Our thoughts . . . 07-22-09
LET'S THINK ABOUT THOSE FEES
I will not claim to be an expert on the demographics of dental practices and the dental workforce, but common sense suggests that with the decline of dental school enrollments compared to my class of 160 in 1977 and the large number of dentists expected to retire in the next ten years, there will be practices that may have great difficulty finding a worthy successor. Current practice owners have an obligation to their staff members, patients, and the surrounding communities to configure their practices to the most presentable and marketable forms. While we could discuss a variety of topics related to the curb appeal of a practice to the marketplace, the intent of this article is to focus on the importance of fees and how they relate to the ability to transition the practice to a successor.
As a practice broker, one of the more difficult issues I have encountered when selling the practice of a retiring dentist to a younger buyer is the reluctance of the seller to raise fees during the few years prior to putting the practice on the market. This usually happens because the seller is winding down his career, is financially sound, and is reluctant to "burden" the patients with a fee increase. This presents a problem for buyers because most practices are financed on the basis of their cash flow, and buyers need to be able to service that debt without hindering their own ability to make a living. Offices with fees that are too low present cash flow inadequacies that shrink the pool of potential buyers, and as I will explain later, may have negative impacts on the patient base in the long run.
The expenses to run a successful dental practice rise continually, and if fees are not periodically increased to cover those expenses, cash flow will suffer and the market value of the practice will decrease. It has been my experience that dentists who are interested in purchasing and financing an established practice generally need to see an overhead of less than 60% of total revenue. This will help to ensure compensation of 28-30% for the doctor and leave 13-15% for debt service and capital improvements. If these numbers are not met after a cash flow analysis of your practice, the seller will have a difficult time attracting a buyer. Let's look at an example of how a fee increase of only 10% may take a practice from being unmarketable to marketable. Note that not only would the practice have more revenue available for debt service, the provider would receive a higher salary for his or her labor.
|
|
Before 10% fee increase |
% of revenue |
|
After 10% fee increase |
% of revenue |
|
Income |
$500,000 |
$550,000 |
|
||
|
Rent/utilities |
$30,000 |
6% |
|
$30,000 |
5% |
|
Salaries |
$125,000 |
25% |
|
$125,000 |
23% |
|
Supplies |
$35,000 |
7% |
|
$35,000 |
6% |
|
Lab |
$45,000 |
9% |
|
$45,000 |
8% |
|
Other |
$75,000 |
15% |
|
$75,000 |
14% |
|
Subtotal |
$310,000 |
64% |
|
$310,000 |
56% |
|
Dr.’s Salary |
$150,000 |
30% |
|
$165,000 |
30% |
|
Total |
$460,000 |
92% |
|
$475,000 |
86% |
|
Excess Earnings |
$40,000 |
8% (inadequate for debt service) |
|
$75,000 |
14% (adequate for debt service) |
Here is another more personal example of how an office that chooses to charge fees that are below the market rate can be difficult to transition to a new dentist. Let's say a patient comes in with a problem that needs treatment, and the new dentist quotes a reasonable market rate fee of $850. The patient is upset, because the
"old doc" only charged $600 for the same procedure. The patient leaves the practice because he or she feels taken advantage of, despite the fact that every other dentist in the area charges the same $850 for the procedure. Even after the patient realizes this, they will seldom return to the practice. The only way for the new doctor to soften the blow is by giving the patient a large discount—lessening the value of that patient's file. Many potential buyers will pass on this opportunity rather than face the confrontations.
Let's clear up some misconceptions that many dentists have when they are confronted with the idea of raising the office's fees. First, if you haven't raised fees in the last 36 months and think a 10% increase is too much—you're probably mistaken. Think about how much your rent, utilities, supplies and employee compensation costs rose over the course of 36 months.
If you think your patient base will leave you if you raise the fees 10%, you're probably mistaken. As a dentist who practiced for more than 30 years and owned metro, suburban, and rural offices, I can assure you that your patients will not flee from your practice if you increase your fees to maintain your cash flow. I would say that less than 10% of patients even noticed that the fees had been increased, and less than 1% ever made an issue out of it.
Most important, if you think having low fees is appreciated and makes you a "nice guy" in the eyes of your patients and staff—in the long run you're probably mistaken. Don't be benevolent with low fees. All of us do pro bono work for those who truly are in need. If you have bad feelings about receiving higher profits due to your fee increases, donate the excess earnings to the charity or organization of your choice. In a worst case scenario, your practice doesn't sell, you close the doors, your staff is unemployed and your patients are left to fend for themselves and may now have to travel considerable distance at considerable expense to get treatment. You will have done them no favor.
It is, of course, unethical to discuss fees with other dentists in order to fix prices, but there are legitimate ways to find current market values for services, ranging from professional fee surveys, journal articles and editorials, insurance plan fee submissions and subsequent reports from those insurance companies.
In summary, if you are of the opinion that you can sell your practice with low fees and inadequate cash flow for the purchasing dentist, you will more than likely be disappointed regardless of where the practice is located. Your standard of living may have been less than you had hoped and retirement may prove difficult. Additionally, since you will have done your patients a disservice by not being able to attract a worthy successor to your practice, your legacy may not be what you pictured when you first hung out your shingle. Certainly there are other issues that may ultimately decide the salability of your practice, but you don't have to let low fees be the deciding factor.
Sharp-eyed readers may notice that this is a rework of an article I wrote for the Missouri Dental Association's Focus magazine in the summer of 2007. Recent events would suggest that the text is still very relevant.
Steve Wolff, DDS
UMKC Class of 1977