There are a couple of things that everyone who has ever bought or sold a dental practice will agree on. Firstly, you must really want to do it. Secondly, you must keep focused on the end game throughout the process. Thirdly, that there are certain things you must spare no expense on to save money. Staff Costs being one of them.
Whatever your dental practice sales journey looks like it is important that the profitability of the business does not suffer during the transition phase. In essence, the vendor should focus on ensuring the profitability of the business is as much if not more than it was when a deal was agreed upon. There are some things where you should spare no expense to save money.
It is not very palatable for a seller to be faced with efforts to renegotiate a sale price as completion comes into sight because profitability has fallen away.
We wrote a blog a while ago called ‘Spending the Buyers Money’. It is a reminder to vendors that during the transition phase vendors should be very cautious about making financial commitments which their prospective buyers may have to deliver on.
Staff costs for any business is a key metric when it comes to determining the profitability of a business. It is the fine balance of employing a team of people. With the skills your patients need and them earning an amount which keeps them motivated and the business profitable.
We cannot get away from the fact that ‘business profitability’ is the main driver of ‘business value (£)’.
Many of the dental practices we are acting for are well established in successful businesses. All sounds good so far.
A forensic review of the staffing costs often reveals an over-inflated payroll which is not delivering the best value back to the business.
This can be the result of a loyal, hardworking, and stable team being awarded many years of incremental increases. Where the length of service may overshadow the financial contribution some team members are making to the profit margin. It may be that as the incumbent Principal you are prepared to sacrifice some profitability. To have your trusted team around you. That is of course fine, but when you come to sell prospective purchasers and their lenders may not feel so benevolent.
You may not have a raft of debts and loans, but you can be 99% certain that whoever does buy your dental practice will. Although corporate buyers do not have to ‘go to the bank’, they are paying with investors money, which they are expecting a return and repayment on.
So, when it comes to managing staff costs we advise our clients who have agreed to a sale, but who have not completed, to:
- Maintain turnover to manage the % of staff costs.
- Not give above inflation pay rises to team members.
- Work to keep overall payroll costs within industry benchmarks.
- Discuss & agree to pay reviews to team members with the incoming owner(s).
- Project the financial consequences of pay reviews on the profitability of the business.
Because it is their money that you are planning to spend.
So, what does good look like?
Or what did good look like prior to the lockdown?
Across the full spectrum of dental practices, the most profitable dental practices keep their staff costs at between 17%-20% of turnover.
We advise clients to aim for 18-19%.
If your staff costs are at 10%-12%. Then that will likely be considered unsustainable and probably insufficient to provide adequate patient care.
Conversely, some client’s staff costs are running at 24%-30% of turnover. Not only are these costs eating into your day-to-day profitability they are eroding the value of your dental practice.
Any reduction in staff costs will immediately improve your bottom line.
This is an example of a client we are currently helping prepare to go to market. The dental practice had a turnover of £950,000. Assuming the cost base of the business was within industry standards the valuation of the business would have been around £1,500,000.
The staff costs were 30% of turnover. These costs were pulling the profitability of the practice down so hard. That when calculating true EBITDA and extrapolating a valuation the dental practice had lost £450,000 of the expected valuation. As a vendor, you are selling a sustainable profit margin. The components of which are your hard-earned turnover and your cost base.
Remember, it is not all about simply cutting costs. If you do more revenue with the same cost base, your % costs come down and the profitability rises.
The key is to start the review process early. To move the needle you will need to make some decisions. Then it will take some time for the benefits to flow through to your bottom line.
Prospective buyers are reluctant to take on practices that need a restructure. So it makes more sense for the incumbent to do this. If you want the buyer to, then it is likely they will want to mitigate their risk by renegotiating the purchase price.
In summary, do the numbers, run a tight ship, ask for advice, and spare no expense to save money on staff costs. Because all these changes improve your outcome.
If you would like us to help come up with a strategy then please contact us today. There may be some simple fixes. Or we may refer you to a business coach.
The caveat to this article is that the data quoted were sourced prior to the Covid – 19 pandemic of March 2020. Data does not yet exist to show what % of revenue staff costs are currently running at. However, the messaging remains the same, and you can of course refer to your own financial information as it was prior to the pandemic.
We also understand that there has been an increase in employer pension contributions. Under the workplace pensions rules which have increased staff costs.
If you would like to talk about anything to do with buying, selling, or financing a dental practice please Contact Us today.