Welcome to Part 3 of Aligned Dental Partners three-part educational series to help dentists and group dental practice owners run a more profitable and valuable business.
Part 1 – Hygiene is not a Loss Leader
Part 2 – “How to get supply and lab bills to account for less than 10% of revenue”
Part 3 – “What is the value of your practice?”
Aligned Dental Partners’ Approach
As a leading consulting firm to dentists and group dental practice owners, Aligned Dental Partners can help value your practice or dental group and maximize your company’s value at time of sale via “EBITDA/Profitability” Coaching and Consulting. ADP works with owner dentists to determine the value and understand the components of what your practice is truly worth. More importantly, we can show how to increase your company’s value and position yourself for a premium exit. Whether you plan for a capital event in the near future or 20 years from now, put the value of your practice front and center to make every day count toward the bigger picture –increasing the value of your company.
What is EBITDA and Why is it Important?
Twenty years ago before the flood of private equity into the dental industry, few dentists understood what EBITDA meant. As investment bankers became involved in the industry, they needed a way to value the dental businesses the same way they valued their other portfolio companies.
EBITDA is a bankers term that defines the net profit of a business after normalizing expenses and owner’s pay. It stands for Earnings Before Interest, Taxes, Depreciation and Amortization. This metric is used in almost all dental deals structured today, whether it be securing a bank loan (perhaps to purchase another practice), mergers, or selling your practice(s) to another dentist or DSO. Your practice is worth a multiple of your EBITDA, depending on how much revenue it generates, net profitability, existing infrastructure, and the growth your company is achieving. Most solo offices are worth 2-4 times their EBITDA, while sophisticated DSOs can exceed 12-14 times. Having a healthy EBITDA means having a valuable business. This is your value! The EBITDA target is 20% of collections or higher – where do you measure up?
Some Pitfalls to Avoid
- Many owner dentists determine the health and value of their practice by total collections and what they have in their checking account. While these figures may give a decent indication of money coming in and going out of the practice, they are not necessarily tied to the profit and loss of the practice, overhead percentages, and costs that may be out of line with industry standards.
- Poor bookkeeping/accounting – owner dentists should utilize their P&L’s each month, instead of when the accountant gets around to sending it. The owner and bookkeeper or accountant should have a mutual understanding of expectations around providing timely P&L statements. P&Ls should be very detailed but are often lacking which leads to numerous expenses being dumped into “buckets” where they don’t belong. This hinders your ability to identify areas of concern and take action.
- Not understanding how to properly calculate the net profit of your business. Too often we see dentists “going to market” without having properly “added back” or “adjusted” their one-time, and non-recurring expenses. Having a broker value your business without understanding all your possible options for deductions can drastically lower the value of your business.
Best Practices to Consider
- To be a successful dental business owner it is in your best interest to intimately know your profit and loss. This begins with securing a detail driven bookkeeper or accountant that utilizes a robust chart of accounts.
- Review your P&L on a monthly, quarterly and annual basis, which provides the opportunity to identify areas of concern and act accordingly. As a result of consistent analysis, you are in a position to better control your business’ EBITDA.
- Organize your financials so you can properly calculate EBITDA and normalize the owner doctor(s) pay to a standard associate wage.
- Additionally, understand the targets for overhead so you can truly measure your practice performance.
Overhead Targets for Group Practices as a Percentage of Overall Practice Revenue:
Doctor Compensation: 20%
Staff Compensation: 22%
Dental Supplies: 5%
Lab Costs: 7%
General & Administrative: 7%
We encourage you to look at your profit and loss statement and determine where you stand in relationship to these standards and ask yourself “what needs to change?”.
Aligned Dental Partners has the tools and resources to help your practice build its net worth. For help with your practice, and a free one-hour consultation on how to increase your EBITDA…