Q: How does overhead affect the value of a dental office?
A: Overhead determines profitability and profitability determines value. (See the video for reason #2.) In conjunction with office collections, overhead is the most important value in practice management.
The relationship between overhead and collections can be like a healthy marriage; they both have to be stable and complimentary to make the marriage (or practice) work.
Look for practices that have a profit margin of approximately 40% (60% total overhead).
The majority of the time, anything below 40% profit margin/ above 60% overhead (61.7% is the current US average for all specialties) isn’t as well run as it could be.
This could mean there is a flaw in the management of any of the four main subcategories of office expenses: General Wages (Staff Expenses), Facility Costs, Supplies & Labs, and Advertising.
Looking at the profitability of the practice is a lot more difficult than just glancing at the “net income” reported on the seller’s Profit & Loss statements. You have to deduct the Seller-specific expenses, like travel, meals and entertainment, and the owner’s salary (but be leery of brokers over-deducting owner expenses).
As far as the worth of the practice, there are multiple methods in which a practice can be valued, each with its own formula and taking certain factors into account. One frequently used method is the income-based approach.
This method is heavily influenced by the overhead of the office, both positively and negatively.
If the office’s overhead is higher than 61.7%, then the value of the office starts to drop. Every percent higher than the benchmark will substantially decrease the worth of the office.
The opposite is true. If the overhead is even the smallest percentage below the benchmark, you’ll see a spike in office profitability and value.
Before you get too emotionally invested in purchasing a specific office pause and do a quick check to make sure the collections and overhead are at least close to these recommendations…then send it on over to us and we’ll take a deeper dive for you.