I’d like to explain the principle of leverage (no, it’s not some complicated yoga position!!) and discuss why you may want to create some leverage in your own practice. Many of our clients run practices in which they have several fee earners (associates, therapists and hygienists) working alongside them. In this situation, it is possible (desirable even) to achieve some degree of leverage in the practice.
What do I mean by leverage? Leverage is the principle which allows the principal to benefit from practice profits generated by the efforts of all of the fee earners!
This means that the Principal will earn more than if they worked as an Associate, or worked as the sole fee earner in their own practice. In fact, if this were not the case, you might well ask why anyone would become a practice principal, given all the additional risk and work that is involved in building a team of capable fee-earners! The only real appeal would be the benefits of having the company of colleagues and being able to offer additional services.
And yet, I regularly meet dentists who own practices that do not create much in the way of leverage, and in terms of their personal income, they would actually be better off working for someone else as an Associate.
We are often asked to assess a client’s dental practice. We look at many different areas of the practice, however, in terms of how successful the practice looks financially, we will consider the following:
- The income it generates for the principal.
- The value of the asset if the principal were to sell the practice.
- The amount of time that the principal has to spend in the practice to help generate the profits.
Most dentists measure their financial success in terms of the annual income they receive for their efforts. However, in dentistry it is relatively easy (by working long hours), to create a practice that pays the principal a high income, but one which also takes up all of their time (so they live in a constant state of overwhelm/burnout). It is also relatively easy to create a practice that pays the principal a low income, because the principal works just a few hours and therefore has plenty of time (and no overwhelm/burnout)
The point of this is article is to examine how it is possible to create a practice that:
- Pays the principal a high income
- Increases the wealth of the principal when it is sold and
- Doesn’t take all of the principal’s time.
At Breathe, we like business modeling and have developed lots of tools that enable our clients to model their practices simply and effectively, whilst also experimenting with different scenarios within their business model. This allows them to see what difference these scenarios make to their business/profits.
We generally assess our client’s business models by asking these 5 important questions:
- Does the business model make sufficient profit?
- What is it most sensitive to? (That is, what changes make the biggest difference?)
- How much leverage does it create?
- Can it be made bigger/added to; is it scale-able?
- Can it be sold easily to a willing buyer?
What follows is a selection of business models that all demonstrate a pleasing amount of leverage. (That is, the Principal earning some profits from the fee-earners that work alongside them.)
First off, here are the assumptions that power these models (You might choose a different set of assumptions and the model will change, however it is the principle of leverage that I want to demonstrate):
- That 1000 adult patients will keep a dentist busy full time
- That if most of these 1000 adult patients see a hygienist, this will create 3 days a week of hygiene.
- The fees earned in these models are around £200/hour for the dentists, and £90/hour for the Hygienists.
- Principals can produce £1,500 a day in gross fees.
- Hygienists can produce £650 a day in gross fees.
- Associates can produce £1,000 a day in gross fees.
- A private prctice that carefully manages its costs can produce a net profit of 33% of its gross fees/turnover. (Figures from NASDA).
- The net profit is the money left in the practice after everyone has been paid except for the principal.
So, just like Lego, it is possible to arrange these components together in many combinations. Below I have created four such combinations. In the final model, the principal is no longer working as a dentist in the practice and is just the owner:
Practice Business Model 1
- 1 Principal, 1 Hygienist. 2 Surgeries. 1,000 Adult Patients.
- Principal’s Daily Gross Fees of £1,500/day 4 days/week, 44 weeks/year. £264,000
- 1st Hygienist’s Daily Gross Fees of £650/day 3 days/week 47 weeks/year. £91,650
- Total Gross Fees = £355,650
- Net Profit of 33% = £117,364
- The Principal earns the equivalent of 44% of his personal gross fees.
Practice Business Model 2
- 1 Principal, 1 Associate, 2 Hygienists. 3 Surgeries. 2,000 Adult Patients.
- Principal’s Daily Gross Fees of £1,500/day 4 days/week, 44 weeks/year. £264,000
- Associate’s Daily Gross Fees of £1,000/day 5 days/week, 46 weeks/year. £230,000
- 1st Hygienist’s Daily Gross Fees of £650/day 3 days/week 47 weeks/year. £91,650
- 2nd Hygienist’s Daily Gross Fees of £650/day 3 days/week 47 weeks/year. £91,650
- Total Gross Fees = £677,300
- Net Profit of 33% = £233,509
- The Principal earns the equivalent of 88% of his personal gross fees.
Practice Business Model 3
- 1 Principal, 2 Associates, 3 Hygienists. 4 Surgeries. 3,000 Adult Patients.
- Principal’s Daily Gross Fees of £1,500/day 4 days/week, 44 weeks/year. £264,000
- 1st Associate’s Daily Gross Fees of £1,000/day 5 days/week, 46 weeks/year. £230,000
- 2nd Associate’s Daily Gross Fees of £1,000/day 5 days/week, 46 weeks/year. £230,000
- 1st Hygienist’s Daily Gross Fees of £650/day 3 days/week 47 weeks/year. £91,650
- 2nd Hygienist’s Daily Gross Fees of £650/day 3 days/week 47 weeks/year. £91,650
- 3rd Hygienist’s Daily Gross Fees of £650/day 3 days/week 47 weeks/year. £91,650
- Total Gross Fees = £998,950
- Net Profit of 33% = 329,653
- The Principal earns the equivalent of 124% of his personal gross fees.
Practice Business Model 4
- 3 Associates, 3 Hygienists. 4 Surgeries. 3,000 Adult Patients.
- 1st Associate’s Daily Gross Fees of £1000/day 5 days/week, 46 weeks/year. £230,000
- 2nd Associate’s Daily Gross Fees of £1000/day 5 days/week, 46 weeks/year. £230,000
- 3rd Associate’s Daily Gross Fees of £1000/day 5 days/week, 46 weeks/year. £230,000
- 1st Hygienist’s Daily Gross Fees of £650/day 3 days/week 47 weeks/year. £91,650
- 2nd Hygienist’s Daily Gross Fees of £650/day 3 days/week 47 weeks/year. £91,650
- 3rd Hygienist’s Daily Gross Fees of £650/day 3 days/week 47 weeks/year. £91,650
- Total Gross Fees = £964,950
- Net Profit of 10% = £96,495.
- The Principal earns a profit of £96,495. (Without doing any clinical dentistry.)
As you can see from the mathematics of these four business models, all of the models add profits to the owner’s efforts; in other words, the principle of leverage is evident!
In summary:
Practice Model 1: The Principal earns the equivalent of 44% of his personal gross fees.
Practice Model 2: The Principal earns the equivalent of 88% of his personal gross fees.
Practice Model 3: The Principal earns the equivalent of 124% of his personal gross fees.
Practice Model 4: The Principal earns a profit of £96,495, without doing any dentistry.
There are, of course, many challenges to being able to gain leverage in a dental practice, and that is where coaching can help you to overcome the roadblocks. The top three are:
- Associates who under perform.
- Hygienists who under perform.
- Paying Associates and Hygienists too high a percentage of their gross fees.
If you would like to know more about leverage and business modeling and how Breathe can help you develop your practice, then please contact Ernie on0845 299 7209 or ernie@nowbreathe.co.uk