Staff planning & budgeting guidance

Published: 3/9/2020
By Denplan & Lily Head Dental Practice Sales

Keeping track of your practice costs and tightening things up where needed is part and parcel of preparing to sell your practice.  Lily Head at Lily Head Dental Practice Sales is an expert in helping dentists ‘Exceed their business ambitions through the sale, purchase and financing of a dental practice.   

Here, Lily Head discusses the impact staff costs can have on the value of your dental practice and some benchmarking data for Principals to consider.

Do you have patience and determination?

There are a couple of things that everyone who has ever bought or sold a dental practice will agree on.  Firstly, that you must really want to do it.  Secondly, that it can sometimes take a bit of time.

“Wherever you are in your dental practice sales journey it’s important that the profitability of the business doesn’t suffer during the transition phase”, says Lily.  “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.”

It is never palatable for a seller to be faced with efforts to renegotiate a sale price as completion

comes into sight because profitability has fallen away.

A fine balancing act

Lily shares, “I wrote a blog a while ago called ‘Spending the Buyers Money’.  It’s 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 figuring out the profitability of a business. Employing a team of people means achieving a fine balance between their dental skills and a paycheque which also keeps them motivated and your business profitable.”

There’s no escaping the fact that ‘business profitability’ is the main driver of ‘business value (£)’.

Lily tells us that a forensic review of staffing costs often reveals an over-inflated payroll, which isn’t delivering the best value back to your business.

“This can be the result of a loyal, hardworking and stable team being awarded many years of incremental pay increases. Where length of service may overshadow the financial contribution, some team members are making to the profit margin. It may be that as the Principal you’re prepared to sacrifice some profitability to have your trusted team around you. That’s of course fine, but when you come to sell, prospective purchasers and their lenders may not feel so generous.

“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’re paying with investors’ money, which they’re expecting a return and repayment on.”

Keeping your staff and your buyer happy

So, when it comes to managing staff costs, Lily advises her clients who have agreed but not yet completed a sale, too:

• 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 and agree pay reviews to team members with the incoming owner(s)
• Project the financial consequences of pay reviews on the profitability of the business.

Why? Because it’s the buyer’s money you’re planning to spend.

What does ‘good’ look like?

“Or should I say, what did good look like prior to the lockdown?” asks Lily.

• 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.

Lily’s client: a case study

“This is an example of a client we’re 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 (Earnings Before Interest, Taxes, Depreciation, and Amortization) and extrapolating a valuation, the dental practice had lost £450,000 of the expected valuation.  As a vendor, you’re selling a sustainable profit margin. The components of which are your hard-earned turnover and your cost base.

In this example the Principal is undertaking steps to get the staff costs more in line with industry standards and for those profits to flow into the bottom line before selling.

“The key to moving the needle is to start the review process early.

“Remember, it’s not all about simply cutting costs. If you do more revenue with the same cost base, your % costs come down and the profitability rises.

“Prospective buyers are reluctant to take on practices which need a restructure. So it makes more sense for the Principal to do this. If you want the buyer to, then it’s likely they’ll want to mitigate their risk by renegotiating the purchase price.”

My advice to clients is:

Do the numbers, run a tight ship, and ask for advice.

Because all these changes improve the outcome of selling your practice. If you’d like Lily Head Dental Practice Sales to help you come up with a strategy then please contact them today. There may be some simple fixes, or you can be referred to a business coach.

Contact Lily Head today

^Caveat:

^{The data quoted in this article was sourced prior to the COVID–19 pandemic. Data doesn’t 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.}

^{Furthermore, we understand that there has been an increase in employer pension contributions under the workplace pensions rules, which has increased staff costs.}

About Lily Head

Lily Head is the founder and visionary of Lily Head Dental Practice Sales.  Lily is an entrepreneur who is focused on 'helping dentists exceed their business ambitions'.  Lily is an outstanding negotiator with an in-depth understanding of the dental business transfer market and the players within it.

Lily Head is an elected member of ASPD (Association of Specialist Providers to Dentists) and regularly speaks at BDA hosted and independent events all over the UK on dental business transactions.