Have you abdicated the throne?

Dec. 19, 2013
As a dentist becomes more experienced, his clinical skills become second nature. However, office management still requires the dentist's unending attention.

by Gretchen Lovelace, MS, CFP, CPM

As a dentist becomes more experienced, his clinical skills become second nature. However, office management still requires the dentist's unending attention. Complacency by an older dentist in managing staff and overhead expenses may cost him a fortune. The lost fortune results from excessive overhead costs incurred prior to the practice sale, and the reduced value of the practice is due to poor management at the time of sale.

When a dental practice is sold, practice profit and newer equipment are the primary sources of value. If overhead costs creep up over the years, the profit is reduced, which causes a reduced sale price. The sale price is reduced because the buyer must be able to pay the practice overhead, have money on which to live, and still have enough to pay the bank note on the money borrowed for the purchase. Less profit means less money to pay the bank note, thus reducing the amount that can be borrowed by the buyer.

Hypothetically, if the practice overhead is under 55% of gross collections, 45% remains. After a sale, this can be split into 12% to pay the note, and 33% payment for the buyer's labor and profit. However, if the seller abdicates management to his front desk and all accounting to his CPA, the seller is surprised to discover that his overhead is 70% of the gross income, not 55%.

This same seller is clueless as to what happened to the missing 15%. Unfortunately, this 15% is what the buyer needs to purchase the practice. If a practice grosses $500,000, the extra 15% is $75,000 per year of lost profit. Over five years, that 15% adds up to $375,000. This painful $375,000 loss is compounded when added to the resulting sale price reduction.

SOLUTION: Don't abdicate your throne during the last few years before retirement. Take back the crown! Start reviewing profit and loss statement percentages relative to gross collections. Clean up the waste in the supplies. Take back the checkbook and see exactly where the money is going.

Some areas of overspending that are often discovered in practice transitions are:

a. Office supplies -- The electronic age has reduced postage, paper use, and copying costs. Office expenses should be less than .5% to 1% of the gross income.

b. Dental supplies -- Buy supplies in bulk for discounts, and use "first in first out." When switching products, use all of the old before opening the new product. The new target is 4% to 6%.

c. Staff -- With the aid of computers, electronic insurance, and proper scheduling, the total staff compensation should be 24% or less. In the twilight of a practice, compensation increases disproportionately to the income. Unfortunately, these practices have staff compensation ranging from 30% to 50% of the gross income. Consider changing to lower hourly compensation plus a bonus. The staff compensation (including all benefits and taxes) then depends on collections and the staff then gets 24% of collections.

d. Medical waste handling -- Dentists often overspend significantly in this area. Most disposable drapes, paper, and gauze can go directly into the trash.

e. Storage units -- Most old equipment in storage is not worth the storage costs.

f. Interest charges -- Interest charges are detrimental to financial health. If a dentist is over 50 and still has debt, there is a problem. The solution is to stop all spending and make getting out of debt a top priority.

g. New equipment purchases -- Within two years of retirement, it is generally ill advised to purchase new equipment because the cost is rarely recouped at the practice sale. However, with five years or more to retirement, investing in digital radiographs and other upgrades may be wise. This allows a dentist to reap the benefits and make the practice more attractive to buyers.

Contact me for a free review of your profit and loss statement, or for the formula for a workable bonus system to prepare for a future practice sale.

Gretchen Ohlmeyer Lovelace, MS, CFP, CPM, is the past national president of ADS, Inc. Gretchen lectures at LSU School of Dentistry and at national, state, and local dental associations. Her primary focus is ethical practice transitions. Contact her at [email protected] or 877-674-9564.

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