It’s evident that one of your primary goals as a dental practice owner is to have a profitable practice. Therefore, you invest into the aesthetics of your practice, new technology, updated finish-out, marketing and advertising. When it’s time to have your practice valued, you expect a big number.
However, many factors go into a practice valuation, and there’s one in particular that can break down the bottom line number you are looking for: overhead. Efficiently managing your practice’s overhead can help bring your goal of a profitable practice within reach. While the overhead is just one piece of the entire picture, it’s an important piece that can make or break your overall practice value.
The Basics of Overhead
In essence, overhead is the operating expenses of the practice. Typically, the overhead will be the total expense of the practice, excluding any of the following expenses:
- Owning doctor and associates’ salaries (including applicable payroll taxes)
- Financing costs (interest expense, if applicable)
- Non-cash charges (i.e., amortization and depreciation)
- Owner discretionary expenses (i.e., travel, continuing education, automobile expenses, cell phones)
- Excess rent if the doctor owns the building
- Retirement or pension expense
- Other personal or discretionary expenses
Once these adjustments are made, the remaining expenses are divided by the collections of the practice. The result is the overhead rate of the practice.
In dentistry, the overhead rate will typically fall between 30-60%. Typically, the lower the overhead, the higher the resulting value of the practice (all things equal).
This balance sheet from Cain Watters & Associates’ Dental Practice Comparison Report illustrates an example of how overhead is calculated.
Within a few years prior to selling a practice, it’s the perfect time to start focusing on these numbers and working with your dental CPA to help you get them within range. Keeping overhead down not only impacts the overall value of the business, but also increases owner profitability each month.
Talk Numbers With Us
Our analysts at NDP are fully equipped to review your practice’s financials or a practice opportunity you’re interested in. If you’re considering a dental practice transition, contact a member of our team to discuss your goals.