Our second point of interest in purchasing a practice for profit is their Profit & Loss Statement. I will try to dumb this down to a simple yet understandable format that allows you to quickly analyze a practice “outflow”. Keep in mind that I will be mentioning ideal levels in the categories we discuss. But our primary goal is looking for practices that have few, if any, terrible things going on, but they are not perfect. In searching for a practice with the potential of a two to four times increase in profitability in the first 12 to 24 months, we will be looking for things that we, the new buyer, can add to create systemic growth and multiples of profit. Maybe they don’t work consumer hours, don’t see kids, are not in network for insurance, don’t do ortho, don’t place implants, do surgery, etc. Anything that we can bring to the table to improve the numbers and maximize profit is key to our strategy of multiplying production and profit. Understanding their Profit and Loss Statement is part and parcel to that goal. It would also be at this point that, if you are an existing owner, take the time to look at your current office’s financial conditions by analyzing your own current Profit and Loss Statement. Not doing this will ensure that the short fall in your own practice will survive to destroy profit and future earnings and growth for the next office.
Secondly, in the process of looking at their P & L Statements, we will also be learning how to reformat any P & L to make it easier to read, which allows you to have a document that you will use to make financial decisions once you are an owner. Make sure that you have also studied the Growth Analysis Spreadsheet we spoke about last time. The Profit & Loss Statement and Growth Analysis Spreadsheet form the matrix of analyzing your potential purchase and your existing practice if you have one. Follow this closely and you will guarantee yourself predictable and profitable results. These two documents embody the blood pressure and general health of the practices we will look at.
At the end of this portion of our discussion, I have included a traditional P & L statement from a past client. Take the time to notice the categories and format. In addition to this traditional format which is similar to what you would receive from your CPA or a QuickBooks report, we have attached a reformatted document similar to a Cash Flow Report. The trouble with a traditional P & L statement is that it is not an actual report of your real overhead. It is merely a GAAP (Generally Accepted Accounting Principle) document that deals with expenses that have a tax consequence. It will not include debt payments. You could be writing a check every month to the bank for the cost of purchasing your practice and the only indication you will find on a P & L Statement would be a line item for “Interest Expense”. You will never see the actual dollar amount paid out on this type of document. So, to the point: In running a business, we need a simple, straight forward way of looking at the actual income and expenses. It needs to be on one document. It needs to be available to you at any minute of the day, every day of the month, and not just something that you pay a CPA to create so that it arrives 60 days after the month ends. What good is that? If you are a doctor that has a current office, you need to have your own QuickBooks set up on your own computer so that you can access this important data. In a nutshell, we need to access this anytime we make a financial decision in our practice. You should access this various times during the current month so that you can assess the impact of what it tells you in order to better your results for the month. Seeing it at some later date serves no purpose at all.
From the perspective of buying a dental practice, we need to take the common place P & L Statement and reformat it to make it more valuable in a search for financial information on the practice we are looking at. Chapters 16 and 17 in The Super General Dental Practice outlines the actual format and goals in detail. I will only mention what we do here and also add a link later where I discuss this format in a video presentation with Duckett & Ladd Dental CPA and Advisors to better flesh out the details in a visual manner.
The second document attached to this discussion is the same dental office but with the Profit & Loss Statement reformatted and titled “Cash Flow Statement”. The reformatting is our way of dividing the 40 or so line items into 7 major categories. The first six categories summarize the actual expenses or overhead and the seventh category is anything that would be attached to the owner. These details are enumerated in the book The Super General Dental Practice: www.supergeneralpractice.com.
The first six categories are: Staff Compensation, Facility, Lab, Marketing, Office Supplies, and Dental Supplies. To help you categorize and summarize the important data that we will refer to in valuing any potential purchase of an existing dental practice, I have summarized them in this Income & Expense Summary document:
INCOME & EXPENSE SUMMARY – MONTH OF ___________________
PRODUCTION __________ COLLECTION _________ COLLECTION % __________
MONTH YEAR TO DATE IDEAL GOAL
EMPLOYEE COSTS: ________ _________ 27%-28%
FACILITY COSTS: ________ _________ 7%-9%
DENTAL SUPPLIES: ________ _________ 5%-6%
MARKETING: ________ _________ 3%-5%
LAB: ________ _________ 8%-10%
OFFICE SUPPLIES: ________ _________ less than 2%
TOTAL EXPENSES: ________ _________ 52%-60%
COLLECTION %: _______ _________ 100%+
PROD/EMP/MO: _______ _________ $20,000-$25,000
PROD/OP/MO: _______ _________ $25,000-$30,00
NEW PATIENTS: ________ _________ 40-60NP/DOCTOR
DIRECT REFERRALS: ________ _________ 50%+
HYGIENE % /MONTH: ________ _________ 33%+
PROD/NEW PATIENT: ________ _________ $2,500 PLUS
What is 1% of one year’s collections in your practice? ______________
As you can see, we are taking the Growth Analysis Spreadsheet and the Profit & Loss Statement and combining them to come up with a score card for the practice. We are quantitatively measuring the important factors of a practice to determining the positive and negative sides of a purchase. This creates a consistent, easy to read, scalable score card so you can easily and quickly compare one practice to another. As a reminder, listed on the far right of this “score card” in blue are the ideal numbers for a well-run practice. Those of you who are already owners need to profile your existing practice and how it lines up compared to an ideal profit model. This will give you insight to areas you will want to clean up as well as areas in your potential purchase that might be better than what you own now. You cannot manage anything you do not measure. Having a target or benchmark is wise when you consider that purchasing an existing practice for fast profitability demands being accountable for the results after the sale. These documents and changes in format and intentionality ensure that you walk into this purchase completely understanding what you need to do and how to do it.
When we use a P & L Statement in the purchase of a practice, we need to do one more thing. We need to “normalize” this document. When you get it, we will quickly reformate the categories, but we also need to take out any expenses that are not real dental costs in this practice. We call this normalizing the document so that any expenses that would not be there after the sale are identified and removed from our calculations of true overhead. If you did reformat the P & L, then the seventh category is anything that is paid or used by the owner. Examples would be their take home pay, taxes, continuing education, benefits, automobile write off, depreciation, rental on a storage unit for patient records that really houses their bass boat, debt payments, pay to the spouse that really doesn’t work there, pay for their kids that clean the office, travel, meals, etc. You get the idea. When we normalize the P & L, what is left is true overhead and potential profit when we take over after the sale.
Formulating this part of the process means learning the real numbers and understanding the true cost of doing business. Here is the link to a discussion and the exact design for looking at Profit and Loss Statements reformation for maximum usefulness. You can also access the video we produced by following this link: https://youtu.be/Ffg9h69NAFs
In our next discussion we want to look at “location” of practices that meet our profit first criteria in a purchase. Call or email me with any questions you might have.
Michael Abernathy DDS