In my last post, I discussed a recent and real-life example of a dentist who was understandably put off by the asking price of a practice they were looking at. My advice was not to discount high overhead, it may not be a bad thing for new buyers and different issues that contribute to it may be easily fixed. Overhead, whether seemingly too high or too low, can be a tricky to analyze, and usually requires some digging to find out what’s really going on. Here, I give you several areas where things you might initially see in the practice P&L may not be as bad as they appear and what it could mean instead.
- Office Expenses and Supplies
The first thing as a new buyer is to understand what is in this category. I’ve seen sellers attribute just about any random office expense to this supposed catch-all category, and the details and adjustments aren’t always valid. The industry norm for office expenses and supplies is 1 to 1.5 percent and should not include things like payroll processing, merchant services, employee expenses, software fees, or dental supplies. We also find many owners “perks” in office expense and supplies.
- Utilities/Telephone/Cable-Internet
I usually don’t see too many issues here, but it’s an area that comes up frequently enough to merit including in this list. Expenses like electric, phone, and internet could be renegotiated at lower rates or even eliminated or replaced with newer technology. I’ve also encountered sellers who pay their home utilities thru the practice and sometimes the telephone expense includes yellow page advertising for thousands of dollars that a buyer won’t keep. It’s on the buyer to ask and verify reasonableness.
- Accounting and Professional Fees
These are necessary fees, of course. But if they seem high, know that accounting and professional fees might also include a CPA who does payroll and monthly compiled CPA financial statements that aren’t necessary if you’re using a bookkeeping software like Quickbooks. 3rd party payroll providers almost always cost less to process payroll than your CPA.
- Lab Fees
Lab expenses can be misleading. I’ve seen providers who do their own work in-house and as such, have a comparatively low lab fee while their lab labor is included under wages which may wind up looking higher than it really is.
- Dental Supplies
Look closer: dental supplies might also include office expenses, lab fees, equipment repair, and even software fees and outsourced IT services. Another point to note is that if a practice is using a CAD/CAM technology, that will usually cause the dental supplies number to appear higher than normal.
- Labor and Wages
Always request the W-2s. New buyers should know who is getting paid what, and why. Many seller P&Ls have one wage category for all their staff wage expense. Sometimes these wages include lab labor (noted above), janitorial, bookkeeping and family members. This can make the wage expense seem much higher than it really is AND provides NO indication as to which department may be out of whack.
It’s also important to ask for the 1099s for any contract workers. Temp workers or contract associates might be included in payroll, or they might be allocated to a different category altogether.
On the flipside, there are some parts of running a dental practice that new buyers might not know, and therefore can impact overhead and profitability. Buyers should look for these line items and make a note to follow up and adjust the projections accordingly based on their expected expenses.
- Advertising
Advertising and marketing expenses should be required for any dental practice that wants to add new patients – and that’s all of them! Not all dentists allocate much, if anything, to this category, so if you don’t see a line item for advertising expenses, expect to add it once you buy the practice. This expense could be as much as two or three percent.
- Office Repairs and Maintenance
Always look for a line item for office repairs and maintenance on the cash flow statement. Sometimes, the outgoing dentist did their own repairs or combined the expense into another category, like dental supplies or office expenses. If the former was true, new buyers should adjust their cash flow projections to include an amount for this. If the latter is true, then someone may have “normalized” those other expenses removing real overhead that the next buyer will actually have.
- Taxes
This is one area that can add to expenses if not properly accounted for. Sellers may show little to no taxable value and therefore, pay very little or no property taxes whereas the next buyer will be placing a value on the same assets and the localities will be assessing taxes on behalf of the buyer.
- Computers and Software
If the computer equipment hasn’t be updated recently, know that you may need to make room for this expense sooner rather than later after buying the practice.
- Capital Replacements
When doing the practice inspection, look at the state of the dental equipment. If it’s extremely old and outdated and will impact your ability to run an efficient, profitable practice, then adjust overhead accordingly so you know this expense will be coming. Alternatively, you can try to negotiate for a price adjustment that factors in truly outdated equipment.
My parting message is to dig deeper! Even an overhead expense that seems to meet industry standards might have more happening beneath the surface. Unfortunately, without a thorough analysis, some of these items can easily get missed and the new owner is left with many surprises once he or she takes over. Don’t be afraid to ask the broker, your dental CPA, and the selling dentist what the numbers mean, and don’t hesitate to request documentation to verify. Your new dental practice is too important to guess or assume that the overhead is stated correctly and accurately. For questions or to talk more about this topic, email me anytime at tlott@dentalcpas.com.