will be higher than the normal ranges as a percentage of revenue because there’s not enough dentistry. This isn’t always the case; however, we see it quite a bit with high overhead, high labor practice stats.
The lesson to learn here is DON’T automatically run away from a practice that appears to have high overhead. Look at some of the other stats first like the breakdown of production by provider, the specific department wage percentages to revenue and look at the schedule to see how many hygiene hours they have per week compared to dentistry hours. This information alone may provide the insight you need to pursue the opportunity and do a little more digging to see what the real deal is.
Sometimes these high overhead practices are the goldmines you often read or hear about. Good luck and happy practice hunting!
About Tim LottTim Lott, CPA, CVA has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator on Dentaltown.com. You can reach Tim at email@example.com or any of the other dental partners/principals at (800) 772-1065 or firstname.lastname@example.org. For more blogs, visit our Dental CPAS blog page.