This podcast is sponsored by dentalmarketing.com and they have agreed to give the listeners of this podcast a free competitive marketing analysis. This analysis is going to show you very clearly how your practice is doing compared to your competitors. It's going to give you the health of your SEO, it's going to give you a website grade, and you'll also see what your competitors are up to. This helps you know what ad strategy you should have today, how clean and effective is your marketing right now find out by getting this free and detailed analysis, text the word marketing to 4 8, 6, 5 9, and you'll receive this competitive analysis from our sponsor dentalmarketing.com. I want to talk about something that I don't hear anyone talking about. That is, if I have one or more locations, especially multiple locations, how can I maximize the value of those locations? What changes do I need to make in the practice today?

How can I make different decisions on structuring, how we grow the practice, how we manage the practice, how we spend our money? What are the kind of clean, straightforward ways for me to increase and improve the operations, but especially the value of my small practice group? That's something we need to know as dental CEOs, whether we have a group now or we have a group later. The lessons we learn in this kind of strategy of maximizing our value should be how we run and live every day anyway, and that's what I'm going to be talking about today in the dental CEO podcast.

Okay, so for this episode, I want us to have this hypothetical situation of I own three locations. Alright? I own three locations. Granted, you might own 10 or one or none, but let's just understand the world of three locations. I own three locations and I know I want to sell. I am going to be retiring. Maybe I'm going to do something new, or maybe I've got three locations I want to sell over here and I'm just going to ride off from the sunset in this fourth location over there where I just work part-time and do full arch cases and have a beautiful facility and three employees, whatever the situation, I've got three locations I want to sell. Alright? So we need to make sure that we maximize the valuation of those locations. Maximizing the valuation is, in an ideal world, something we're doing every quarter, even a decade before we're willing to sell.

We are running a company as though it has the processes that have maximized its value. Of course that's ideal. What's realistic though, is we as operators tend to kind of get stuck in our own of thinking and we don't really make big changes, even changes we really need. We don't make 'em because we've grandfathered in the old way. We've always done it. We've got the veteran employees that have always been doing the same thing the same way, and we don't typically get triggered to make changes until there's some bigger event or bigger event coming, and that's what I'm talking about. Let's say the bigger event coming is we're going to sell, sell in a year, sell in three years, we're going to sell. Okay, what can we do? What should we do? What should we think about doing to maximize the valuation? Alright, so we know at three locations our valuation is going to be heavily influenced by the amount of EBITDA we have and the multiple that's put on it.

For those of you that don't know what I just said, maybe you're new to the dental business world. Ebitda. That is a number that, lemme describe it this way. Let's pretend like I was an absentee owner of a practice and I had to pay all the bills and I had to pay a dentist to do the dentistry. How much money is left over for me, the absentee owner before I make my loan payments and taxes? How much money is just created every month, extra money created every month after I pay the doctors, after I pay all of the bills, how much money is left over for me? The absentee owner that is EBITDA and that money doesn't pay for inappropriate expenses, meaning running my car through the company is not a real expense that impacts ebitda. We're going to pretend like that's EBITDA paying my son who doesn't actually work there paying for me to fly to The Bahamas to take a CE course for one day, those are all discretionary expenses that were just running through the company.

Discretionary expenses are viewed as ebitda, meaning if someone else bought our company, they wouldn't be paying for you to go to The Bahamas. That would be ebitda. So EBITDA is this kind of in a way, this financial success, this profitability in a way, the money that the business generates that is after paying all of its bills and all of its people including the dentist, but before it has to pay taxes, before it has to make loan payments, okay? Ebitda. So if we have three locations, those locations are going to be worth some sort of number times our ebitda. So I want to do some just easy math here. So let's say we have three locations and those locations do 6 million in collections combined. So 6 million in collections. I'm writing this down right now so I don't forget, and out of the 6 million in collections, it has 1 million in ebitda.

Now is that a reasonable ratio? One out of six is 17%. That is reasonable. It's not a top performing, it's not a bottom performing that is a reasonable kind of EBITDA margin, 17%. So what I'm saying here with this hypothetical is very reasonable. So I've got three locations, $6 million in collections, 1 million ebitda. Well, I want to sell in a year or three, and so what should I now do? Right now I might be able to sell for, let's just say eight times ebitda. I'm just making something up. If I've got 1 million in ebitda, maybe I get it might actually be worth nine times ebitda. So I've got 1 million in ebitda, it's worth nine times ebitda, so it's worth 9 million sale price. We do 6 million in collections because of my size, because the buyers want me. I'm in a major metropolitan area. Maybe I've got a good payer mix.

We've got extra space to expand if the buyer ever wants to expand. All kinds of variables can impact the multiple. But just for this example, I'm worth nine times EBITDA and my EBITDA is a million, so my purchase price is 9 million. Okay, well, how can I make that go up? How can I make that go up between now and then? Well, there's two kind of strategies. Let's think. Very simple. I can make that valuation. Let's assume that my multiple's not going to change. I'm going to be worth nine times my ebitda, whether my EBITDA is 1 million or half a million or a million and a half. Let's just make that assumption for a second. So what we're really trying to do when we say increase the sale price, increase the valuation is we're going to focus on increasing ebitda. So how do we increase ebitda?

Well, we can cut the expenses down. We could also increase our collections at a faster rate than our expenses. So we can cut our costs or we can grow the practice. Simple way of saying it. So cutting costs are the fastest, they're the most predictable and we have to be very aggressive in doing that. Here's how well, hold on, I need to back up a bit. We need to make sure that our EBITDA is actually accurate. So EBITDA is something that we can calculate, but what does not belong as an expense is something I already said, discretionary expenses. That is not a true expense that takes away ebitda. But what also doesn't take away EBITDA are one time unusual expenses like maybe you were in an IRS audit and you had extra accounting expenses, or you were in a lawsuit and you settled whatever, a lawsuit for $10,000.

That 10,000 was real money. You had to spend that IRS audit accounting bill was a real bill you had to pay, but that is not a normal reoccurring expected bill that a future owner will have of your practice. You don't get sued once a year. You don't go through an IRS audit once a year. That's a one-time thing. Those one-time things don't apply toward ebitda. It's called an add back. That cost gets added back when we calculate ebitda. Okay? So that's the second thing we got to know about ebitda. The first thing is it doesn't include discretionary expenses. The second thing is it doesn't include one-time unusual expenses. The third thing is it shouldn't include purchases of furniture, fixtures or equipment. Those assets we buy, those big purchases shouldn't even fall on our profit and loss statement. They fall on our balance sheet. So when you go spend $40,000 on an x-ray, a C-B-C-T, or whatever it might be, that $40,000 expense should not go against your EBITDA because again, it's a one-time purchase that is going on your balance sheet.

It's going to be depreciated on depreciation schedule. It should not be falling on your profit and loss statement and reducing artificially shrinking your ebitda. There's all kinds of other little examples of this, but when we calculate ebitda, there is a right way to calculate it. And then when we negotiate to sell our practice, we need to be defenders of our EBITDA number defenders of how we calculated it. We need to make sure that these rules aren't broken and that we don't artificially shrink our ebitda. Alright? So that's the foundation. We need to understand EBITDA and how to calculate it, how to justify it, how to protect it. Alright, well now how do we increase it? We're going to increase it by spending less or we're going to increase it by growing more. So what can we spend less money on the year or three before we might sell our group?

We need to go in and cut all expenses that are not vital and important or revenue generating expenses. So an example of this would be we pay, excuse me, we pay 1 99 a month here. We pay 2 99 a month there. We've kind of grandfathered in where we have three different software programs we pay for and there's a lot of overlap between all three, but we've kind of always just been using all three. Those are great examples. We got to stop that. We got to cancel two of them and just use one of them so that we can free up the $8,000 that those extra software programs cost us. Remember, we're selling for nine times ebitda, so if we can save eight grand, that's worth another $72,000. When we sell, we need to also look at things like credit card fees. We can pass those on to patients now.

So that's a huge savings. I mean that's a massive savings. We need to look at things like dental supplies. Number one, have we enforced the budget? Meaning no order goes out, that's over budget. We should have our dental supplies at less than 4% forever, decades. We were told it should be six or 7% I believe I was actually literally one of the first ones to say four is the limit. And what I see is a lot of practices are under three, but that's because they manage the budget. We have to manage the budget. So whatever your supplies are, it needs to be below four, ideally around three. And sometimes that's managing the budget, but sometimes we could also lower it even more because we can stop buying expensive brands. We can stop buying Gucci gauze and Prada gloves and buy an affordable brand of gauze, affordable brand of gloves, the most affordable brand of cotton rolls and patient bibs and things like that.

We also need to make sure that not only are we buying affordable brands, but we're buying them from affordable places. So we're getting the lowest pricing we can to have that product we need. Now, we don't cut corners or costs or go affordable on vital things where the brand matters for clinical quality. We're not just trying to find the cheapest of everything, but when quality's not important, like a cut and roll, we want to save as much money as we can. When quality is important, like bonding agent, we need to get the bonding agent that's best. Alright, on lab a lot of times practices grandfather in spending a lot of money on lab work, we need to make sure that number one, we have affordable labs that we use. Maybe that means for the year or three before you sell, you start trying out all the affordable labs until one lands that fits for your practice.

We also need to make sure we're picking affordable restorations for the back of the mouth where we don't need some master cera is doing something at a high dollar amount. And what is it worth for us to do milling or 3D printing? Well, it's worth nine times the money we save annually. If I've got three locations, I'm going to do some math now and I'm doing 6 million in collections, it's not uncommon that a group that size is spending like 400 grand a year on lab fees, 400 grand a year. That's a little less than 7%. If I can get that down to 4% instead of a little less than 7% instead of 400 grand, I'm closer to something like 200 grand, 240 grand. That $160,000 saved times nine is worth $1.4 million more to me at the time I sell. Remember nine times, multiple, nine times anything we save.

So if I go from a six and a half percent lab bill to a 4% lab bill because I've made better decisions, I can create more than a million dollars extra sale price on that same line to think if I go back to supplies, a typical practice group might be spending six or 7% on supplies, and if I can get that down to 3.5% instead of 6% at my 6 million collections, that's 150 grand saved. That is another $1.35 million. So on supplies and lab combined, these types of changes is going to add another two and a half million dollars to sale price. And then what if I add another 50 grand savings in credit card fees? Well shoot, that's worth another half a million dollars in sale price. What if I, instead of hiring more hygienists when a hygienist maybe quits or gets fired, I replace them with assisted hygiene.

Now I've taken that hygienist payroll and I've replaced it with an assistant payroll to still process those patients. That creates a huge savings for me. And again, that savings is worth nine times ebitda. What if I lose front office people instead of replacing them? I do more outsourcing to virtual people. I might spend between hourly wage and payroll taxes. I might spend, I don't know, 20, 25 bucks an hour on a front office person onsite. But if I use a front office person that's virtual, that costs me $12 an hour and that virtual person can do all the insurance verification. That virtual person can do all the appointment confirmations or try to fill the hygiene schedule, these kind of tasks that are simple and they take a long time, and I can have rock stars in the practice, but I have virtual people doing all the kind of work that my rock stars don't want to do.

Just that savings, let's say from 25 bucks an hour to 12 bucks an hour, that's $13 an hour savings. And if I multiply that times the whole year, that's like 25 grand an employee. I do that with 25 grand times. Nine is almost a quarter of a million dollars in more sale price, man. Now suddenly between credit card fees and lab and supplies and virtual, and let's say I cut out some software, I'm adding millions and millions of dollars to my sale price. Also it so many practices are spending eight, $900 a month thousand 11, $1,200 a month on it, and we're spending maybe an equal amount on our old archaic dental practice management software. If we were to switch to a cloud-based system, that would cut our IT bill in half and that would also cut our software cost down and that savings in a three location group could be another $40,000 saved, $50,000 saved per year.

That's another half a million dollars in sale price. So I hope you see that we need to be investigators of our expenses and we need to now be in a new mindset that says I need to pick smarter ways of running the practice that spend less money. This could easily, instead of being a $9 million sale, this could be a $13 million sale if I were to take these strategies. I'm actually thinking about one dentist right now. I'm not going to mention your name, but you are a podcaster. You are a consultant. You were one of my original coaching clients. One of my favorite actually, you started with a startup practice. It went from five ops to nine ops, eventually, I think expanded to 17 by year five, something like that. And you eventually sold your practice for $13.7 million, $13.7 million. Those that was a single location, but a group practice, those kinds of valuations happen when you've maximized ebitda and we're going to maximize EBITDA on one hand by cutting expenses.

Well, what about maximizing EBITDA through growth? Well, this is going to be a little bit counterintuitive sometimes, but let's talk about growth. When we talk about growth, we have to talk about variable increases in ebitda, variable profit. So let me explain what I mean by that. Here is wrong math. Wrong math says I've got empty chairs and I run 70% overhead and a crown costs a thousand dollars. How much do I need to charge for a crown that I put in one of my empty chairs to not lose money? Well, my fee's a thousand dollars, my practice overhead 70%. How much do I need to charge for this next crown? I'm putting in an empty chair to not lose money. Wrong math says, oh, well you need at least a $700 crown fee. No, that's wrong math. What does it cost me to put a crown in that chair?

It doesn't cost me $700. It costs me lab, it costs me materials. That might be a hundred bucks, 150 bucks, and if I have to pay a dentist, it costs me the dentist pay. And so when it's all said and done, I might be in it $450 or so in cost to put a crown in that empty chair. So that means that if we do collect a thousand dollars and we only had 450 or $500 in cost, I'm getting 50, 55% EBITDA in a way on that additional procedure. You see, that's the variable profit because we already had to pay for rent and we already to pay for the team and for the utilities and for the marketing and everything else. Now all the extra procedures we put into our schedule without adding more rent, without adding more staff, without adding more marketing, all the extra procedures we put in our schedule have a very high percentage of variable EBITDA being added to our bottom line.

That's the reality of business, and that's the reality in dentistry. Dentistry has very low variable costs. What's the variable cost of an x-ray? What's the variable cost of an extraction? What's the variable cost of an exam? It is really, really low. And so the name of the game so often is fill the chairs, fill capacity, because once we have to commit to the rent and everything else, and we've paid that, everything after that is incredibly profitable for the company. Now, when we think about, alright, how do we maximize ebitda? Well, we need to, of course, I said we need to spend less money, but how do we grow ebitda? We can grow collections and typically added collections has a lot less cost than the first collections we had. So let's take an extreme example. Let's say I've got a couple empty chairs and I've got a full hygiene schedule sort of full, it's not perfectly full, but sort of full. It doesn't feel right to me to add another hygienist. Damn, that's expensive. Hygienists get paid a lot of money. We're not completely full on hygiene. I mean we're kind of full, but we have no shows and stuff. It doesn't feel right to add another hygienist, but let's look at that decision a little bit differently. What does a hygienist cost us?

It's a hard question unfortunately to answer, but in many markets it's really high. I'm going to use a really high number. I'm going to say $70 an hour. That is higher than a lot of markets. It's lower, unfortunately in some markets, but I'm just going to use a really depressing number as an example. So $70 an hour, and let's say in a day they work eight hours, and so you got to pay some payroll taxes and stuff, benefits, whatever. So for easy math, I'm going to say hygienists costs us $600 for every day they work $600. Okay, so how many extra patients do we need to see to pay for this extra hygienist?

Before I answer that question, lemme tell you what's probably happening in your hygiene schedule and in your doctor's schedule, and I want to use the analogy that I've used in the past of a busy restaurant. When a restaurant is really busy, they've got reservations that are booked and someone walks in, no reservation, they walk in and say, what's the wait? And the restaurant says, oh, the wait's an hour and a half. So many people walk out. The owner of the restaurant has no idea how many more customers they could have even had they just saw all my tables are full. I'm doing good. They have no idea. 50 other tables could have been filled because the people came in and walked out. Same thing with the people that are logging on online. There's this awesome jazz club in San Antonio. I love going to called Jazz Texas.

I love going, but man, they sell out in their tickets a week or two ahead of time. And unfortunately for me, my wife and I typically don't decide on date night until one or two days before date night. And so I go log in to Jazz Texas and I log in and almost every time, every table, every ticket is always taken. Same thing with a restaurant. People log in, they want to eat at a certain restaurant, they log in, they see it's all taken, and they move on and pick a different restaurant. The owners of this restaurant, this jazz club, have no idea how many customers they could have had because there was no availability. People are leaving, walking away or skipping 'em without them being able to add it up and no. So hypothetically speaking, how can we make sure we've captured every single customer possible?

Well, we only know if we have in this kind of scenario, if we create enough tables, enough chairs, enough appointments, enough reservations, enough capacity that we always have an open table, meaning we always have so many open tables that even when people walk in and say, what's the wait? We say, no, wait, we could teach you. Now, every time someone logs in online and they look and is there a reservation? Yes, there's always a reservation. Only then are we getting close to capturing the entire demand that's coming to us. So what does that mean for dentistry? Well, if you look at the doctor's schedule, or especially look at the hygiene schedule, if you're booked out more than a week, you're for sure having some sort of drop off happen. People on the phone, they're not converting people trying to schedule online, they're deciding not to.

There's some sort of drop off. If we were to add an extra hygienist that we don't even feel emotionally that we need, but we add this hygienist and we create open capacity, what will happen? Probably we'll see a few extra patients at the minimum, people that would have not converted on the phone. But now that you've got this extra hygienist, you've got holes all over your hygiene schedule. Now, if they want to come in today or tomorrow in the afternoon, there's an opening and now they convert, and previously they didn't. When we create open capacity in a schedule, of course within reason, but when we have an appropriate amount of openings, always we are likely capturing the majority of the demand. Okay, so now back to this whole conversation about ebitda. Let's say I've got my group and we're booked out in hygiene one or two weeks, sometimes three or four.

What happens if I add an extra hygienist that I don't emotionally feel like we need because we're not that booked out? But what happens if I do? Chances are with those new openings we are going to see patients we would've never seen. Okay, well this hygienist costs me $600 a day. So how many extra patients do I need to see to break even on the variable cost of this hygienist? Well, we can look at it two ways. We can look at it as the immediate collections we get from a hygiene visit. We could also look at it as the total patient collections we get from that year where we get hygiene money and doctor money. So on the immediate revenue, we might get 150 bucks or 200 bucks or more for that patient visit in hygiene. So if my hygienist costs 600 bucks and every hygiene visit, we're going to get this new patient visit coming in or whatever it might be gives us, let's just round it and average it at 200 bucks, then hypothetically speaking, I need three extra patients for that entire day.

I had to pay the hygienist, meaning my hygienist could be open half the freaking day with nothing due as long as that other half of the day has these extra patients in it. We have broken even on the cost of that hygienist from the very first visit. That's again, only looking at the revenue from the very first visit. What if we look at the revenue or the collections from that patient for that next year? Patients, of course, what they spend per year is different and different practices based on your case acceptance, your fees, your insurance involvement, and the types of cases you do, of course. But what's a very reasonable number for me to use in this example is something like $900. $900 is going to cover the vast majority of practices. I would hope that the patients spend more than that on average in the first year, but 900 is going to cover the vast majority of us.

So if we bring a patient in and they spend 900, we get $900 collections in that year. Let's assume that 200 of it was from hygiene and that 700 of it was from the doctor. Okay, well, what's our costs? Well, that 700 from the doctor, well, our costs are going to be paying the doctor and their taxes and some materials we are going to have. So paying the doctor off of 700 bucks might be $225. That is 32%. That's doctor pay plus payroll taxes. So $225 of the $700 doctor cost plus materials cost of the $700 that supply and lab, that's going to come out to 10% or less. So I'll just add, and I'll just round it up. I'll say it's 75 bucks materials. So what's our cost if you're not adding all the math like I am right now, $300. So that $700 doctor portion had 300 costs.

Or excuse me, I said seven. I guess I should have said 800, but no, 700. So let me back up here. I hope I didn't confuse anyone. Let me restate all of this. Extra patient spends $900 this next year. That 900, 200 of it was for hygiene and 700 of it was for the doctor's side and the doctor's side. I had to pay a doctor to do it. So my costs were 300 of the 700. So what's my net here? Of the 900 we collected minus the 300 for the doctor side, maybe minus another, whatever, 50 for the hygiene side, that's 900 minus three 50. I netted $550, $550. Now let me ask you, if I have to pay a hygienist $600 a day when it's all said and done and the dust settles, and I've seen these patients and I keep seeing these patients every month or whatever, every year we're seeing more and more people.

If I net five 50 or more over the course of the year and my hygienist costs $600 a day, how many extra patients does my hygienist have to see from this expansion decision to justify them being here? The answer is around one, around one. So I've got a schedule that's relatively full, it's not perfect. And if I uncomfortably expand it by adding another hygienist, as long as I'm getting at least one extra patient coming in into my business that I would not have had otherwise, then I'm going to have added variable EBITDA drop to the bottom line. That is on the doctor's side as well, the same thing. And so it's counterintuitive, but in this one to three years before we sell our group, we actually need to expand our capacity on the hygiene and the doctor's side beyond a full schedule to create openings so that we capture as much volume as possible because we make so much variable profit on our procedures, we can afford the added burden of the hygienist salary that we just took on.

And expanding capacity could be what I said, adding hygienists. But what if we could expand capacity, not by adding hygienists, but just by adding an assistant and going to assisted hygiene? Oh man. Man, the math is even easier. So that is another angle that we need to take in trying to increase EBITDA is expand our capacity. Now, of course, everything else that drives up production and collections helps as well. So very quickly, if I rattle down this linear path of the creation of collections, where do collections come from? What's that linear story? What does that look like? It starts with intelligent marketing dollars, creating leads, clicks, and phone calls. Then we have to answer the click and answer the phone call. Okay? So there's a whole system around that. Let's master that before we sell, and then when we answer it, we have to convert it to an appointment. There's a whole recipe for that. Let's master that creates appointments. We better have room in our schedule for those appointments. I've already said that. Let's have open capacity. Now the patient shows up. We better diagnose dentistry, which means elective, it means preventative, it means restorative and surgical and so forth. And then we need to have clinical case acceptance, and we need to have financial case acceptance and we need to collect the money. And that's kind of the cycle here. And each one of those steps has recipes that work. So now back to the point of this podcast episode, I'm going to increase my EBITDA by saving money, but also by growing. I'm going to grow by increasing capacity, but I'm also going to grow by learning and implementing the recipes for better lead flow, better answering, better conversion, better scheduling, better diagnosis, better case acceptance, better collections.

So probably I'm adding a coach or consultant for at least a year, maybe even all three years, to maximize that. Oh, and by the way, the cost of a coach or consultant is an add back. So it doesn't impact your ebitda. I'm probably adding a coach and consultant to help me expand, expand, expand my growth. Of course, we could also bring things in like, well, your fees, if you increase your fees the right way, that could also increase ebitda. But I'm going to bring in a co or consultant for that while I expand my capacity while I have this heavy focus on cost controls. Compare what I just said, this dentist that followed my advice just now, compare that dentist who cut costs, like I said, who grew, like I said, had a coach and consultant to lead them through this process, compare that dentist to the one that didn't.

And what you're going to see is the difference between a $9 million sale price and an $18 million sale price. And what's even more impactful than that is the $9 million sale price might've had 4 million in debt and might've paid another million in taxes. They net four. The $18 million sale price had 4 million in debt. That's 14, and maybe they had two or three in taxes, right? They net at 11. The difference between netting 4 million and 11 million is crazy significant. So this is something that I believe every single entrepreneur or CEO in dentistry that is knowing that they're going to go down a path of selling, has to take very seriously. They have to get into this new phase of their career, this new frame of mind that says, I need a coach. I need a consultant. I need to maximize growth, maximize EBITDA by also of course minimizing my costs, and that is going to clean me up and prepare me for the best sale.

And of course, also, I need to have my ducks in a row. I need to have clean financial statements that maybe have even been audited. I need to have records of everything. I need to clean this business up so that I can attract as many buyers as possible at the highest valuations as highest multiples and lower my risk that this deal gets whittled down. That's what I'm trying to describe right now. That is this episode is the first part of this big conversation of what to do if we're going to be selling the future. Alright, I hope this was interesting. I hope this was valuable. I don't hear hardly anyone talking about this kind of stuff, but man, we need to talk about this stuff a lot. So if you think this is valuable, post something online for us, leave us a review. If you think is great, that'd be helpful.

We'd appreciate the support. But help us understand what you are connecting with so that we can do more and more episodes. If you want me to talk more about something specific, let us know. Post on it, we'll see it, and it'll impact us because we're releasing episodes at least once a week. So tell us what you want to hear. If you want to hear more about this, let me know. Subscribe if you haven't, and look for future episodes. Thank you so much for your support and listening to this, and I hope, again, I hope it was valuable and I will see you next time. My name's Scott Leune, and this was the Dental CEO podcast.