How to Value Overhead

Here’s what you should pay attention to when evaluating overhead of a dental practice.

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What is the typical overhead for a dental practice? In your quest to buy the right practice, you’ll come across a lot of numbers, and it can get a bit overwhelming. Let’s demystify this one.

First, let’s start with the answer. The median overhead for a dental practice, as a percentage of collections, is 61.9%. That number fluctuates a bit based on practice size (see table below). Now that you have the answer, a little context would be a good idea.

What is overhead?

Put simply, overhead is the expense of running a business. In a dental context, these are the necessary expenses of running your business before you, the owner, pay yourself. Overhead includes expenses like staff costs, equipment, building maintenance, marketing, and so on. Again, these are necessary costs for running the business. Overhead does NOT include things like your own salary, auto expenses, that trip to Hawaii for a seminar, or the interest on the loan you got to buy the practice in the first place.

Here are a couple other terms you’ll hear thrown around in discussions of overhead:

EBITDA – Earning Before Interest, Taxes, Depreciation, and Amortization. Yeah, it’s a mouthful. Don’t stress too much about it; in broad terms, it’s mostly a fancy accounting term that means roughly the same thing as overhead.

Profit margin – This is exactly the inverse of overhead. If a practice has overhead of 61.9%, then its profit margin is 38.1%. This is the money you have left over to pay yourself, or invest it further in growing your business.

Why should you care about overhead? When you’re looking at many practices for sale, overhead is a quick way to get an indication of the health of the practice. To be clear, it doesn’t tell the whole story, but it will give you a good jumping-off point to ask relevant questions about the practice’s operations.

For example, as I said before the nationwide median overhead for a dental practice is 61.9%. But what if the practice you’re looking at has 64% overhead? Has that owner let costs get away from them? Not necessarily. It could just be a larger practice, which tends to bring higher operating costs. Here’s the nationwide breakdown:

As a rule, except for very small practices, the larger the practice, the more the overhead. That’s because as a practice grows, the owner needs to bring on additional staff to manage the production needs. More collections means more patients and more procedures, which may mean more hygienists, more office staff, or maybe an associate. It seems the limit to how much dentistry one doctor can do while also effectively managing the business itself is somewhere between $1M and $2M in collections.

In fact, staff costs are the number-one expense in any dental practice. So if you see a practice with overhead that comes in below the average, there’s a good chance that the practice owner has found a way to manage their staff effectively and achieve more with fewer people. Whether you buy that practice or not, that’s a dentist worth taking to lunch for a brain-picking session.

And what to make of the smaller practices with overhead percentages approaching those of large practices? That’s simply a matter of math. Some expenses in dentistry are fixed, like insurance payments or rent, and spreading those over a smaller annual income leaves less for profit. It isn’t necessarily an indication of an unhealthy practice.

When you know a practice’s overhead, you don’t know the whole story. But you’ve got a good place to start with some questions about the practice. Is this practice paying too much for lab fees and equipment? How was this owner able to shave a few percentage points off his overhead? Does that dentist prefer working with seasoned hygienists, for whom she pays a premium?

And as always, as you look at overhead and profit numbers, if you have any questions that I can shed some light on, please reach out and let me know.

Read More:

How Much Should a Dental Practice Collect? | Negotiating a Dental Practice Purchase

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