Our thoughts . . . 08-02-07
GENERAL PRACTICE OVERHEAD TARGETS
Dr. Erin Flood of Prairie Village, Kansas recently asked our office about a couple of overhead category targets, so I think this might be the right time to visit this issue both as it applies to office profitability and to practice marketability. To be clear, we at EMA do not compile practice data to produce these numbers ourselves. Rather, we rely on the annual practice budget ratios given in the October issue of the McGill Advisory, an excellent monthly publication for practice and financial management issues. If you would like subscription information, give us a call. Their ratios seem to work well for our cash flow analysis in determining the profitability and hence, marketability of a potential listing. Although the vast majority of our listings are General Practices, the newsletter also has category recommendations for all specialty practices. Another excellent article on this subject was written by Allen Schiff, CPA, CFE and published in the June 2006 issue of Dental Economics entitled 10 Critical Numbers to Watch…and How to Back Them. I contend that it was an excellent article as we at EMA agreed with most everything he had to say.
We feel strongly that general practice offices keep overhead ratios in these ranges:
*includes salary, wages, bonuses, payroll taxes, benefits but NOT retirement plan contributions.
Total Staff Compensation*
Clinical Supplies
Lab
Rent
Office Supplies/Postage
Legal/Accounting
Continuing Ed<28%
6%
7.3%
6%
2%
1.5%
1%
Adhering to these targets should result in a true office overhead of between 55 and 60%. We will leave the difference between the overhead shown on a tax return and the true or normalized overhead to our next discussion, but let’s review the basic P & L statement we use at EMA to help determine a practice’s value and marketability:
| Gross Revenue - Overhead Gross Profit - Producer’s Salary Net Profit or “Excess Earnings” |
55-60% 28-30% 12-15% |
Remember if there is not adequate revenue for the buyer to make a fair wage and have excess earnings available to service debt and make any needed capital investments, the marketability of your practice will suffer. Even if you are not currently planning to transition your practice, why not enjoy the benefits of improved profitability and your own capital improvements?
Steve Wolff, DDS
UMKC Class of 1977