Overhead and The Million-Dollar Practice Myth
Dr. Lean Larry and Dr. Overhead Andrew
–Written by Dr. DeAngelo S. Webster
““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
Allow me to introduce two distinct dentists to you.
Firstly, there’s Dr. Larry, who we’ll refer to as ‘Lean Larry‘.
Larry runs a practice that generates a middling $500,000 annually, with an overhead of 40%.
Secondly, meet Dr. Andy, whom we’ll nickname ‘Overhead Andy’.
Andy’s practice yields braggable $1,000,000 per year, yet carries a 70% overhead.
When you do the math you will realize that $1,000,000 after a 70% overhead expense yields a remainder of $300,000 profit. And $500,000 after a 40% overhead expense yields the same $300,000 profit.
Though they both net an identical $300,000 annually after deducting expenses, Andy works twice as hard, doubling Larry’s output for the same income. Given the choice, most would prefer to be in Lean Larry’s shoes.
In the U.S, the standard overhead for dental practices usually hovers around 65%. My own dental practice historically operates with an overhead around 40%. The term ‘overhead’ can be manipulated to paint a rosier picture of a practice’s financial health than reality dictates. Here’s my candid definition of overhead and one that I recommend you adopt:
Overhead represents the total revenue your practice generates, minus ALL of its expenditures.
These overhead costs encompass:
- Any recurring loan payments related to your practice (often omitted when dentists boast about their earnings).
- Rent or mortgage payments if you own the property.
- Professional and third-party charges (accountant, IT services, SEO firm, etc).
- All office and clinical supplies.
- Facilities expenses including water, energy, phone, internet, landscaping, snow removal, etc.
- Laboratory fees.
- Employee wages, benefits, and payroll taxes.
- Any other expenditures that draw money from your business account.
These costs can fluctuate dramatically from one practice to another, explaining why overheads can range from 35% to an extreme 80%.
After factoring in overhead expenses, the notion of running a ‘Million Dollar Practice‘ can seem misleading and futile, resulting in an inflated operation growing aimlessly. In the business world, a venture’s value is determined by its profitability: the same applies to dental practices. A common rule of thumb when purchasing a dental practice is to pay approximately 65% of its gross revenue. Just the simple example above should start to illustrate to you that having a ‘million dollar practice’ leaves so much information off the table that it doesn’t really tell us anything much at all about how financially successful the doctor or practice really are. A particulary dentist friend of mine was known on the old Dentaltown Boards to have an overhead in excess of 95% despite producing $2,000,000 per year.
In today’s market, Lean Larry could likely sell his practice for around $325,000, whereas Overhead Andy could garner around $650,000. Assuming both practices are debt-free at the time of sale, Andy seems to have the upper hand, netting an additional $325,000. However, let’s delve deeper. If Larry and Andy had operated these practices for 25 years, Andy would have generated an extra $12,500,000 in comparison to Larry, without taking home an extra dime of profit.
Suddenly, the extra $325,000 seems quite insignificant; that’s essentially $12,175,000 evaporated into overhead costs, an amount Andy generated but never benefited from. Lean Larry may not have produced this $12 million, but he also didn’t exhaust himself to earn it. In effect, Andy’s hard labor for over $12,000,000 went unpaid. Would you work strenuously, generating $12,000,000, and not get paid for it? Alarmingly, many dentists do.
If such an arrangement was made for charitable purposes, it would be commendable. However, in this scenario, it is not. Overhead Andy believes he’s a successful businessman since he runs a “million-dollar dental practice.” Meanwhile, Efficient Larry has been smoothly sailing for the past 25 years, earning the same income as Andy but with significantly less work. No thank you, Andy, you can keep your high-overhead million-dollar practice. A ‘Million-Dollar practice’ is not a worthy goal; it’s a deceptive illusion.
If you were a prospective buyer, would you choose Larry’s or Andy’s practice? The answer should be clear.
I acknowledge an assumption I’ve made here: an increase in revenue to the million-dollar mark will likely result in a corresponding rise in overhead percentage. Why do I infer this? After years of studying and analyzing dental practices, I’ve found that this is typically the case. Dentists often struggle to replicate the efficient systems of their smaller offices in larger setups, leading to exponential increases in overhead as revenue grows. Ideally, one could scale a $500,000 practice with 40% overhead to a $1,000,000 practice with the same overhead. It’s possible, but rare. Many dentists have either never seen it happen, don’t believe it’s possible, or are content generating the $12,000,000+ of unpaid work previously mentioned. Sadly, some dentists start off with high overhead and never experience the freedom that comes with low overhead. Those who have spent millions building their practice or purchased an already high-overhead practice often find themselves in this category. Reducing the overhead of a high-cost practice is considerably more challenging than ramping up a low-cost one. Once overhead is high, it’s challenging to reverse; the pressure to “feed the beast” becomes relentless.
Low Overhead is About Saying No
An overhead of 65% is generally accepted as the industry norm, with some practices falling slightly above or below this benchmark.
If you, as a dentist and business owner, aspire to reduce your overhead, it demands rigorous focus. As eloquently put by Steve Jobs in the shared video, “Focus is not about saying yes to the task at hand. Rather, it’s about saying no to the myriad other compelling ideas that vie for attention.”
This means saying ‘no’ to sppend half a million dollars or more on launching a new dental practice.
It means saying ‘no’ to purchasing a million-dollar practice as a quick ticket to success.
It means saying ‘no’ to the sales pitch for expensive ‘dental toys and tech tools’.
It means saying ‘no’ to hiring an expensive office manager simply because you lack a clear understanding of your own business operations at your 5 employee practice.
It means saying ‘no’ to following the statous quo of 65%.
I would argue that there is an ethical dimension to maintaining a low overhead for your practice. A practice with lower overhead ultimately benefits our patients as well. High overhead results in high bills. High bills necessitate maintaining a high revenue stream, which could pressure dentists to recommend costlier or more aggressive treatments. This may not be in the best interest of the patient. And this absolutely does not apply to all dentists with high overhead models – but we do see this pattern prevalent in corporate dental chains. Such chains often find themselves needing to generate huge revenue to pay their revolving staff of dentists and still have enough to pass on to their corporate heads. There is always pressure to produce enough money to feed the beast.
It’s an open secret that these chains, colloquially referred to as Dental Mills, have a reputation for promoting aggressive treatment planning and falling short in delivering quality long-term care. The quality of service diminishes as dentists find their schedules overburdened with more patients and procedures than they can reasonably manage. Similar pressures are felt by dentists burdened with substantial debt obligations and substantial high bills and payroll numbers to meet every month. The pressure to produce can break some dentists.
In contrast, a low overhead practice operates free of financial pressure to produce. A low overhead style practicing dentist can match the average dentist’s net pay with a few fillings, exams, and prophylaxis. There is no need to feel compelled to ‘sell treatment’, or plunge into financial despair if a patient declines a treatment plan. In a setting like this myself, I am privileged to devise treatment plans and work in an environment devoid of financial pressure on myself, my practice, or my patients. Production goals are not necessary.
There is a multitude of ways to practice dentistry, and each dentist must decide which approach best suits them, their business, and their patients.
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