We ask two experts to answer the same question on a complex issue.
Tom Snyder, DMD, MBA
Question:
I want to buy an existing practice, but the current staff is making significantly more money than the normal rate for the area. I'll have a lot more costs as a new owner, including a sizable practice loan for my own personal financial needs. What are my options to try to retain the staff but still pay myself responsibly?
Highly compensated staff can be a double-edged sword. Usually these individuals have been employed for many years. Their biggest asset is patient relationships as they can be extremely helpful in transferring goodwill, especially if your seller is retiring. Remember, if certain staff members are not meeting your standards of performance, you can replace them with lower-paid personnel. Instead of making major changes in personnel after you acquire the practice, give all team members a 90-day period to prove their value to the practice. There are several steps to take in reviewing the staff's compensation package.
The first step is to review staff retirement benefits. If your employees have been receiving sizable pension benefits, it may be advisable to institute a new retirement plan, but one that costs significantly less. If the seller had a qualified pension plan, and if he or she retires, it would be discontinued. For example, a 401(k) or a simple IRA may be good alternatives as the percentage of staff salaries paid by an employer is usually low.
The next step is to review the staff health insurance plan. Do you intend to continue with the existing plan or consider alternatives that may be more cost effective? Also, if you intend to have your staff pay part of the premium, consider implementing a section 125 plan. This will allow your employees to pay their premium portion in pretax dollars. This is a simple plan to implement, especially if you are planning to use a payroll service.
The next step is to review vacation benefits. Many long-term employees may have five or even six weeks of paid vacation, so consider scaling back vacation time to save expenses. Finally, review staff salaries to see how much out of line they may be for similar staff positions in your area. However, the most important strategy for you to reduce staff costs is to increase practice revenue. Admittedly, having highly compensated staff is a dilemma, but at the end of the day, patient retention is even more critical, especially if your seller is retiring.
Peter J. Ackerman, CPA, CVA
Retaining the staff is essential for a successful transfer of goodwill. Three primary components of goodwill will keep the patient base coming back to the practice: the practicing dentist, location, and staff. You can typically change one of the three components, but rarely will you retain a significant portion of the patient base if you change more than one.
A cash flow projection should be a part of every transition analysis. The first step in a practice cash flow projection is to "normalize" the historical financial statements, adding back personal, elective, noncash, and one-time expenditures. The goal is to adjust income and expenses to be what the purchaser believes he or she will experience after the transaction. Due to the aforementioned reasons, adjustments to staff compensation should be considered carefully, if at all. A cause-and-effect principle must be adhered to in the normalization process. If I reduce staff compensation, what effect will it have on revenue? If staff compensation is high because of too many employees, and there happens to be one expendable employee whom the rest of the staff would be happy to see go, it is reasonable to reduce staff compensation. However, this is rarely the norm. Typically, a retiring dentist has overpaid staff members who have been with the practice for years. In this instance, the staff compensation must remain as is.
If staff compensation cannot be reduced and the reasonable compensation required to attract a dentist to purchase the practice cannot be reduced, then the only two alternatives are to reduce the purchase price to account for a lower debt service ... or if the practice is attractive enough and the purchaser believes there is enough potential to increase revenues, grow into an overhead that is more in line with the industry norms.
Tom Snyder, DMD, MBA, is the director of transition services for Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or [email protected].
Peter J. Ackerman, CPA, CVA is a principal of ADS Midwest, a firm that provides practice brokerage, appraisal, and consulting services to dentists and related specialists throughout the Midwest, and past president of ADS. He can be reached at [email protected] or call (855) 463-0101.
