No hygiene re-charge: is this hurting your practice value?
When valuing a dental practice, we see a number of instances where when a practice has a hygienist or therapist, the associates receive the income but there is no charge to the referring associate for the hygienist use. This can have a significant impact on the practice value.
If we assume there was an associate undertaking £200,000 of gross fees and paid 50% (we will ignore the lab costs for ease), then they would be paid £100,000 and there would be £100,000 remaining for the practice.
Let us assume a hygienist is now taken on costing the practice £40,000 per annum and in an exaggerated circumstance the associate refers all of the £200,000 of income to the hygienist/therapist. The associate, without any re-charge in place, is still receiving £100,000 of associate pay, but the practice now has to pay a new £40,000 cost, so is left with £60,000 instead of the £100,000.
Whilst there can be a counter argument that the associate is now free to undertake even more work, if another associate had been taken on rather than the hygienist/therapist, then this would leave the practice with extra income being generated but without the extra cost of £40,000.
As such, we would want to see that the practice is in a ‘cost-neutral’ basis in that there is a re-charge for the hygienists use. There are many ways in which this can be done but as a minimum we would want to see that the hourly rate was being covered by the associate. For example, if the hygienist was paid £35 per hour and the hygienist was undertaking 30 minute appointments, the referring associate would be paying £17.50 for each 30 minute used. It is also important to distinguish that this is from the net pay (after the 50% deduction) otherwise the practice is still covering half. By doing this the practice is recouping the extra £40,000 of cost.
There would still be a financial benefit for the associate to refer, as the hygiene treatment to the patient maybe say £60, so they would still receive £12.50 (£60 @ 50% less £17.50), but then the cost is being covered. Some would go further and include NI and pensions if the hygienist/therapist were employed, adding nurse costs etc.
There are a number of other scenarios where the fees that the hygienist/therapist undertake are paid direct to the practice, or where a private plan is in place then the associate is paid a lower percentage to establish that part of the treatment is undertaken by the hygienist.
Where you have a hygienist or therapist in place, the value of your practice can be dramatically impacted by the referral mechanism that you have in place. Understanding how this works will allow you to make amendments to this and potentially increase your value. Some practices have seen significant increases in values, in the hundreds of thousands, by making these changes. In the above example, the extra cost of £40,000, if moved to a full re-charge can increase the EBITDA by £40,000 and under an ‘associate led model’ could gain an extra value of £260,000 – £280,000.
If you are considering the sale of your dental practice then having a valuer who can not only provide a value of the practice but look at enhancements such as this can be invaluable. Where the practice could be suitable for a Corporate, going direct and not having advice on these aspects could be very costly. We suggest that as a minimum having a dental practice valuation prior to a sale is always worth getting.
Martyn Bradshaw is a Director of PFM Dental Sales & Valuations and has been undertaking valuations and the sales of dental practices for over 20 years. PFM Dental is a professional advisory firm, providing: Dental Practice Valuations and Sales, Independent Financial Advice and Accountancy. Whether you are looking for an open market sale, sale to a Corporate or even an associate, PFM Dental can provide you with expert advice.
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