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Spending the buyer’s money

Spending the buyer's money - Lily Head Dental Practice Sales

We wrote previously how team members who are receptive to training will most likely quickly develop new skills, become more productive and generate more value (£) to your business.  I absolutely believe this to be true.

However, like many things in life the best outcomes often require some compromise.  Managing the dental practice staffing costs as you begin the process of taking your dental practice to market is one of them.  The point being that any increase in salary and benefits are likely to be costs born mainly by your buyer.  Not just now but for years to come.  Effectively you are ‘spending the buyers money’.

It is essential that your staffing model enables you to deliver your clinical services in a safe and effective way.  In fact, if it comes to light during the due diligence period that a practice is under staffed, it may well be that a buyer and the lender would add back into the calculations the cost of growing the team.

The average mean staff cost as a % of turnover is around 16% – 20%.  NHS practices a little less.  Private practices a little more.

These are the numbers that will give buyers and their lenders comfort that the practice is being run efficiently.   They are looking for a focus on cost management (not to be confused with cost cutting).

Many of our clients will have been in business many years. We realise that often our clients will have staff who have shared their journey and whose expertise and loyalty has been rewarded over an extended period.  We also understand that staff earn incremental increases as they become more qualified and competent.  The trick there is to make sure those people are then carrying out high value tasks which reflect their training achievements and salary.

If your staff costs are in line with expectations, then it is important to maintain that right through to completion.

If your staff costs are above the mean, then we are available to advise on how you can manage these things.

One of the best ways of improving your staff cost % is of course to simply add turnover without adding team members.  This is something we can consult on with you.  We can spend time with you understanding your cost base.  And then provide guidance on how to bring your staff cost % closer to the mean.

One thing we always advise.  If any or all your staff are due a salary review during the period of a sale, then you should always involve the prospective buyer.  Effectively you are spending the buyer’s money (or his lenders money).  The buyer will be responsible for any decisions you make that this time for years to come.  As you know pay reviews impacts NI contributions, holiday pay, pension contributions, redundancy etc.

Let’s do some simple calculations to demonstrate how staff costs can impact the value of your practice.

Assume an owner operated dental practice.

The figures below are simply to demonstrate the point.

  • Turnover £500,000.
  • Staff costs @25% of revenue = £125,000.
  • This reflects a 7% overspend based upon the mean of 18% amounting to £35,000.
  • On a valuation based on profitability (preferred by lenders) your profits are being reduced by £35,000.
  • Assume a valuation of 3.5 times EBITDA then the practice valuation will be reduced by £122,500.

An accountant might say that the extra money you spend in staff costs is not only lost to you year on year but is also lost to you again when you sell the business.

If you would like to discuss anything about buying or selling a dental practice please Contact Us today.

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