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Finding the sweet spot

Posted on September 22, 2021 in Articles & Frank Taylor & Associates

Set your principal gross at £300,000 max, urges Lis Hughes…..

For those of you who are looking for advice on how to increase the goodwill value of your dental practice, here’s another simple tip of how you can achieve this.

As the principal of your own dental practice, you will typically be the top fee earner. You will gross more than your associates, and this is not unusual.

In my 20 years of experience, I see a gear shift in principals, the mindset sharpens and with this the principal starts to perform at a higher level. There is a need to deliver more – and not just clinical dentistry.

As a principal you start to work like it’s your last day before going on holiday. You know that day where you somehow seem to fit a weeks’ worth of work into 8 hours!

But this becomes your new normal.

No longer is delivering dentistry during the week enough – you also need to be the marketing director, sales director, HR director, managing director and responsible for CQC.

Despite these additional responsibilities it is not uncommon for principals to still produce most of the practice income.

However, a word of caution…. this can be detrimental to the goodwill value of your dental practice.

When valuing goodwill, we assume that a principal can deliver about £300,000 of dentistry. If the actual figure is above this, we will increase the need for associates to compensate for the difference.

For example, if the current principal worked 4 days per week and was a super-grosser generating £500,000, we would make an adjustment to assume a principal gross of £300,000.

An increased reliance on associates for £200,000 of fees means the associates costs would increase by about £75,000 (labs 6% and associate paid 40%) – meaning a profit deduction of this amount. This in turn is bad news for the goodwill value as this is based on a multiple of adjusted profit.

If the practice had a profit multiple of 4x this would take £300,000 off the goodwill value.

However, the opposite is also true, and this can increase your goodwill value. If you are a part-time principal and gross say £150,000, we would reduce your associates costs down by about £55,000 to adjust for the new principal income up to £300,000.

The sweet spot is to work your own personal gross to about £300,000 but no more. I appreciate this could impact on the immediate profitability, but goodwill values are based on adjusted profit multiples, so you want to minimise the introduce of additional associate fees when the profits are reconstituted.

Ensuring your own gross is in line with the expected norm will help increase the value of your goodwill.

It might sound odd, but you might need to lower your gross to increase your value!

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