I have purchased a practice a couple years ago, and the previous owner (who I get along with great and couldn’t be happier that he is still around) is now requesting that he increase from 30% production to 40% production. The reasoning is fairly deep, but I’ll give somewhat of an explanation…….
He does regret that he sold the practice, and now we want to expand the practice and really put a lot of energy into it. He states that he feels that in order for him to be able to do all of this, he feels that he should have an increase in his pay. Any thoughts would be appreciated.
The overhead for him will NOT be 60%, it will be less. To find out how much less, run the numbers, it’s not that tough. I suspect at MOST, as a percent, the additional cost for his production is somewhere between 30-40%, lets say 40%, he gets 35%, that’s a total of 75%, so you’re still getting 25%. Meet him in the middle and move on.
If in fact the OH for his production IS 60% you have bigger issues then his compensation.
This may generate some lively debate, here it goes. Lets play with some real #’s:
Lets start off with a typical one doctor practice, hygienist does $200k, doctor does $600k, total is $800k with overhead at 60% that’s $480k. Of that overhead, generally, somewhere between 25%-30% is FIXED, which means, 30%-35% is variable, or driven by production.
Let’s assume we add another practice on top of this IN THE SAME FACILITY AND we don’t have to add space or equipment. You simply schedule the use of the facilities accordingly. So you add another doctor that does $600k and an additional hygienist that does $200k for a total of $800k. The total practice revenue is now $1.6 million. What ADDITIONAL overhead costs have you added? Generally it’s just the variable piece between 30%-35%, in my response above I suggested as high as 40% ADDITIONAL overhead by adding another doctor. So on the ADDITIONAL $800k, the ADDITIONAL overhead is $320k, giving you total overhead of $800k (original $480k+add’l $320k=$800k). $800k overhead on a $1.6 million practice is 50% overhead. This is NOT uncommon with multi-doctor practices. IF overhead with one doctor is 60%, you SHOULD see an improvement in overhead percentage when adding an additional doctor or adding additional revenue.
First, that’s why I suggested that if the ADDITIONAL overhead being added for the 2nd doc is 60% (not 40% at most) then you’ll have bigger problems.
So, if that additional doctor (with hygienist mind you) is generating $800k AND the additional overhead is $320k that leaves $480k on the table to use towards the doctor’s compensation. If you are paying 30% of $600k, that’s $180k, you are left with $300k as the profit, not a bad deal. If you bump it to 40% of $600k, that’s $240k leaving you with ONLY $240k. Heck, now you’re EQUAL in compensation to that doctor. So even if you settle for 35%, you can still earn MORE off that additional doctor than what the other doctor is making.
If you want to play with percentages only, the additional overhead to add the additional doctor might be 40%, you pay them 40% of THEIR revenue (which equates to 30% of the $800k in additional revenue) that leaves 30% of the total additional revenue falling to the bottom line.
Now, I’ve tried to keep it simple, certainly there may be additional payroll taxes IF the doctor is an employee, maybe they negotiated additional professional expenses that YOU agreed to pay (insurance, dues, CE, licenses, etc.) however, those won’t come close $240k or $300k.
By the way, the additional overhead items as I see them?
Lab and Supplies – 15%
Assistants, Hygienists and FD – 20% (many times the additional labor cost falls below the typical labor cost as a percentage of overhead)
Other Miscellaneous Expenses – 5%T
otal additional Overhead – 40%S
o even if you believe the additional overhead is 50% and you agree to pay the doctor 40% (of his revenue, or 30% of the total) still that leaves 20% of $800k or $160k. Still making money.
Anyway, that’s how I see it and I’ll say it again, you can analyze your specific situation and determine what the additional costs are by having that doctor there and calculate what their contribution is to the bottom line to help you determine what impact an increase from 30% will have.
I believe the impact to your bottom line by this additional doctor, who you’re currently paying 30%, is greater than the 10% that some believe.