Thomas L. Snyder, DMD, MBA Managing Partner The Snyder Group, LLC Printer Friendly Version

Your Associate Can be a Profitable Investment

Among common folklore in the dental profession is the idea that associates cost a practice money. Nothing is further from the truth, if you do it correctly. Earning a 30-35% profit margin on the revenue generated by your associate is definitely a realistic goal!  Before hiring an associate you must perform a cost-benefit analysis to determine the likelihood of that profitability. The steps listed below will help you analyze the economic benefits of hiring an associate, and will help you establish realistic expectations about your return on investment.

Step 1: Determine Production Goals
Your associate’s skills and experience will definitely affect anticipated production goals. Your fee schedule, as well as the services provided, will also influence overall potential production. To estimate your associate’s projected annual production, choose a daily production goal, then multiply by the number of days per year that your associate is expected to work. Then, depending on your practice’s service mix, geographical area, and fee schedule, typical daily production in the beginning should range between $900 to $1,800 per day. The more experienced the associate, the higher the daily goal should be.

Next, determine your practice’s overall collection/production ratio. For example, if your projected gross production is $800,000 and you historically collect 95% of your gross production, the anticipated revenue would then be $760,000. Next, multiply your collection/production ratio by the associate’s estimated annual production goal to establish the anticipated revenue from your associate.

Step 2:  Assign Direct Expenses to the Associate
Allocate all direct expenses to your associate to get a better understanding of your potential investment.  For example, if your associate requires hiring a new dental assistant, then list the dental assistant’s salary and fringe benefits as related associate expense. Additionally, calculate the cost of administrative staff that may have to be added due to a potential increase of office hours, if you are planning to extend hours or open an additional day.  Next, estimate the associate’s dental supply costs by multiplying your practice’s current overhead ratio for dental supplies and multiplying by the associate’s anticipated revenue. Now, estimate the associate’s lab expense. A good rule of thumb at the outset is to project a 5% lab expense ratio. If you will be purchasing additional equipment or adding an operatory for your associate, include the financing in your computation.  Finally, project the associate’s potential annual compensation as well as any fringe benefits that you may offer. Will you be providing a guaranteed salary for the first several months, then convert to a commission structure based on Net Production or Collections?  Commission rates vary by region, so check with other colleagues in the area to see what the current ratios are.

Step 3:  Apply the Formula and Get the Answer
To forecast the estimated profit margin for your associate, apply the formula below using your specific practice data. While the profitability of an associate is measured in pure financial terms, the advantages of hiring an associate often include benefits that defy measurement. If your calculations indicate that profit margins are less than the 30-35% goal, be sure to gauge the intangible value of increased family time, improved quality of life, or better access to care for your patients.  Remember that the addition of an associate can provide not only economic sense, but also common sense, when it comes to achieving your personal and professional goals.

Associate Profit Analysis Summary
Daily Collection - $1200
(Assume 95% Collection/Production Ratio on Daily Production Goal of $1000)
# Days Worked Per Year x 196
Projected Annual Revenue - $235,200                        
(Assume 34% Collections)
Associate Compensation - $82,320
(6% Dental Supplies)                     
Associate Payroll Taxes - $6750
(8% Lab Expenses)            
Associate Lab Expense - $11,760
Associate Supplies - $14,112
Assistant Salary (inc P/R tax) - $28,000
Uniforms - $3000
CDE Allowance - $1000
TOTAL EXPENSES - $146,942

Projected Annual Revenue: $235,200
Less TOTAL EXPENSES: $146,942
Associate Profit: $88,258
PROFIT MARGIN: 38%
($88,258 PROFIT / $235,200 ANNUAL REVENUE)

Next Steps After Doing the Math:

Contracts
Once you’ve assured yourself that the economics make sense, proper planning prior to employment is key. The first step is to have an employment contract prepared. Make sure you use an attorney who has dental experience, as there are nuances in a dental employment agreement that are unique to our proforma. For example, should a restrictive covenant be in force from the first day of employment or should it be graduated over time? Should your associate be prohibited from soliciting your patients as well as your staff? Should you place restrictions on the lab selection? If your associate leaves after a few months, on their own volition, after investing thousands of dollars in marketing, should you be reimbursed?

These are just a few of the key questions that need to be addressed in your associate employment agreement.  “Off the shelf” documents will not do justice to these key areas, only properly prepared contracts will.

Consultant’s Assistance
Finally, we found it very helpful for you to consider engaging a practice management consultant to assist in preparing your practice for your associate. Try to select a consulting firm or individual consultant that has experience in practice transitions. Marketing your new associate to your patients and your community are also key ingredients to success. It starts with proper communication. Staff verbal skills are needed to properly introduce your new associate as well as convincing existing patients to accept the new doctor. Additionally, to make sure that your new associate meets his/her production goals, utilize scheduling templates to ensure that your associate will meet targeted goals. 

Most importantly, if your associate is a candidate for your long term transition plans, make sure that you properly think about your exit strategy so that once you begin interviewing candidates you can present your vision for a successful relationship.

Dr. Thomas L. Snyder is Managing Partner of The Snyder Group, LLC, a nationwide practice transition and financial management consulting firm. With more than 75 years of experience in the field, The Snyder Group can provide you a full range of services relating to practice transition matters and retirement planning. They can be reached directly at 1.800.988.5674.

If you would like additional help, email Dr. Snyder at drsnyder@thedentistsnetwork.net.

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