Entry #10

Overhead and The Million-Dollar Practice Myth

““People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are.” – Steve Jobs

Meet Dentist #1. We will call him Lean Larry.  Larry owns a practice that produces $500,000 per year on 40% overhead

Meet Dentist #2. We will call him Overhead Andy. Andy owns a practice that produces a $1,000,000 per year on 70% overhead.  

In both situations, Lean Larry and Overhead Andy are taking home the same $300,000 after expenses.  However, Andy is doing twice as much work. In that, Andy is producing double Larry, yet making the same pay.   I would rather be Lean Larry any day of the week.

The average dental practice overhead in the United States typically floats around 65%.  The overhead in my dental practice currently floats between 35% and 40%.  There are many ways to define the term ‘overhead.’  Dentists have a great ability to redefine the definition of overhead to make it sound like they are doing better than they are. I will tell you my definition of overhead and what your definition should probably be as well: because its the truth.  Overhead is your gross revenue –> all of the money that comes INTO the practice; minus ALL expenses.

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These overhead expenses include:

Your monthly practice loan payment if you have one (many dentists leave this one out to make it sound like they are making more money when bragging to friends)

Your monthly rent or monthly mortgage payment if you bought the real estate

All professional and 3rd party fees (accountant, IT provider, SEO company, etc)

All supplies – office and clinical

Building expenses such as: water bill, energy bill, phone bill, internet bill, lawn care bill, snow removal bill, etc

Lab bills

Employee Wages, Benefits, and Payroll Taxes

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These overhead expenses can, and do, vary wildly from practice to practice.  It is why one practice can have 35% overhead and another practice can be operating at an 80% overhead.

After overhead expenses we will find that the goal of having a ‘Million Dollar Practice’ is indiscriminate and pointless, other than developing a bloated practice and growing for nothing other than the sake of growth.  In business, the goal is to profit.  Profit and ability to profit is the measure of value on an asset or business: which in this case is a dental practice.  For those of you in the market to purchase a dental practice in the future – it is COMMON for a dental practice to sell for approximately 65% (there’s that number again) of gross revenue.

Today in the market – based on this rule of thumb Lean Larry from our earlier example would likely sell his practice for around $325,000.  Overhead Andy would likely sell his practice for around $650,000.  Assuming both dentists have their practice debts paid off in full at the time of sale — this is one of the few times when Andy comes out ahead. As the seller — he will generate an additional $325,000 from the sale of his practice.  However, at what cost?  Assuming that Larry and Andy both worked in these practices for 25 years.  Andy will have overproduced $12,500,000 beyond what Larry produced during the same time period – but hasn’t taken home any additional pay.   In perspective, the $325,000 bump at the time of the sale now seems like a paltry payout.  That is effectively $12,175,000 that disappeared into bills. Disappeared into overhead costs.  $12,175,000 that Overhead Andy produced and NEVER saw.  Lean Larry never saw that $12+ Million Dollars either, but he also didn’t bust his back over somebody’s mouth to generate it.  Overhead Andy produced over $12,000,000 — effectively for free.  Would you perform manual labor at your place of business to generate $12,000,000+ and not get paid for it?  Many dentists would. Many dentists do. 

If this were to be done with the intent of charity, then by all means, it would be a noble cause – but in this example its not.  It’s being done because Overhead Andy thinks he is a good businessman because he has a “million-dollar dental practice.” Meanwhile, Lean Larry has been cruising along for the last 25 years making the same take home pay as Andy. With – let me say it again; effectively half the work.   No thanks.  Andy can keep his high-overhead million dollar practice.  A Million-Dollar practice should not be a goal — it’s a meaningless myth.

If you were in the market to buy; would you opt to purchase the practice of Larry or Andy?  It should be an obvious decision.

I will now address an assumption which I admit to making.  I am assuming that with an increase in revenue up to the million dollar range, there will be a correlated increase in overhead percentage.  Why do I make this assumption?  Because from years of study and analyzing dental practices this is what I have found to be the case in the vast number of cases.  The dentist is not able to translate the efficient systems of their small office into a large office as growth occurs.  The overhead increases exponentially with the revenue increase sucking away the profits.  In an ideal situation one would be able to scale a 40%-OH $500,000 to a 40%-OH $1,000,000 practice.  And it’s possible.  I’ve seen it done.  But most dentists haven’t seen it done. And either don’t think its possible, or don’t mind producing that $12,000,000+ of free work we talked about earlier.  Heck, some dentists START at high overhead and have never experienced the freedom and bliss that comes with low OH.  If you spent several hundred thousand dollars, a million dollars, 2 million dollars to build a practice — you probably have high overhead.  If you bought a big high-overhead practice to begin with from a selling dentist, you probably have high overhead.  It is massively more difficult to scale down and correct a high overhead practice, than it is to ramp up a low overhead practice to higher revenue.  I.e. once your overhead is high, it is hard to go back; because now there is pressure as the old saying goes to “feed the beast.”  Most million dollar dental practices are big multi-chair monsters with lots of hygienists.  As Lean and Mean pioneer Dr. Rick Kushner famously once said, “Show me multiple hygienists and I’ll show you 80% overhead.”

65% overhead is the industry standard.  Some a little higher, some a little lower.  If you, as a business owner and dentist, want to commit to diminishing your overhead.  It is going to take massive focus.  And as Steve Jobs eloquently tells us in the video posted above – “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are.”  

It means saying no to spending half a million dollars on a start-up dental practice.

It means saying no to spending a million dollars to buy a practice because it seems like the easy way to hit it big. 

It means saying no to buying certain ‘dental toys and tech tools’ that a sales rep is trying to sell you on. 

It means saying no to hiring an office manager if its because you don’t understand how your own business runs.

It means saying no when your dental buddies want to sit around and complain about PPOs.  

I go as far to say that there is an ethical argument to be made for maintaining low overhead for your practice.  Low practice overhead is in the best interest of our patients as well.  With high overhead, there are high bills to be paid. High bills demands that high revenue in the practice is maintained and this sometimes may tempt dentists to push more expensive or aggressive treatments for patients.  This may not always be in the patient’s best interest.  The patient may be pressured by the dentist to do this work, as the dentist is pressured by his high bills to do this work.  We see this every day in corporate dental chains.  Corporate dental chains need to generate exorbitant amounts of revenue to pay their ever revolving staff of dentists and still have enough money left over to kick some upstairs to the men in suits.  It is no secret that corporate dental chains have the reputation that they pressure or ‘encourage’ aggressive treatment planning.  It is also no secret that these chains, often called Dental Mills, have the reputation in our industry of not effectively delivering quality long-term care to the patients.  Quality suffers as dentists have their schedules slammed with more patients and procedures than even the most good-natured of us can properly handle.  We see the same pressures applied to dentist who now have a $700,000 practice loan to pay off.  Or a $100,000+ Cone beam or CEREC to pay off.

In my practice I have zero financial pressure to produce.  I can take home the net pay of the average dentist with a few fillings, exams and some prophies.  I don’t have pressure to ‘sell treatment.’ And I don’t get a sense of financial despair if a patient doesn’t accept a treatment plan.  I am able to treatment plan and work in a style in which I have zero financial pressure on myself, my practice, or my patients.

There are many ways to practice — each dentist will have to judge for themselves which way is the best for them, their business, and their patients.

Kaizen,

–DeAngelo S. Webster, DDS

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