5 Key Numbers to Analyze When Buying a Dental Practice

Every once in a while, I will try and highlight a truly great dental podcast episode that’s worth listening to, even though it may have aired a long time ago. In episode 7 of the Practice Purchase Podcast, host Brian Hanks delves into the crucial aspects of analyzing a dental practice from a quantitative perspective and this podcast episode is truly a classic for dentists preparing to buy a practice. During the episode, Brian explains why understanding five key numbers can make the difference between a successful purchase and a potential misstep.

Foundational Requirements

Before diving into the numbers, Hanks emphasizes two foundational pieces of information buyers need access to:

1. Actual financials of the practice (valuation, tax returns, or profit and loss statements)
2. Knowledge of “add backs” – separating taxable items from the actual business financials

The Five Key Numbers

1. Collections

• Minimum recommended: $800,000 annually
• Ideal: $1,000,000 or more
• Rationale: Practices with higher collections tend to have better systems, staff, and location

Hanks cautions against the common mistake of seeking smaller practices due to existing student loan debt. Counter-intuitively, a practice with higher collections often provides better means to pay off debts quickly.

2. Profit

• Target: 35-40% of collections
• Average dental practice overhead: 61.7%
• Key concept: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

Understanding add backs is crucial here, as reported profits to the IRS often understate the true profitability of the practice.

3. Staff Costs

• Target: 28-32% of collections
• Includes: Salaries, payroll taxes, benefits, and insurance

Hanks notes that there’s little correlation between higher staff pay and better practice performance, cautioning against overpaying staff.

4. Lab Fees and Dental Supplies

• Target: Combined 10-13% of collections
• These are variable expenses that change with production levels

5. Rent and Building Expenses

• Target: 7-8% of collections, certainly less than 10%
• Includes: Rent, repairs, utilities, and upkeep
• Note: This may vary based on geography (e.g., higher in urban centers)

Additional Considerations

Hanks mentions advertising and one-time expenses like legal fees or consultants as other areas to potentially examine.

Conclusion

Brian says that by focusing on these five key numbers, prospective dental practice buyers can gain a comprehensive understanding of a practice’s financial health and potential. Hanks emphasizes the importance of seeking professional help for a thorough analysis and recommends his Practice Purchase Blueprint course for those wanting to learn more about the process. If you want to learn more about Brian and his services, please visit his website at: https://www.dentalbuyeradvocates.com/

Remember, while these numbers provide valuable insights, they should be considered alongside other factors such as practice location, patient base, and growth potential when making a purchase decision.